Reading Technology Review is a wonderful antidote to reading Regulation Magazine

Friday, May 26th, 2017

Arnold Kling has grown more pessimistic about American political culture:

I think that I would have preferred that the elite stay “on top” as long as they acquired a higher regard for markets and lower regard for technocratic policies. What has been transpired is closer to the opposite. There was a seemingly successful revolt against the elite (although the elite is fighting back pretty hard), and meanwhile the elite has doubled down on its contempt for markets and its faith in technocracy.

I am disturbed about the news from college campuses. A view that capitalism is better than socialism, which I think belongs in the mainstream, seems to be on the fringe. Meanwhile, the intense, deranged focus on race and gender, which I think belongs on the fringe, seems to be mainstream.

The media environment is awful. Outrage is what sells. Moderation has fallen by the wayside.

It seems increasingly clear that no matter who wins elections, my preferences for economic policy get thrown under the bus. The Overton Window on health policy has moved to where health insurance is a government responsibility. The Overton Window on deficit spending and unfunded liabilities has moved to where there is no political price to be paid for running up either current debts or future obligations. The Overton Window on financial policy has moved to where nobody minds that the Fed and other agencies are allocating credit, primarily toward government bonds and housing finance. The Overton Window on the Administrative State has moved to where it is easier to mount a Constitutional challenge against an order to remove regulations than against regulatory agency over-reach.

Outside of the realm of politics, things are not nearly so bleak. Many American businesses and industries are better than ever, and they keep improving. Scientists and engineers come up with promising ideas. Reading Technology Review is a wonderful antidote to reading, say Regulation Magazine. The latter is the most depressing thing I do all month.

There’s a lot to like about cutting corporate taxes

Monday, May 15th, 2017

There’s a lot to like about cutting corporate taxes:

One reason is that corporate taxation isn’t the greatest way of raising revenue. When you tax a corporation, it’s not just the shareholders who pay. Prices for customers go up to some degree, and take-home wages for employees — both at the top and the bottom of the pay scale — go down. It’s difficult to tell who pays what — some economists estimate that shareholders pay essentially all of the tax, while others conclude that workers pay the lion’s share.  There’s also a chance that some piece of the corporate tax might fall on those who can least afford to pay, specifically low-wage workers and poor people. That uncertainty implies that society should shift the tax burden from corporations to wealthy individuals. That will ensure that less of the cost of government falls on the poor. Since corporate tax represents only 11 percent of U.S. revenue, replacing some of that with higher top-end income taxes shouldn’t be too difficult.

There’s also the question of whether corporate taxes reduce investment. In the 1980s, some economists concluded that taxes on capital — of which corporate taxes are one variety — should be zero. Since capital — the physical kind, buildings and machines and so on — allows greater production in the future, taxing it today just means a smaller economy, and therefore a smaller tax base, down the road. That result came from a highly unrealistic model, and later economists showed that when you tweak the model a bit, the optimal corporate tax is no longer zero. Still, the U.S. should be focusing on ways to boost business investment, which has fallen as a share of output in recent years:

There is plenty of evidence that corporate tax cuts can raise investment levels. A 2009 paper by economists Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho, and Andrei Shleifer found that lower corporate taxes are correlated with more investment. And when Canada cut taxes for some kinds of companies but not for others in the early 2000s, the companies that got tax cuts invested more. A number of other studies find similar results. So in this climate of low investment, the U.S. should try corporate tax cuts as one method of getting businesses to spend more.

But perhaps the clearest reason to cut corporate taxes is the waste they generate through avoidance. A key, often overlooked fact about the U.S. corporate tax is that many businesses manage to pay little or nothing. One of the most common ways to do this is to shift profits overseas, through transfer pricing, inversions, or other perfectly legal methods, to a tax haven country like the Cayman Islands. There, a company can avoid taxes indefinitely, reinvesting the profits in its business and letting them compound. If the company wants to cash out, it has to repatriate its cash and pay taxes to the U.S., but the returns from delaying the date of payment can be substantial. And often, a corporation can avoid taxes altogether by waiting for the U.S. to enact a repatriation holiday. In addition to tax havens, there are many other legal loopholes businesses can exploit to avoid taxes.

As a result of avoidance, the U.S. doesn’t collect much more of corporations’ profits than other countries do, despite having a much higher official tax rate. A number of recent studies find that on average, U.S. companies pay about 27 percent to 30 percent of their profits in taxes, compared with 24 percent to 26 percent average for other nations.

Meanwhile, because of tax avoidance, the true rate isn’t closely tied to the headline rate. The official U.S. rate has remained at 35 percent since 1993, with only minor changes. But the percent of corporate profits collected through the tax system has fallen quite a bit.

All that avoidance costs real resources — hours of labor by tax accountants and financial professionals, buildings for them to work in, and computers to keep everything in order. By cutting the corporate tax rate, the U.S. would reduce the incentive for companies to waste all that money avoiding taxes.

Reducing the reward from tax avoidance might also lower an important barrier to entry in U.S. industries. Tax avoidance probably has big fixed costs — you have to hire teams of lawyers and set up foreign subsidiaries. Those fixed costs make it difficult from small startups to compete on a level playing field with big, established companies, worsening the problem of monopoly power in the economy. Cutting the corporate tax rate would make the system fairer.

This is known as “bad luck”

Sunday, May 14th, 2017

The creative class drives cultural and economic flourishing, Richard Florida argued (in The Rise of the Creative Class), but now the “superstar cities” that attract the creative class have grown increasingly unequal, a problem he dubs The New Urban Crisis:

We find that as a city gets bigger, denser, more productive and more economically successful, inequality rises. In a way, the more successful a city or metro area becomes, the more unequal it becomes, and that is quite challenging.

I’m reminded of what Heinlein had to say about creativity and poverty:

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as “bad luck.”

There is a difficulty with giving The Bell Curve a chance

Friday, May 12th, 2017

Charles Murray explains his controversial book The Bell Curve:

In April, I recorded an interview of almost two and a half hours with Sam Harris for his Waking Up podcast, which, I learned only after I had done it, regularly attracts a few million listeners. We spent more than half of the interview discussing what is actually in “The Bell Curve” as opposed to what people think is in it. Both of us expected our Twitter feeds to light up with nasty reactions after the interview was posted. But the opposite happened. The nasty reactions were far outnumbered by people who said they had always assumed that “The Bell Curve” was the hateful pseudoscientific mess that the critics had claimed, but had now decided they wanted to give the book a chance. It has been a heartening experience.

However, there is a difficulty with giving “The Bell Curve” a chance. The paperback edition has 26 pages of front material, 552 pages of main text, a 23-page response to the critics, 111 pages of appendixes, another 111 pages of endnotes, and a 58-page bibliography. It’s a lot to get through. But there’s a shorter way to get a good idea of what’s in the book: Dick Herrnstein and I began each chapter with a summary that was usually about a page long. With the publisher’s permission, I have stitched all of those summaries together, along with selections from the Introduction and the openings to each of the four parts of the book. If these tidbits arouse enough interest that you buy the book, I will be delighted. But at this point in my life, my main objective is that a labor of love, written with a friend who I still miss twenty-three years after his death, be seen for what it is.

Kevin Kelly’s fundamental technological forces

Thursday, May 11th, 2017

In The Inevitable, Kevin Kelly presents a dozen fundamental technological forces:

Becoming
“In this era of ‘becoming,’ everyone becomes a perpetual newbie.”

Cognifying
“The bigger the network, the more attractive it is to new users, which makes it even bigger and thus more attractive, and so on. A cloud that serves AI will obey the same law.”

Flowing
“We are exploring all the ways to make things out of ceaseless change and shape-shifting processes.”

Screening
“People of the book favor solutions by laws, while People of the Screen favor technology as a solution to all problems.”

Accessing
“As we increase dematerialization, decentralization, simultaneity, platforms, and the cloud — as we increase all those at once, access will continue to displace ownership.”

Sharing
“[I]t is an emerging design space in which decentralized public coordination can solve problems and create things that neither pure communism nor pure capitalism can.”

Filtering
“The filters have been watching us for years; they anticipate what we will ask.”

Remixing
“[The entire global economy] is headed for the inevitability of constant, relentless, and increasing remixing.”

Interacting
“Computers have been on a steady march toward us.”

Tracking
“If today’s social media has taught us anything about ourselves as a species, it is that the human impulse to share overwhelms the human impulse for privacy.”

Questioning
“Our society is moving away from the rigid order of hierarchy toward the fluidity of decentralization.”

Beginning
“A hundred years ago H. G. Wells imagined this large thing as the world brain.”

Crime control is not actually a mystery

Wednesday, May 10th, 2017

Crime control is not actually a mystery, Devin Helton notes:

In the long run, men follow incentives. That is not to say we calculate benefits and potential punishment before every action. But over time we build up intuition and a general sense of what we can get away with, what results in social sanction, what results in criminal sanction, what gets status among friends, and what results in success or failure with women.

When we compare the high crime and low crime poor communities, we see large differences in the incentives:

In low crime areas, disobedience at school results in harsh punishment — often corporal punishment.

In high crime areas, disobedience is either unpunished, or punished by suspension, which is hardly punishment to a kid who does not want to be in school anyways.

In low crime areas, the police are quick to crack down on even petty crime. If a gang is known to be harassing a certain area, they are not afraid to apply the billy clubs as needed until the gang is no longer a problem.

In high crime areas, the police ignore drug dealing for months at a time. Murders go unsolved. Police only enter areas when called in, if even then.

In low crime areas, men who lack motivation to work go hungry or enter a workhouse where they are isolated from their buddies and women.

In high crime areas, men who lack a commitment to work earn a living from side hustles, welfare, and living off of mom’s and girlfriends. They still get access to their friends and to sex.

In low crime areas, women are kept under the care of their parents until they are married off to a stable man. If a woman gets pregant out of wedlock and needs aid, she too would have to go the work house where she would be under curfew and discipline.

In high crime areas, women get pregant before locking in a husband, and have to raise their child alone. A rotating array of boyfriends often abuse the children, setting off a cycle of violence. (Non-father males in all human societies, and indeed, all primate societies, are often the most dangerous child abusers, as they have no genetic investment to the children).

In low crime areas, anti-social people are ostracised from the community. They lose access to friends, credit, and are shamed. Without a job, they must enter the workhouse, or they are in jail for their crimes.

In high crime areas, predators live in public housing for years, committing all sorts of crime, with no repurcussion.

(Note: I’m not advocating a return to Victorian era workhouses. I’m simply noting the obvious that if you want people to work a market job, then the “not-working” option has to be worse than the market job option. In the modern era, when we are much wealthier, there are many ways of doing this that wouldn’t entail the horrors of Dickensian workhouses.)

The Bob Rubin trade

Monday, May 8th, 2017

Nassim Nicholas Taleb describes the Bob Rubin trade:

[A] system that doesn’t have a mechanism of skin in the game will eventually blow up and fix itself that way. We will see numerous such examples.

For instance, bank blowups came in 2008 because of the hidden risks in the system: bankers could make steady bonuses from a certain class of concealed explosive risks, use academic risk models that don’t work (because academics know practically nothing about risk), then invoke uncertainty after a blowup, some unseen and unforecastable Black Swan, and keep past bonuses, what I have called the Bob Rubin trade. Robert Rubin collected one hundred million dollar in bonuses from Citibank, but when the latter was rescued by the taxpayer, he didn’t write any check. The good news is that in spite of the efforts of a complicit Obama administration that wanted to protect the game and the rent-seeking of bankers, the risk-taking business moved away to hedge funds. The move took place because of the over-bureaucratization of the system. In the hedge fund space, owners have at least half of their net worth in the funds, making them more exposed than any of their customers, and they personally go down with the ship.

People don’t learn when they they are not the victims to their own mistakes:

Skin in the Game reduces, sometimes even eradicates, the following differences that arose as a side effect of civilization: action and cheap talk (tawk), consequence and intention, the practical and the theoretical, expert and pseudoexpert, entrepreneur and bureaucrat, Coventry and Brussels, the concrete and the abstract, the ethical and the legal, the genuine and the cosmetic, scholarship and academia, democracy and governance, science and scientism, politics and politicians, love and money, the spirit and the letter, Cato the Elder and Barack Obama, quality and marketing, commitment and signaling, and, centrally, the collective and the individual.

But, to this author, is mostly about justice, honor, and sacrifice as the core of human existence.

Does inequality cause crime?

Thursday, May 4th, 2017

It is often argued that inequality or poverty causes crime, Devin Helton notes, and that only by addressing these “root causes” can we reduce crime:

But as we know from Statistics 101, correlation does not prove causation. There are numerous variables that differ between countries or states that can have a correlated impact on inequality and crime: governance, ethnicity, culture, institutions, traditions, etc.

To avoid these confounders, another way to test the link between inequality and crime is to examine the treatment effect. If public policy choices increase inequality, does crime go up? If public policy choices decrease inequality, does crime go down?

From 1910 until the late 1970s, both England and America undertook concerted programs to reduce inequality. Both introduced progressive income taxes. Both changed laws to support unionization. And then in the 1980s both countries reversed course. Britain elected Thatcher, the U.S. elected Reagan. They lowered tax rates, made life more difficult for unions, and promoted business. Inequality rose in both countries for the next few decades.

I hope you see where this is going:

Turns out that inequality reduces crime, and equality increases crime. For every 10% decline in inequality according GINI coefficient, homicide nearly doubles! That is a very strong correlation. (You can download my spreadsheet here).

Does he actually believe this?

No. My results above are due to tricks and confounding factors.

[...]

In total, the statisical analysis above does not prove causation. But — all those studies using correlations to show the opposite, that inequality causes crime, are also bogus. They are also cherry-picked, confounded, and intellectually dishonest. With so many interlocking causal factors, anyone who calculates a correlation with regards to inequality and crime and tells you this proves X causes Y is either appallingly stupid or utterly mendacious.

Read the whole thing.

It conquered the office

Friday, April 21st, 2017

Adam Smith famously used a pin factory to illustrate the advantages of specialization, Virginia Postrel reminds us — just before the Industrial Revolution really kicked off:

By improving workers’ skills and encouraging purpose-built machinery, the division of labor leads to miraculous productivity gains. Even a small and ill-equipped manufacturer, Smith wrote in The Wealth of Nations, could boost each worker’s output from a handful of pins a day to nearly 5,000.

In the early 19th century, that number jumped an order of magnitude with the introduction of American inventor John Howe’s pin-making machine. It was “one of the marvels of the age, reported on in every major journal and encyclopedia of the time,” writes historian of technology Steven Lubar. In 1839, the Howe factory had three machines making 24,000 pins a day — and the inventor was clamoring for pin tariffs to offset the nearly 25 percent tax that pin makers had to pay on imported brass wire, a reminder that punitive tariffs hurt domestic manufacturers as well as consumers.

[...]

Nowadays, we think of straight pins as sewing supplies. But they weren’t always a specialty product. In Smith’s time and for a century after, pins were a multipurpose fastening technology. Straight pins functioned as buttons, snaps, hooks and eyes, safety pins, zippers, and Velcro. They closed ladies’ bodices, secured men’s neckerchiefs, and held on babies’ diapers. A prudent 19th century woman always kept a supply at hand, leading a Chicago Tribune writer to opine that the practice encouraged poor workmanship in women’s clothes: “The greatest scorner of woman is the maker of the readymade, who would not dare to sew on masculine buttons with but a single thread, yet will be content to give the feminine hook and eye but a promise of fixedness, trusting to the pin to do the rest.”

Most significantly, pins fastened paper. Before Scotch tape or command-v, authors including Jane Austen used them to cut and paste manuscript revisions. The Bodleian Library in Oxford maintains an inventory of “dated and datable pins” removed from manuscripts going as far back as 1617.

[...]

But a better solution was on its way. In 1899, an inventor in the pin-making capital of Waterbury, Connecticut, patented a “machine for making paper clips.” William Middlebrook’s patent application, observed Henry Petroski in The Evolution of Useful Things, “showed a perfectly proportioned Gem.”

It was that paper clip design that conquered the office and consigned pins to their current home in the sewing basket.

US healthcare is famous for three things

Wednesday, April 12th, 2017

US healthcare is famous for three things, Ben Southwood notes:

It’s expensive, it’s not universal, and it has poor outcomes. The US spends around $7,000 per person on healthcare every year, or roughly 18% of GDP; the next highest spender is Switzerland, which spends about $4,500. Before Obamacare, approx 15% of the US population were persistently uninsured (8.6% still are). And as this chart neatly shows, their overall outcome on the most important variable — overall life expectancy — is fairly poor.

But some of this criticism is wrongheaded and simplistic: when you slice the data up more reasonably, US outcomes look impressive, but being the world’s outrider is much more expensive than following behind. What’s more, most of the solutions people offer just don’t get to the heart of the issue: if you give people freedom they’ll spend a lot on healthcare.

The US undoubtedly spends a huge amount on healthcare. One popular narrative is that because of market failures and/or extreme overregulation in healthcare, prices are excessively high. So Americans with insurance (or covered by Medicare, the universal system for the elderly, or Medicaid, the government system for the poor) get the same as other developed world citizens, but those without get very poor care and die younger. A system like the NHS solves the problem, according to this view, with bulk buying of land, labour, and inputs, better incentives, and universal coverage.

But there are some serious flaws in this theory. Firstly, extending insurance to the previously-uninsured doesn’t, in America, seem to have large benefits. For example, a recent NBER paper found no overall health gains from the massive insurance expansion under Obamacare.* A famous RAND study found minuscule benefits over decades from giving out free insurance to previously uninsured in the 1970s. In fact, over and above the basics, insuring those who choose not to get insurance doesn’t ever seem to have large gains. Indeed, there is wide geographic variation in the life expectancy among the low income in the US, but this doesn’t even correlate with access to medical care! This makes it unlikely that the gap between the US and the rest is explained by universality.

To find the answer, consider the main two ingredients that go into health outcomes. One is health, and the other is treatment. If latent health is the same across the Western world, we can presume that any differences come from differences in treatment. But this is simply not the case. Obesity is far higher in the USA than in any other major developed country. Obviously it is a public health problem, but it’s unrealistic to blame it on the US system of paying for doctors, administrators, hospitals, equipment and drugs.

In fact in the US case it’s not even obesity, or indeed their greater pre-existing disease burden, that is doing most of the work in dragging their life expectancy down; it’s accidental and violent deaths. It is tragic that the US is so dangerous, but it’s not the fault of the healthcare system; indeed, it’s an extra burden that US healthcare spending must bear. Just simply normalising for violent and accidental death puts the USA right to the top of the life expectancy rankings.

One of our cultural problems, Arnold Kling adds, is that we spend too much on health care and not enough on public health.

Above-median income and close to zero saving

Tuesday, March 28th, 2017

There is a significant portion of the population with above-median income and close to zero saving, Arnold Kling notes:

I think it is hard to tell a story that explains that in terms of rational behavior. Remember, we are talking about a lot of people, not just a few random exceptions.

A Tale of Two Bell Curves

Monday, March 27th, 2017

Bo and Ben Winegard tell a tale of two Bell Curves:

To paraphrase Mark Twain, an infamous book is one that people castigate but do not read. Perhaps no modern work better fits this description than The Bell Curve by political scientist Charles Murray and the late psychologist Richard J. Herrnstein. Published in 1994, the book is a sprawling (872 pages) but surprisingly entertaining analysis of the increasing importance of cognitive ability in the United States.

[...]

There are two versions of The Bell Curve. The first is a disgusting and bigoted fraud. The second is a judicious but provocative look at intelligence and its increasing importance in the United States. The first is a fiction. And the second is the real Bell Curve. Because many, if not most, of the pundits who assailed The Bell Curve have not bothered to read it, the fictitious Bell Curve has thrived and continues to inspire furious denunciations. We have suggested that almost all of the proposals of The Bell Curve are plausible. Of course, it is possible that some are incorrect. But we will only know which ones if people responsibly engage the real Bell Curve instead of castigating a caricature.

Masters of reality, not big thinkers

Sunday, March 26th, 2017

Joel Mokyr’s A Culture of Growth attempts to answer the big question: Why did science and technology (and, with them, colonial power) spread west to east in the modern age, instead of another way around?

He reminds us that the skirmishing of philosophers and their ideas, the preoccupation of popular historians, is in many ways a sideshow — that the revolution that gave Europe dominance was, above all, scientific, and that the scientific revolution was, above all, an artisanal revolution. Though the élite that gets sneered at, by Trumpites and neo-Marxists alike, is composed of philosophers and professors and journalists, the actual élite of modern societies is composed of engineers, mechanics, and artisans — masters of reality, not big thinkers.

Mokyr sees this as the purloined letter of history, the obvious point that people keep missing because it’s obvious. More genuinely revolutionary than either Voltaire or Rousseau, he suggests, are such overlooked Renaissance texts as Tommaso Campanella’s “The City of the Sun,” a sort of proto-Masonic hymn to people who know how to do things. It posits a Utopia whose inhabitants “considered the noblest man to be the one that has mastered the most skills… like those of the blacksmith and mason.” The real upheavals in minds, he argues, were always made in the margins. He notes that a disproportionate number of the men who made the scientific and industrial revolution in Britain didn’t go to Oxford or Cambridge but got artisanal training out on the sides. (He could have included on this list Michael Faraday, the man who grasped the nature of electromagnetic induction, and who worked some of his early life as a valet.) What answers the prince’s question was over in Dr. Johnson’s own apartment, since Johnson was himself an eccentric given to chemistry experiments — “stinks,” as snobbish Englishmen call them.

As in painting and drawing, manual dexterity counted for as much as deep thoughts — more, in truth, for everyone had the deep thoughts, and it took dexterity to make telescopes that really worked. Mokyr knows Asian history, and shows, in a truly humbling display of erudition, that in China the minds evolved but not the makers. The Chinese enlightenment happened, but it was strictly a thinker’s enlightenment, where Mandarins never talked much to the manufacturers. In this account, Voltaire and Rousseau are mere vapor, rising from a steam engine as it races forward. It was the perpetual conversation between technicians and thinkers that made the Enlightenment advance. ted talks are a licensed subject for satire, but in Mokyr’s view ted talks are, in effect, what separate modernity from antiquity and the West from the East. Guys who think big thoughts talking to guys who make cool machines — that’s where the leap happens.

Meaning, even a very small meaning, can matter a lot

Friday, March 17th, 2017

Dan Ariely’s studies can be darkly humorous:

In their first experiment, Ariely’s team asked college students to find sets of repeated letters on a sheet of paper. Some of the students’ work was reviewed by a “supervisor” as soon as it was turned in. Other students were told in advance that their work would be collected but not reviewed, and still others watched as their papers were shredded immediately upon completion.

Each of the students was paid 55 cents for completing the first sheet, and five cents less for each sheet thereafter, and allowed to stop working at any point. The research team found that people whose work was reviewed and acknowledged by the “supervisor” were willing to do more work for less pay than those whose work was ignored or shredded.

In a second experiment, participants assembled Bionicles, toy figurines made by Lego. The researchers made the Bionicle project somewhat meaningful for half of the students, whose completed toys were displayed on their desks for the duration of the experiment, while the students assembled as many Bionicles as they wished. “Even though this may not have been especially meaningful work, the students felt productive seeing all of those Bionicles lined up on the desk, and they kept on building them even when the pay was rather low,” Ariely said.

The rest of the participants, whose work was intended to be devoid of meaning, gave their completed Bionicles to supervisors in exchange for another box of parts to assemble. The supervisors immediately disassembled the completed figurines, and returned the box of parts to the students when they were ready for the next round. “These poor individuals were assembling the same two Bionicles over and over. Every time they finished one, it was simply torn apart and given back to them later.” The students in the meaningful and non-meaningful conditions were each paid according to a scale that began at $2.00 for the first Bionicle and decreased by 11 cents for each subsequent figurine assembled.

“Adding to the evidence from the first experiment, this experiment also showed that meaning, even a very small meaning, can matter a lot,” Ariely said. Students who were allowed to collect their assembled Bionicles built an average of 10.2 figurines, while those whose work was disassembled built an average of 7.2. Students whose work was not meaningful required a median level of pay 40 percent higher than students whose work was meaningful.

“These experiments clearly demonstrate what many of us have known intuitively for some time. Doing meaningful work is rewarding in itself, and we are willing to do more work for less pay when we feel our work has some sort of purpose, no matter how small,” Ariely said. “But it is also important to point out that when we asked people to estimate the effect of meaning on labor, they dramatically underestimated the effects. This means, that while we recognize the general effect of meaning on motivation, we are not sufficiently appreciating its magnitude and importance.”

Neoliberal management may reduce productivity

Thursday, March 16th, 2017

Chris Dillow suggests some ways that neoliberal management may reduce productivity:

Good management can be bad for investment and innovation. William Nordhaus has shown that the profits from innovation are small. And Charles Lee and Salman Arif have shown that capital spending is often motivated by sentiment rather than by cold-minded appraisal with the result that it often leads to falling profits. We can interpret the slowdowns in innovation and investment as evidence that bosses have wised up to these facts. Also, an emphasis upon cost-effectiveness, routine and best practice can deny employees the space and time to experiment and innovate. Either way, Joseph Schumpeter’s point seems valid: capitalist growth requires a buccaneering spirit which is killed off by rational bureaucracy.

As Jeffrey Nielsen has argued, “rank-based” organizations can demotivate more junior staff, who expect to be told what to do rather than use their initiative.

The high-powered incentives offered to bosses can backfire. They can incentivize rent-seeking, office politics and jockeying for the top job rather than getting on with one’s work. They can crowd out intrinsic motivations such as professional pride. And they can divert (pdf) managers towards doing tasks that are easily monitored rather than ones which are important to an organization but harder to measure: for example, cost-cutting can be monitored and incentivized but maintaining a healthy corporate culture is less easily measured and so can be neglected by crude incentive schemes.

Empowering management can increase opposition to change. As McAfee and Brynjolfsson have shown, reaping the benefits of technical change often requires organizational change. But well-paid bosses have little reason to want to rock the boat by undertaking such change. The upshot is that we are stuck in what van Ark calls (pdf) the “installation phase” of the digital economy rather than the deployment phase. As Joel Mokyr has said, the forces of conservatism eventually suppress technical creativity.