Money Talks... and Lies.

"Pinocchio lies and his nose grows".
Carlo Chiostri (1901) [A]

Alright, it's nice to hear this ("Wealthy More Likely to Lie or Cheat, Study Finds" SMH/Bloomberg, 28-02/2012), backed by what seems properly conducted and published research. (See here)

But let's face it, folks, it's not like that is a surprise.

Barely a couple of weeks ago I reported here on a paid PR campaign to distort the public debate on weather change.

"Bullshit! That's at most just in the US", our Australian exceptionalist, right-of-centre friends would shout dripping patriotic indignation. "In Oz things are different. We play cricket, drink beer and Aussie chicks are better looking".

Which is largely true, but irrelevant.

Those PR campaigns, it would be remembered, seemed to point to Oz, too.

But, let's not fool ourselves, that wasn't the first case of PR campaigns of misinformation designed to force the Australian government's hand.

That's pretty much what happened quite recently, in a rather modest scale, with the pre-commitment scheme backflip in the poker machine dispute. Overseas readers: that scheme was proposed by independent MP Andrew Wilkie and accepted with little conviction by the Gillard government as a condition for Wilkie's support. Faced with opposition from the usual suspects, the Gillard government backflipped at the first opportunity, leading to Wilkie's strangement:

"A spokesman for Clubs Australia said the industry was pleased with the outcome [i.e. the backflip] but would not be halting its campaign against mandatory pre-commitment until it had considered the details of the new policy." (See here)

At a much more dramatic scale, exactly the same thing happened less than 2 years ago:

"MINING tycoons have claimed much of the credit for Kevin Rudd's downfall, saying the industry-led opposition to the resources tax was the main reason for the leadership coup. (...)
"The billionaires Andrew Forrest and Clive Palmer said the tax was a crucial factor in Mr Rudd's departure.
"The comments came as the industry suspended its multimillion-dollar  anti-tax advertising blitz, and pledged to enter negotiations with the [Gillard] government in good faith." (See here)

Or, for those inclined to a little historical recollection, have a look further back at the Cash for Comments Affair. (See here).

Image Credit:
[A] Pinocchio lies and his nose grows, by Carlo Chiostri (1901). Wikipedia.

Offshoring for Everybody.

An electric household fan [A]

"Countries have always traded with each other to exploit their natural advantages, and in the past it was goods that could be put in a box and shipped. This meant it was generally low-paid and low-skilled jobs in areas such as manufacturing that were lost offshore.
"Not any more." (See here)

A few days ago, a brief TV segment asked passersby their opinion about Apple products being manufactured by Foxconn workers earning less than US$ 2 an hour, under semi-slavery conditions.

Unfortunately, I could not find footage of the segment.

This well-dressed, prosperous looking, young fellow, when asked, replied something to the effect that he found it regrettable, of course, but that's life and the bottom line is that he gets good products at an affordable price.

Let's see if these prices remain affordable much longer after the shit hits the fan, because "it is now architects, accountants, lawyers, web designers, analysts, geologists, engineers and computer programmers - the knowledge workers - whose jobs are at risk".

Image Credit:
[A] An electric household fan. Wikipedia.

Inequality and Technology.

Robot with Benedict XVI. [A]

One of the explanations for income/wealth inequality is technological advancement.

The reasoning that often underlies this explanation goes something like this: newer, more productive technology requires more technically capable operators; more educated individuals in possession of these higher skills, being more productive, command higher incomes than their less technically adept, less educated and less productive counterparts.

Or, as The Wall Street Journal, quoting research by the IMF, put it back in 2008:

" 'The disequalizing impact of financial openness (...) and technological progress appear to be (...) increasing the premium on higher skills, rather than limiting opportunities for economic advancement,' Jaumotte, Lall, and Papageorgiou write.
"The authors say that the best solution to this problem is increased education. 'Broader access to education will allow a greater segment of the population to take advantage of the opportunities from globalization and technological change' they said". (Emphasis added. See here)

Sounds fair, right?

Too bad that the people at Rio Tinto did not read WSJ or chose to ignore the theory of marginal productivity of labour: their Mine of the Future ™ programme introducing 150 driverless robotic trucks to replace their current fleet of conventional trucks aims to replace human drivers, whose only skill is to drive a humongous truck, with highly skilled operators.

However, unlike WSJ's theory suggests, these more highly skilled, educated operators are not supposed to earn higher wages.

From yesterday's 7:30 (from ABC):

"PETER STRACHAN, ANALYST: You aren't using the same sort of people, different skill set, different cost base. You don't have to accommodate them, you don't have to fly them in and out. All those costs come off for the company, and it's a matter of saying, 'Well instead of having someone we have to pay $300,000 a year, say, to be on-site, flying in, flying out, all the extra cost of fly in/fly out, we can get a skilled person for $75,000 or $80,000 a year to do that same job'." (Emphasis added. See here)

So much for the theory, I guess.

Update:
24-02-2012. David Ruccio has a very insightful piece on outcome fairness under capitalism. This is a big topic, with implications for the study of inequality, for instance.

But it also has other implications: capitalism is often justified (or legitimized, to be more precise) with the argument that "you get what you deserve". Your wages are proportional to your productivity: capitalism is supposed to be "meritocratic".

As I've shown above, this is not generally true.

If you are on the receiving end, you are entitled to say this is unfair. However, it is legal and legitimate under capitalism. And no appeal to fairness or justice will ever change this. I've written about this already.

So, if you don't like it, you better do something about it.

Image Credit:
[A] Robot con Benedicto XVI, by Certo Xornal. Wikipedia

Class War in Spain.

Spain is currently being convulsed by large national protests against the labour laws reform the Rajoy Government imposed. (See here)

However, other protests, largely ignored by foreign media, are taking place in Spain at the same time. Here I will focus on one.

Since the Valencian Generalitat approved a decree, last January, cutting down salaries to 55,000 teachers and 140,000 other public servants in Valencia, Alicante and Castellón, peaceful public protests have been taking place in those provinces.

The cuts were made in an attempt to free resources to pay a 62.5 billion euro debt, attributed in a large part to corrupt deals between the centre-right ruling party Partido Popular ("People's" Party) officials, in power in the Generalitat for the last 16 years, and private sector "entrepreneurs" and the until recently apparently clean local financial institution Caja Mediterráneo. (See here, Spanish)

Spanish PM Mariano Rajoy appointed Paula Sánchez de León national government representative before the Generalitat.

And although Sánchez de León has not been personally implicated in the corrupt deals, she was a close collaborator to the former president of the Generalitat, Francisco Camps, who was forced to resign and is on trial under corruption charges. (See here, Spanish)

High school and university students, teachers and public servants have been protesting the measures, demanding Sánchez de León's resignation and those deemed involved in corruption be punished. Until Wednesday 15 of February, the protests had been peaceful.

This is how record numbers of the Spanish National Police officers are treating Spanish kids:

Readers will note no stones are being thrown. No fires. This is what El País had to say:

 "The student protest degenerated into an improvised and chaotic Prague Spring. While the youngsters defended in the street their freedom of expression (...) tens of patrols and hundreds of agents dispersed themselves, running after the kids, who -in the fourth day of protest- have not yet broken a glass, a shop front or a street light". (See here. Spanish. My translation)

According El País, Antonio Moreno, head of the National Police in Valencia, is clear he is waging a war against the protesters: "En el anterior conflicto del 15-M también tuvimos que utilizar la fuerza cuando fuimos atacados" (my translation: in the previous conflict, against the 15-M, we also had to use force when attacked). Asked by journalists how many agents were deployed, Moreno refused to answer because he did not intend to "proporcionar esa información al enemigo" (my translation: he did not intend to give the enemy that information).

These statements may appear a ridiculous over-reaction by an armchair general fighting a unilateral war against an unarmed "army" of teenagers, their parents and middle-aged teachers. Arguably, that's a valid interpretation.

I, however, could find another interpretation: "general" Moreno is indeed fighting a war. A class war. He is fighting this "conflict" on behalf of the corrupt, the thieves, charlatans and snake-oil sellers of capitalism, and the "enemy" are those designated to pay for the fuck up Moreno's masters left behind: the Spanish people.

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Carta abierta a la policía española:

Joder, que me dais asco y vergüenza. Sois más despreciables que la Merkel o Sarkosy: sois vosotros quienes traicionan a España, no ellos.

Antes que sea demasiado tarde, decidle "basta" al Gobierno de Rajoy, porque vais por el mismo camino que Grecia.

Portaos como hombres, como españoles, coño.

Influence Game?

Marionettiste in Prague on Charles Bridge.[A]

With the exception of a story at The Sydney Morning Herald Online (published yesterday morning, Thursday 16th), an op-ed by free-lance journalist Graham Readfearn (at The Drum Unleashed), and a piece by Amber Jamieson (at Crikey), both of which appeared yesterday towards the end of the afternoon, apparently no Australian media organization considered newsworthy the alleged leaking of documents from The Heartland Institute and the subsequent statement by the Institute.

In particular, yesterday I could not find any reference to this in the ABC, SBS, the private TV free-to-air channels (Seven, Nine and Ten). And I certainly did not expect to find any reference in the News Ltd press.

This in contrast to The New York Times, The Guardian, BBC, AP, The Washington Post, Forbes, New Scientist, National Geographic, ABC (America), ZDNet, Slate Magazine, Scientific American, The Financial Times, and a host of minor publications in English language, all of which have reported on this subject during the last 24 to 20 hours, as this screen capture of Google News partially shows:

In fact, an hour ago (approximately 11:00 am, Australian time) even The Australian (a branch of News Ltd.) finally reported on this subject.

I am not privy to how news editors work in Australia. Maybe they are too conservative (both in the political sense, or in the sense of considering newsworthy only a set of conventional subjects). Perhaps they are too overwhelmed with really newsworthy items like the investigation by French police of the theft of a diamond-studded dog collar from a grave at the world's oldest pet cemetery (see here).

But I would hate to believe that political considerations stop news from being reported, and that they are only reported after the Australian public has been exposed to foreign news sources.

Image Credit:
[A] Marionettiste in Prague on Charles Bridge. Wikipeda.

Europa Devouring her Children.

"Saturn Devouring his Son".
Francisco de Goya (between 1819 and 1823) [A]

" 'Traitors! Collaborators! We're Greeks. You're beating up your mothers and your sisters.' " (See here)

This is the true face of capitalism: evil, madness, horror, death and poverty.

"The trouble with historical metaphors is that they can obscure the present: what's really at stake here is not Greece's identity but Europe's. All eyes are fixed on Athens, but the way out of the crisis requires a choice about what kind of Europe we want. The one we have now, with its deep structural inequalities and its rigid adherence to a failed economic ideology, protects neither democracy nor human rights. Stiff-necked and punitive, it prefers to eat its children." (Emphasis added)

Image Credit:
[A] "Saturn Devouring his Son". Francisco de Goya (between 1819 and 1823). Wikipedia.

Bits & Pieces: RBA's Infallibility.

Moses with the Tablets of the Law.
Rembrandt (1659) [A]

An opening note for overseas readers: for diverse reasons, a favourite Australian pastime is to predict when the RBA will change official interest rates.

------------

A few days ago SMH's Jessica Irvine published a piece on why economic forecasters engaging in this "hobby" often get it wrong. Read it here: it's a good read.

The piece was motivated by last week's surprise RBA decision to keep official interest rates unchanged. Bank economists (plus journalists, and commentariat) forecast a reduction, almost unanimously.

Don't get me wrong, Irvine makes a good case: it's these economists' job to make forecasts and they make them using imperfect information. They are vulnerable to confirmation bias, too.

Irvine: "The problem is, these economists are only human".

Fair enough.

She also mentions journalists: "And then comes the media, which, it must be said, doesn't deal well with uncertainty (a human trait)".

Again, fair enough. I have no objection.

Irvine doesn't mention the sundry commentary one finds in the blogosphere, but one could assume similar reasoning applies to the best of it: an all-too-human tendency to over-simplify and follow the leaders.

In contrast, "the Reserve, for its part, feels under no compulsion to fall into line with this game calling. Its board members have the privilege of waiting until all the data is in before acting", said Irvine.

This is much less reasonable.

Irvine implicitly assumes that the RBA's decision was right. This is most obvious in the preceding quote, but you can perceive it in the whole text.

I object to that assumption. The RBA is as much under pressure to make a decision, as the forecasters are to second-guess it in advance. It's the RBA's job to make decisions under pressure.

To make these decisions the RBA uses information, which is publicly available. Therefore, is not clear the RBA has any substantial advantage over forecasters in this regard.

Furthermore, the board members and staff preparing the RBA's board briefs are as susceptible to confirmation bias as any one else. Despite the RBA's mystical aura of infallibility, it's staffed and directed by humans.

In other words, the situation is probably much more symmetrical than Irvine's account suggests.

Asymmetry do enter the situation when one takes into account the consequences of a mistake, which Irvine didn't do: most likely a red-faced forecaster, in the case of a bank economist.

If the RBA makes a mistake the consequences would be more serious. And, at least in this occasion, it is not trivial the decision was right.

Image Credit:
[A] Moses with the Tablets of the Law. Rembrandt (1659). Wikipedia.

Rationality = Methodological Individualism.

I wasn't planning writing on this, but Robert Viennau came up with a very interesting post on decision theory.

In the comments to his article, Viennau mentioned favorably a piece by Mario Rizzo. Upon reading it, I agree with Viennau: although I have a problem with a few secondary points, the piece is indeed quite thoughtful (readers could find it rewarding reading it).

After arguing the limitations of decision theory, Rizzo reached the conclusion:

"What are we to conclude from this? Are we to say that the behavioralists are right after all? The behavior illustrated here is not rational. It certainly is not rational in the sense meant by those who espouse the standard axiomatic version of rationality. But since it is quite plausibly rational in a broader sense of the term why should the failure to conform to the axioms bother us?  It might bother us if our only task were to explain or predict behavior. The model does not do the job". (Emphasis added).

As it happens, I agree with the conclusion.

So, what's the problem?

The key here is the implications one is to derive from the conclusion: how one answers the question posed (i.e. "Why should the failure to conform to the axioms bother us? It might bother us if our only task were to explain or predict behavior").

In other words, if the narrow neoclassical formal (i.e. axiomatic) model of human individual, micro behavior is deemed to be faulty, what is the alternative?

Most of economics is based on the notion of methodological individualism: the aggregate, macro phenomena are to be explained and predicted from purposeful individual, micro behavior (that is, action, in Misean terminology).

If the current model is inadequate, one answer is to replace it with an informal broader model of human individual, micro behavior. This is what Austrians already do (at least Austrians in the Misean variant), who base their model on the action axiom:

Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego's meaningful response to stimuli and to the conditions of its environment, is a person's conscious adjustment to the state of the universe that determines his life. Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement of commentary. (See here)

In my opinion, this is a false way out, because it gives the analyst the role of ultimate arbiter of what is rational behavior: the analyst "rationally" determines what the rational behavior is, on an ad hoc basis.

An altogether different answer, that I favor, is the abandonment of methodological individualism, at least in its most extreme forms.

Update:
12/02/2012. Although Bill Mitchell doesn't mention methodological individualism, at least one of his posts ("Fiscal austerity – the newest fallacy of composition", 06/07/2010) seems complementary to the views just exposed.

Mitchell starts by claiming that mainstream macroeconomics is largely affected by a form of the fallacy of composition: assuming what is rational for individuals is necessarily rational for the collective of individuals.

Mitchell explains that initial assessment:

"The origins of this logical error lie in the way in which mainstream economics developed. It was largely concerned with microeconomics and started its a priori reasoning from the perspective of an atomistic individual. The single consumer or single firm. I won’t go into detail here but this body of theory soon got into trouble via the so-called Aggregation Problem.
"So to make statements about industry or markets or the economy as a whole, the mainstream had to aggregate their atomistic analysis. Of course this proved to be impossible using any reasonable basis and so they fudged the task and assumed things like the 'representative household' to be the demand side of a product market and the 'representative firm' to be the supply side."

A few comments: what Mitchell calls "a priori reasoning from the perspective of an atomistic individual" is the deduction of individual behavior, from rational individual behavioral assumptions (in neoclassical microeconomics) and what Mises called action axiom (in Misean Austrian economics).

From this individual behavior and according to the principle of methodological individualism, the collective, aggregate, behavior is to be deduced. When a collective, macro behavior can be traced back to individual behavior, it is said to have microeconomic foundations.

The difference between Mitchell's views, as expressed in the quote above, and the views expressed by me here is that Mitchell emphasizes several macroeconomic problems inherent in the methodological individualism programme (what he refers to as the Aggregation Problem) and leaves out of consideration (at least in the text mentioned) the intrinsic difficulty in defining rationality. Therefore, with the caveat expressed that I am scrutinizing this particular text, the methodological individualism/microfoundations paradigm is not necessarily ruled out.

I, at the other hand, implicitly place greater emphasis in the latter aspect (i.e. rationality definition), and leave out the macroeconomic aspects (i.e. Aggregation Problem) altogether, because I consider that macroeconomics can hardly be based on detailed microeconomic behavior, when we are unable to express what rationality is.

Marriner S. Eccles

Marriner S. Eccles during a press conference. [A]

"You create the source of wealth by labor and employment, which is the only source of wealth."

Born in Utah, Marriner Stoddard Eccles (1890-1977) was a Mormon and during his youth did missionary work in Scotland. By the age of 22, he was a millionaire and an economist.

By the age of 43, an established banker and industrialist, Eccles was summoned to a hearing before the Committee on Finance, US Senate (February 13 to 28, 1933).

He had also accumulated an impressive CV, which he proceeded to mention:

1. President of First Security Corporation (Utah and Idaho);
2. Vice president and treasurer of the Amalgamated Sugar Co;
3. President of Sego Milk Products Co (Utah, Idaho, and California);
4. President of the Utah Construction Co;
5. President of the Stoddard Lumber Co (Oregon);
6. Director of 2 chain retail concerns: the Anderson Lumber Co.; the Mountain States Implement Co (Utah and Idaho);
7. Member of Utah governor's executive relief committee;
8. Director of the Salt Lake branch of the Reconstruction Finance Corporation.

Eccles had a reason to mention this to the Committee: "I mention these contacts merely to rebut any assumption that my views are founded upon theory alone".

It would seem, in those days, to claim commercial success, if not wealth itself, could provide some credibility, especially if one held views that went against the mainstream of economics. At the time, such unconventional views were summarily dismissed as wishful thinking (not to mention as the delusions of a feverish and obtuse mind, or, worse, as charlatanism).

Evidently, things have changed enormously in our enlightened times...

In any case, Eccles needed any advantages he could muster: the then head of the Finance Committee, Reed Smoot (Republican, Utah), also a Mormon, had confronted serious challenges to his Senate membership, decades earlier, due to his religion. One could speculate that, per se, the presence of Eccles, another Mormon from Utah, would raise eyebrows among the senators attending the proceedings.

On top, in that hearing Eccles revealed highly heterodox and contentious views on economics. From a historical perspective, the most important subject is arguably his Five-Point Program, which anticipated many of the New Deal policies then newly elected President Franklin Delano Roosevelt would eventually apply with Eccles' help.

"Construction of a Dam". William Gropper (1939). [B]

But this is not what I intend to highlight here. The brief quote opening this text comes from those hearings and suggests that Eccles was not only a Keynesian before Keynes, but he might also have seriously considered the "metaphysical" [1] labour theory of value:

"Senator WALSH of Massachusetts. It [i.e. the Federal Budget] would not be balanced immediately; it would be balanced in the future.
"Mr. ECCLES. I am saying that when that is done it would automatically balance as with an individual or corporation, because you create the source of wealth by labor and employment, which is the only source of wealth."

But, if on account of its brevity, the quote above is not necessarily conclusive, the following, more extended quote, is much more suggestive:

"If our problem is then the result of the failure of our money system to properly function, which to-day is generally recognized, we then must turn to the consideration of the necessary corrective measures to be brought about in that field; otherwise, we can only expect to sink deeper in our dilemma and distress, with possible revolution, with social disintegration, with the world in ruins, the network of its financial obligations in shreds, with the vary basis of law and order shattered. Under such a condition nothing but a primitive society is possible. Difficult and slow would then be the process of rebuilding and it could only then be brought about on a basis of a new political, economic, and social system. Why risk such a catastrophe when it can be averted by aggressive measures in the right direction on the part of the Government?"

Is Eccles speaking of a revolution and proposing his Five-Point Plan as a way to ensure it does not come about? I highly recommend readers to read the transcript, so they can judge by themselves.

Photo Credit:
[A] Marriner S. Eccles. Wikipedia.
[B] "Construction of a Dam", by William Gropper (1939). US Department of the Interior. Wikipedia.

Note:
[1] The "metaphysical" remark is a private joke I share with some anti-Marx progressives who achieved the noteworthy feat of "disproving" Marxism, without knowing anything about it. Other readers can safely disregard the comment.