As published in City AM Wednesday 24th April 2019Read More
At this time of year, most people are focused on leisure. The holiday you have just had, the one you are on now, or the one you are just about to go on.
With exquisite timing, the 1 August issue of the top Journal of Economic Perspectives has a symposium of papers about work.
The opening sentences in the summary of the first of these reinforces the impression that economists can sometimes be rather unworldly. This is despite the fact that the author, Edward Lazear, occupies a chair at Stanford Business School and replaced Ben Bernanke as Chairman of the Council of Economic Advisors in 2006.
“Labor is supplied”, the summary proclaims, “because most of us must work to live. Indeed, it is called “work” in part because without compensation, the overwhelming majority of workers would not otherwise perform the tasks”.
It is an excellent illustration of the technique outlined by the 1950s British satirical writer Stephen Potter about how to gain the upper hand in a conversation about business. In his book One-Upmanship, he describes his ‘Economics B’ technique as the ‘Approach of Utter Obviousness’.
To be fair, the paper itself has real content. Lazear points out that economics as a science has made good progress in specifying how compensation and the forms in which it comes influences worker effort.
The results are sometimes surprising. For example, Bengt Holmström, the 2016 Nobel Laureate, concluded his Prize lecture with the statement that “one of the main lessons from working on incentive problems for 25 years is that, within firms, high-powered financial incentives can be very dysfunctional and attempts to bring the market inside the firm are generally misguided”.
The other two papers are much less about conventional economics. They focus on the psychology and meaning of work.
Greg Kaplan at Chicago and San Schulhofer-Wohl of the Chicago Federal Reserve examine how changes in the distribution of occupations since 1950 have affected the aggregate non-monetary costs and benefits of working.
The physical effort of work has obviously declined a lot over the decades, so that is a benefit. But the authors find that the emotional impacts of the changing occupation distribution vary substantially across demographic groups.
Compared to 70 years ago, work has become happier and more meaningful for women, but more stressful and less meaningful for men. And most of these changes are concentrated on workers with lower educational qualifications.
The final paper, by Lea Cassar of Cologne and Stephan Meier of Columbia is even further removed from the traditional areas studied by economists. They tackle the massive topic of work as a source of meaning in people’s lives.
The authors develop an initial theoretical model which incorporates the three psychological needs at the basis of self-determination theory: autonomy, competence, and relatedness. Intriguingly, they suggest that the concept of meaning at work can be examined using existing tools in economics such as labour supply theory and principal-agent analysis.
Economics has a strong streak of confident imperialism. Increasingly, it intrudes into a wide range of other social sciences.
As published in City AM Wednesday 15th August 2018
Image: Holiday by Pxhere is licensed under CC0 1.0 UniversalRead More
Mark Carney, the governor of the Bank of England, hit the headlines at the weekend, claiming that Marxism could once again become a prominent political force in the west.
Automation, it seems, may not just destroy millions of jobs. For all except a privileged minority of high-tech workers, the collapse in the demand for labour could hold down living standards for decades. In such a climate, Communism may seem an attractive political option.
Karl Marx as an economist is a bit of a curate’s egg, good in parts. In the late eighteenth and early nineteenth centuries, it was obvious that the system of factory production was dramatically different to anything which had ever existed, but it was thought that might disappear just as suddenly as it had emerged.
Marx was the first major economist to see that the accumulation of capital in factories represented a new, permanent structure of the economy: capitalism. He developed a theory of the business cycle, the short-term fluctuations in economic growth, which is much more persuasive than the equilibrium-based theories which dominate academic macroeconomics today.
But he was completely wrong on a fundamental issue. Marx thought, correctly, that the build-up of capital and the advance of technology would create long-term growth in the economy. However, he believed that the capitalist class would expropriate all the gains. Wages would remain close to subsistence levels – the “immiseration of the working class” as he called it.
In fact, living standards have boomed for everyone in the west since the mid-nineteenth century. Leisure hours have increased dramatically and, far from being sent up chimneys at the age of three, young people today do not enter the labour force until at least 18.
Marx made the very frequent forecasting mistake of simply extrapolating the trend of the recent past.
In the early decades of the Industrial Revolution, just before he wrote, real wages were indeed held down, as the charts in Carney’s speech show. The benefits of growth accrued to those who owned the new machines. Marxists call this the phase of “primitive accumulation”.
But such a phase has characterised every single instance of an economy which enters into the sustained economic growth of the market-oriented capitalist economies, from early nineteenth century England to late twentieth century China.
Once this is over, the fruits of growth become widely shared.
In fact, Carney’s own charts give grounds for optimism and contradict the lurid headlines around his speech. One is headed “Technology driving labour share down globally”. In other words, the share of wages and salaries in national income has been falling. In the advanced economies, this was some 56 percent in the mid-1970s and is 51 percent now. But all the drop took place before the mid-2000s. If anything, the labour share has risen slightly since.
Similarly, inequality has increased over the past 40 years, but almost all the increase took place in the 1980s. Depending which measure we take, it has either stabilised or fallen since 1990.
The future looks more optimistic than either Marx or Carney suggest.
As published in City AM Wednesday 19th April 2018
Image: Car Factory by Jens Mahnke is licensed under CC0.0Read More
The liquidation of Carillion continues to feature prominently in the news.
Last week, the story was the fees being charged by PwC, the accountancy firm tasked with salvaging money from the wreckage.
It emerged that PwC’s fees, which take priority in terms of being paid over the various creditors and pensioners, amounted to £20.4m for the first eight weeks’ work. The special manager with overall responsibility has a rate of £865 an hour.
The fees were described in parliament as “superhuman”.
We might reasonably ask how these rates are determined. Why are they not half their actual value? The remuneration would still be very substantial. Equally, why are they not double?
The answer from a basic economics textbook would be that it is a matter of supply and demand. The wage – if such a proletarian term is acceptable in these elevated circles – is set at a level which ensures that there are just enough bean counters to carry out the amount of work which exists.
But it is hard to sustain this argument. The Big Four accountancy firms in the UK take on around 5,000 graduates every year. They receive almost 100,000 applications. There is a long process of whittling down. Eventually, nearly 10,000 get to the final stage, an interview with a partner.
Clearly, many graduates have very strong qualifications. But the wage rate is not bid down by this over-supply.
The argument about how prices, in this case the hourly PwC rate, are set goes back a long way in economic theory.
In the decades just before the First World War, two highly accomplished mathematicians who occupied the top chairs in economics, Alfred Marshall at Cambridge and Francis Edgeworth at Oxford, wrangled over the issue.
Appropriately enough in the week following Cambridge’s triumph in both the men’s and women’s boat races, Marshall was the victor at the time. But, to employ another sporting analogy very much in the news, there was a certain amount of ball tampering along the way.
Edgeworth thought that, in most situations, there was an inherent indeterminacy about the price which emerged. He wrote: “it may be said that in pure economics there is only one theorem, but that it is a very difficult one: the theory of bargain”.
Marshall simplified matters dramatically. He assumed that there are so many economic agents in a market that no single one of them can influence the price. This enabled him to draw, in his own best-selling textbook, the supply and demand curve diagrams familiar to generations of students.
But it was a simplification too far. If no one can influence the price, how is it set?
A lot of modern economic theory is about developing Edgeworth’s view that economics is essentially about bargaining. It makes it much more difficult, but more realistic.
There is no inherent economic justification for the hourly rates which the Big Four accountants charge. They have simply got the best of the bargaining process. Companies need to wake up and start to insist on lower fees.
As published in City AM Wednesday 28th March 2018
Image: PWC by Bjørn Erik Pedersen is licensed under CC by ShareAlike 3.0Read More
The first column of a new year is the time for a prediction.
By far the hardest part of forecasting is to identify tipping points. The success rate of calling a break in an established trend is very low.
Accompanied by suitable health warnings, 2018 looks like the year in which the longstanding relationship between capital and labour looks set to change.
The use of the words “capital” and “labour” does not mean that the two are antagonistic in the Marxist sense. Once a country has properly embraced capitalism, there is not a single instance of it ever being abandoned. And “labour” in particular is a very mixed category indeed, covering both university vice chancellors and the people who clean their offices at night.
But it is a useful simplification to describe the players in the evolutionary game of how to divide national income between profits and wages or salaries.
Over the past three decades or so, capital has been winning. The share of profits in national income across the west has risen, and the share of wages has fallen.
The reaction of a number of major companies to President Donald Trump’s cut in corporation tax rate from 35 per cent to 21 per cent suggests that the game is turning.
Almost immediately, firms like AT&T and Boeing announced special bonuses for their workforces. Even the banks got in on the act, with Wells Fargo, for example, raising its hourly minimum wage 11 per cent, to $15 from $13.50. Additionally, the bank plans to donate $400m to community and non-profit organizations in 2018.
The share of wages in American GDP has already started to stabilise. Since 2014, there have been no further falls. Short-term trends like this can be misleading, but for four years the wage share has been constant.
More generally, the surge towards greater globalisation which has characterised recent decades seems to have halted.
Strong political blocs have grown in the west that share a dislike of the liberal, open border consensus which has done so much to hold down the real wages of the less skilled.
The election of Trump is the obvious example. We see it in the vote on Brexit. We see it in the hostility to the free movement of labour shown by governments in Eastern Europe.
On a more parochial level, scrutiny of the “emoluments” (“pay” is too vulgar a word for these panjandrums to use) of chief executives and vice chancellors is intensifying on almost a daily basis.
There is very little resentment of monies made by those who are perceived to have earned it by their personal skill and effort. Entrepreneurs and footballers alike are held in high regard in this respect.
In contrast, there is distinct antagonism towards rent seekers: those at the top who get paid not on their merits, but merely on the basis of the position they hold.
The balance of forces is shifting. Smart politicians and business people should pay close attention during the coming year.