Wednesday, May 30, 2012

Decision inertia

Econblogger Scott Sumner, extends an excellent comment on one his posts which raises the issue of policy "stickiness", or what I have long thought of as policy inertia.

That there is such a thing as policy inertia is clear from history or from observation of the world around us. An example of policy inertia is that, during the Pacific War, it was decided to base a Royal Navy task force at Singapore, Force Z. It was to be a fairly standard force of aircraft carrier (HMS Indomitable), battleship (HMS Prince of Wales), battlecruiser (HMS Repulse), and support ships (four destroyers). Unfortunately, HMS Indomitable ran aground in the Caribbean en route. Yet the deployment of the rest of the Task Force went ahead anyway. As a result, Force Z lacked naval air support and HMS Prince of Wales and HMS Repulse were sunk by Japanese aircraft off the coast of Malaysia. (Yes, Admiral Tom Phillips was a dill who did not believe in airpower and failed to call for the RAF air support that was fueled and waiting, but the lack of an aircraft carrier made Force Z much more exposed to air attack in the first place; Mediterranean experience being that even a small number of fighter aircraft could break up attacks on ships even if the attacking aircraft were also supported by fighters.) There was a good reason why an aircraft carrier had been originally assigned to a task force operating in such open waters and HMS Indomitable's mishap should have changed the deployment decision, but policy inertia kicked in.

Generally, changing a policy involves higher institutional transaction costs than keeping with the current policy. People have to come to a new agreement, orders have to be changed, new arrangements worked out, etc. If reputation or credibility effects operate, the costs rise further. If changing the decision involves increased uncertainty (e.g. because past experience provides little or no guidance), that raises costs again; further increasing the policy inertia.

Policy inertia (or policy stickiness, in economic jargon) is an observable tendency of organisations and, if one thinks about it, not a surprising one.

Indeed, a certain amount of price stickiness can be understood as being a form of policy inertia, not merely within the firm but also the signaling and other costs involved in communicating changes in existing arrangements with its customers/clients.

Taking it further, policy inertia is an institutional form of cognitive inertia; the tendency to continue with patterns of action or beliefs in an unconsidered fashion. There has to cognitive inertia, we simply do not have the time or cognitive capacity to continually re-assess every decision; so we use habits, routines and other cognitive shortcuts. Similarly, organisations would find it very costly to reconsider every decision all the time. Particularly when you consider the signaling costs to their own staff and other stakeholders and the problematic effect on expectations.

Of course, if you are a central bank and essentially a single decision (monetary policy) is your raison d'etre, then policy inertia is less acceptable. Alas, reputation affects are likely to be particularly strong (and, sadly, get worse the worse economic conditions get since the amount of avoidable economic misery your policy failures are causing mounts and so the greater the implied humiliation in changing policy).

Either way, policy inertia (or what we more broadly might call decision inertia) should be a feature of institutional and macro-economic analysis.

Wednesday, May 23, 2012

What is this thing called property?

My nomination for the most misleading metaphor in modern philosophy is John Locke’s notion that, in a state of nature, one mixes one’s labour with something to rreate property. In John Locke's words:
The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature has provided, and left it in, he hath mixed his labour with, and joined it to something that is his own, and thereby makes it his property.
This is nonsense. Animals engage in “mixing their labour” with things all the time, they do not thereby create property. In fact, one of the distinctive things about homo sapiens is our sense of property. Not a sense of “territoriality” (“this is mine”); plenty of species have that. But the sense of “yes, that is yours and I will deal with it and you on that basis". Property, at its most basic, is acknowledged control, a game of reciprocal constraint. I acknowledge your property in the expectation you will acknowledge mine. If that happens, social possibilities massively expand.

[ADDENDA Hopefully the following clarifies and extends my argument in ways which are more persuasive: but that is a virtue of blogging; offering ideas for comment and testing. Locke's approach has plausibility because of belief that labour is worthy of his hire, so property as "reward for effort" has resonance. But that is not Locke's argument.

Locke's argument starts with the notion that we own ourselves. It does not rest on us being the creation of our own labour, but a notion of self-ownership. By "mixing our labour" with things acquired from nature we "create" property by a process of extension of our self-ownership.

There is a series of problems with this argument. First, if we own ourselves, do we really think that we can therefore sell ourselves, either entire or by amputation and alienation of bits? And, if not, in what sense is this ownership? Is there not something perverse about a concept which implies an acceptable separation of our physical self (in whole or in part) from ourself. To be property is to be owned by something that is not itself and which can be passed on to others. So, to be property, even of ourself, is to be lessened from what we feel is the proper status of being a moral agent.

A notion of self-dominion makes more sense; we control ourselves and property extends from that control. By taking some unowned thing from nature, we assert control over it; it is the assertion and acceptance of control which creates property.

As ever, slavery provides a limiting case. The institution of slavery contradicts Locke's notion that we own ourselves. Slavery is morally obnoxious (a violation of self-dominion, and so human autonomy, in the most profound sense) but it does not make slaves any less property. It is the acknowledged assertion of control over the slave that creates slavery, not the labour of the slaveowner (even if it is directed to that end) extending the slaver's self-ownership to cover the slave. Do we really think that the process of enslaving is a process of the slaver "mixing their labour" with the slave? Surely not; neither as a description nor as some act of legitimation. No amount of applied labour by the slaver makes slavery legitimate nor is it what makes slaves property.

The process of enslaving is a process of getting acknowledged control over the slave. The more difficulty involved, the more the slaver has to act to do so, but the effort required does not affect any "level" of being property, merely whether it is worth the bother. Locke's use of the term 'labour' directs attention to the effort and not to what is being effected. (Hence the connection to the labour theory of value, which makes the same error.)

Moreover, by starting with self-dominion, we can see how slaves can buy their freedom. Although their legal status as property formally precludes them from having any property, the degree to which they can control their own actions can give effective (i.e. economic) property rights.

Nor do we do think the recipient of property gained via exchange is somehow less legitimately the owner because none of her labour has been applied to the thing exchanged (though she has [trans]acted). Her ownership is hers, it has no connection to the labour of any previous owner, merely that it has been acquired by some legitimate process (which, for day-to-day transactions, in the absence of evidence to the contrary, we presume to be the case for any current possessor).

Property exists in acknowledged control; it rests on acknowledgement of a domain of authority by a person over an attribute which is accepted as constraining others (and so is quite dependent on a moral sense, upon which property law can be built) regardless of whether it was acquired from nature or by transaction with another.]

Property is fundamental
For once you have a concept of mutually acknowledged control of things, then you can engage in exchange. For exchange is a transfer of control. And with exchange comes vastly increased social possibilities. One can access resources that do not originate in one’s own area. People can specialise, so produce more, and swap what they have a surplus of for what they have a deficit of. (Or, more precisely, swap what they value less for what they value more.)

The gender-exchange of hunter-gathering (women mind children and gather; men go out singly or in groups and hunt) was likely what gave our foraging ancestors a crucial advantage over Neanderthals, by increasing both our foraging and our child-rearing success (a primordial application of comparative advantage).

Locke’s disastrous metaphor led to the, quite false, labour theory of value, which has things so the wrong way around. Things do not have value due to labour, we direct our labour to acquiring things we value. Our sense of value directs our labour (not always successfully). So Marxian studies which connect movements in use of labour to shifts in price (“exchange-value”) tell us nothing other than labour is more flexible than capital and that we direct resources we control to creating (or otherwise acquiring) according to our expectations of value. As such efforts are rewarded (or not) in commercial exchanges, the selection processes of markets operate.

Karl Marx famously made the labour theory of value his analytical centrepiece. But he did so on the basis of poor reasoning and created a self-contradictory theory of exploitation.

Effective control
According to a definition developed by economist John R. Commons:
A property right is an enforceable authority to undertake particular actions in specific domains.
As Elinor Ostrom says in her Nobel prize lecture, out in the world, five types of property right can be identified.

[Read the rest at Skepticlawyer.]

Monday, May 21, 2012

The price of renting money

Over at Skepticlawyer, I participated in a thread on why interest rates are the price of credit, not the price of money.  It turned into a classic example of why the best way to learn is to teach. A commenter queried my example of borrowing cows (for a consideration) as credit without money. She said that was just renting the cows. Which, of course, it would be. But so is an interest rate.

Interest rates are the price of renting money. So, interest rates are the price of credit (of money being rented). Someone borrows money and they are charged for using the money. The longer they use it, the more they are charged. Just like rent.

Of course, different forms of renting money get charged different interest rates, depending on the risk level involved. But, where landlords differentiate in the quality of the housing offered (low rent means lower quality), money is money.  So, the more risk, the higher the rent. Not least because it is easier for money to disappear than a house. Differentiation gets put into the rent (i.e. the interest rate) because the basic product is not variant in quality, only the conditions under which it is offered.

Money is, however, useful only for its swap value, which is the price of money--what you can get for it. And if the level of money in-use-in-transactions rises faster than output, the average swap value of money will decline. So expectations about the future path of the average swap value of money are built into interest rates. After all, people don't want to lose by renting out their money.

What is particularly useful about thinking of interest rates as rent-for-using-money is that it makes it very clear that interest rates are not the price of money. No more than rent is the price of a house.

And if rents are high, do we think housing is plentiful or scarce? (Relative to demand.) If rents are low, do we think housing is plentiful or scarce (relative to demand)? The same with interest rates and money-for-rent (i.e. credit).

Conversely, if there is lots of money for credit does that suggest people are holding money or spending it? Holding it. If people are holding it rather than spending it, does that suggest money-for-transactions is easy or tight? Tight. [And if money is tight, will the demand for credit be high or low? Low.] After all, low interest rates usually reflect confidence that money will retain its swap value [so that money is expected to be tight relative to is use purchasing output]. (Mostly low interest rates suggest tight money; there are some weird possible cases with interest rates, but we can leave that aside.)

Which is another way of saying both quantity (money supply) and velocity (average rate at which money is used) matter since they both affect the level of money-for-transactions. Hence interest rates are not the price of money and it is highly misleading to treat interest rates as the only indicator of monetary policy.

It also points to a difference between monetary instruments, such as bonds, compared to other assets.  A bond has no value apart from its expected (rental) income. But houses, for example, can reach prices well above their expected rental value. Why that is so is a genuinely interesting question.

But at least I now have a good response to "interest rates are the price of money".  No, they are the price of renting money.  After all, folk generally want their money back, plus a charge for not having use of it themselves. (Or whatever the next best use of it is.) Sounds like renting to me.

Saturday, May 19, 2012

Understanding the dual mandate

Both the RBA and the Fed have a "dual mandate", to keep both inflation and unemployment down. A way to think about that in monetary policy terms is that the central bank, as the monopoly provider of money, is expected to keep the value of money stable (not changing greatly across time) and the level of transactions high (keeping production up around capacity). Keeping the value of money stable minimises the cost of inflation (or deflation) while keeping transactions up so that production is up around capacity means that it is not leaving a lot of labour capacity unused (i.e. unemployed).

If we think of it in terms of the equation of exchange:
MV = Py

(Money supply x Velocity  = Price level x output)

then we want changes in P to be low and y on to be on a stable growth path. Which, to put it another way, means Py on a stable growth path. In economic-speak, that means targeting NGDP, GDP in money terms--which is P x y. (Or, to be more precise, targeting expected NGDP.)

The trouble with just targeting changes in P (inflation-targeting) is that, if there is a fall in y, then the money supply (and so income) has to follow y down, exacerbating the effect of the fall in output (given that prices, and debt obligations, are "sticky"). (Unless one is the RBA and one's target is an average change in P over the business cycle, so can lean against changes in y.)

To put in another way, rigid inflation targeting sacrifices keeping the level of transactions up in order to keep the value of money stable. Conversely, targeting (expected) NGDP involves a commitment by the central bank to respond to changes in the demand for money so that the level of transactions can be maintained (if the demand for money increases) and changes in P are stable (if the demand for money falls).

As Lars Christensen clearly points out, the current crisis comes from central banks, particularly the Fed, not responding to changes (specifically increases) in the demand for money. As Scott Sumner points out, it represents the failure of inflation targeting. (Evan Soltas has some good arguments for NGDP targeting here.)

ADDENDA: One of the tragedies of the illusory appeal of "Austrianism" (popularised Austrian economics) is that it diverts energy from useful critique of the performance of central bankers to an obsessive irrelevance. The historical record shows that it is the periodic propensity for central bankers to undersupply money, to fail to match money demand, which is the most economically disastrous failure of central banking. So it is periodic money-droughts, not hyperinflation, which is the dangerous failure-risk of central banking. (A propensity that is more in line with the normal problem of monopoly-providers, which is to undersupply.) Any serious analysis of central banking must grapple with that, not obsess over over-supply as the "real" or "underlying" problem.

Thursday, May 17, 2012

If it's not Baroque, don't fix it

A couple of days ago, went to St John's co-cathedral in Valletta. Downloading and then uploading images from my iPad defeats me. But images are available here.  It is an unrestrained example of a Baroque Catholic cathedral. When I say "unrestrained", I mean they did not know when to stop. I would say it was positively Hindu or Chinese in its inability to know when to stop, except that would give mere ornamental bling excess a bad name.  It does not so much assault the boundaries of good taste as unthinkingly obliterate them.

But the cathedral  has two Caravaggios on display--St Jerome Writng and The Execution of St John. In a side chapel. A juxtaposition that allows one to contemplate the conjunction of the sublime and the ridiculous.

Still, the cathedral itself is proof that old does not equal tasteful. Or, as I have been known to observe to fellow re-enactors, bad taste is period too.

[Cross-posted at Skepticlawyer.]

Thursday, May 10, 2012

Humanising law

One of the standard complaints against giving queers (by ‘queer’ I mean any person who does not conform to being definitively male-or-female and heterosexual: i.e. same-sex oriented, same-sex attracted, intersex, transgender people) equal protection of the law is that it is an offense against the Christian, or Judaeo-Christian (if Christians want to include the Jews rather than practising more traditional exclusion thereof), traditions of the Western civilisation. To put it another way, it involves de-Christianisation of law.

Controlling women
This is true. But so did giving women equal protection of the law and giving Jews equal protection of the law. Giving women the right to exit a marriage, and to control their fertility, was equally an “offense” against the Christian traditions of Western civilisation. Indeed, if one examines the Christianisation of Roman law, and of proto-common law, one sees the same pattern. As Christianisation advances, women lose the right to control their fertility, they lose the right to exit a marriage. Being so completely untrusted as decision makers in such key areas of their life, the natural corollary was that they lost control over property as well; hence the development of coverture marriage and married woman as chattel of her husband. A free women in C8th England had far more legal standing, property rights and social opportunities than a free woman in C18th England and the reason for the difference was a thousand years of Christianisation of law.

As institutions and technology developed, and the ambit of religion as a source of meaning and explanation (and so authority) shrank, the legal status of women rose in a steady unravelling of the aforementioned Christianisation of law. They regained property rights, they regained the right to exit a marriage, they regained control over their fertility. (Such rights and control having been features of Celtic, Germanic and late Republic/early Empire Roman law.) Women became legally and socially recognised as full decision-makers, with dramatic expansion of their social opportunities.

That Islam, particularly in the Middle East, has not experienced the same shifts—institutional and technological changes being either outside impositions or grudging adjustments to outside pressure—and the ambit of religion as a source of meaning and explanation has (after a temporary period of retreat) resurged, explains the precarious status of women in such countries.

Oppressing Jews
The case of the Jews is, if anything, even clearer. Christianisation of Roman Law involved a steady process of stripping Jews of legal protections and imposing ever more legal constraints. (Pagans were even more severely treated.)

The Germanic conquests of the lands of the former Western Roman Empire was generally a benefit to the Jews, since persecution of belief was not a feature of Germanic law. Indeed, the Carolingian dynasty valued Jews as revenue-producing, law-abiding believers in God. The relentless hostility of the Catholic Church, however, led to the steady stripping of legal protections from Jews and the imposing of harsher and harsher legal constraints. (To their credit, both Karl-lo-magne and his son Louis the Pious resisted the Church’s demands that Jews be stripped of rights, but the collapse of Carolingian power removed that block.)

It was only with a process of de-Christianisation of law that Jews were able to enjoy full legal protections. By the middle of the C19th, places where a monopoly Catholic or Orthodox Christian Church had the most power (the Papal states, Tsarist Russia, Romania) were where oppression of Jews were most intense. During the C19th and early C20th, the Catholic Church put considerable resources into promoting Jew-hatred.

It has been a standard Catholic refrain over the last few centuries that liberal modernity is evil because it gives people rights. Liberal modernity is evil because it gives Jews equal standing law; liberal modernity is evil because it gives women control over their fertility and the right to exit a marriage; liberal modernity is evil because it gives queers equal rights. The Catholic Church has been a strong proponent of the “insult of equality”—that it is an insult to decent, God-fearing Christians that Jews have the same rights as them, that women have control over their lives, that queers have equal rights. All this is even more intensely true in Islam.

Which leads to two questions: why is monotheism so hostile to equal protection of the law? Why has liberal modernity successively embraced equal protection of the law?

[Read the rest at Skepticlawyer.]

Sunday, May 6, 2012

Don't mention the A-word

The Eurozone, the US, Japan and the UK are all suffering prolonged economic stagnation. [You can see how serious it is in the US here.] It is sensible to suggest that they are doing something (or perhaps many things) wrong and need to change policy. 

What is not sensible is ignoring a developed world economy that has conspicuously not suffered any of the economic stagnation problems that have hit the major developed economies. Indeed, has not had a recession (in the sense of two quarters of economic contraction) since 1991. That sailed through the Great Recession and Global Financial Crisis (aka GFC) with barely a ripple. Whose current problems are not of economic stagnation but of maintaining economic balance when one part of the economy is doing much better than another.

That country is Australia. Yes, it is true that the surge in commodity demand (centred on China) has been a boon to the Australian economy (well, to the commodity exporting States; the resultant surge in the value of the $A has been a problem for the tourism-and-goods exporting States—the commodity boom has been a distinctly mixed blessing). But Australia had also managed to avoid recession even when its terms of trade (the ratio of the price of what it sells to the price of what it buys) were in long-term decline and when commodity prices dropped dramatically at the onset of the Great Recession. Indeed, the fall in Australia’s exports as a % of GDP was worse than the US’s.

Yet the Australian success gets mostly ignored. A classic example is Raghuram Rajan’s recent piece in Foreign Affairs. (Non-gated version here [pdf].) Much of what he has to say about the desirability for supply-side reforms is sensible. Indeed, much of what he advocates Australia has already done; which makes the failure to mention what should be the poster-polity for what he is advocating all the more of a glaring failure.

The problem with mentioning Australia is that it does not conform to the stories that Rajan and others want to tell about what went wrong. Rajan essentially ignores monetary policy, both in the commonly offered solutions to economic stagnation (fiscal stimulus and even-lower interest rates: interest rates are a very limited way of looking at monetary policy) and in diagnosing why the economic stagnation descended. So Rajan writes:
today’s economic troubles are not simply the result of inadequate demand but the result, equally, of a distorted supply side.
Australia has done a lot of supply-side reforms, so perhaps it can be ignored. Except Rajan goes on to say:
For decades before the financial crisis in 2008, advanced economies were losing their ability to grow by making useful things. But they needed to somehow replace the jobs that had been lost to technology and foreign competition and to pay for the pensions and health care of their aging populations. So in an effort to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same. The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.
Does anyone really think Australia just magically averted such structural problems, that its economy is somehow profoundly different from other developed countries? Given its per capita GDP growth has been respectable but not outstanding. In particular, while its public finances were much sounder, with public debt reduced to very low levels, enthusiastic embrace of private debt meant that the total level of indebtedness was and is comparable to other developed countries.

 The story that Rajan wants to tell is that:
the common thread was that debt-fueled growth was unsustainable.
Except, apparently, in Australia. Australia ran a mildly higher inflation rate than the US during the “Great Moderation”, so its monetary policy was more “lax” than “easy money-easy credit” US.

[Read the rest at Skepticlawyer or at Critical Thinking Applied.]