Sunday, April 23, 2017

What will government look like after the fourth revolution?

“Democracy in Australia is sinking into a self-destructive spiral. The sickness at its heart is the demise of individual responsibility and expecting more from the state when the national interest says state responsibilities should be cut, not increased. Our democratic system now works to undermine economic progress.”

That is how Paul Kelly, Australia’s most widely respected journalist, concluded an article in The Australian a few weeks ago. The article entitled “Crisis time: We can take a stand – or solve a problem” (probably gated) was published on March 29.

As far as I can see there hasn’t been much public reaction to this article. Only a small proportion of the population read articles of this kind, and most readers would still feel complacent about the Australian economy and the future of democracy in this country. It will become easier to convince people that they should be alarmed about the self-destructive spiral when the crash is imminent. The malfunction began over a decade ago and it might be another decade, or more, before crunch time.

Some other informed commentators take a more optimistic view than Paul Kelly. For example, Gary Banks, former chairman of the Productivity Commission, acknowledges that policy development is now a problem. He has suggested the a “loss of policy capability within government – Commonwealth and State - is palpable and multidimensional”. He is hopeful, nevertheless, that the problem can be ameliorated by improvements to policy-making processes:
Yet, if this diagnosis is correct, there is hope. Unlike the adverse changes evident in our parliaments and media, changes which are arguably reflective of changes in society itself, the decline in capability is not irreversible. Unless it is turned around, however, we cannot tell whether reform has truly become ‘too hard’, as many now seem to assume”.

A few years ago I was similarly optimistic. I still support efforts to improve policy capability within government. I agree with Gary that improvements to the policy-making system are an essential pre-condition for improvements in policy. However, I doubt whether much economic reform will be achievable until we see substantial changes in the rules of the political game that will provide political representatives with appropriate incentives to pursue the broader interests of the community, rather than the narrow interests that too many of them currently seek to protect. And, unfortunately, that seems unlikely to occur until a major economic crisis is upon us.

In his article, Paul Kelly drew inspiration from The Fourth Revolution: The global race to reinvent the state, by John Micklethwait and Adrian Wooldridge. 

The authors of this book make a case that western societies have seen three and a half revolutions in government over the last four centuries:
  • The rise of the nation state in 17th century Europe. Europe’s network of competing Leviathans threw up a system of ever-improving government.
  • The rise of the liberal state in the 18th and 19th centuries following the American and French revolutions.
  • The advent of the welfare state in the 20th century.
  • And the half revolution in the 1980s, associated with economic reforms promoting a partial return to classical liberalism in a few countries.

This history of the revolutions in government seems broadly accurate. Micklethwait and Wooldridge associate each of these revolutions with a notable contributor to ideas about government. In sequence, the four revolutionary thinkers they chose were: Thomas Hobbes, J S Mill, Beatrice Webb and Milton Friedman. It is possible to quibble about that choice, but I will refrain. I want to focus here on what the authors have to say about the fourth revolution.

The authors argue that the fourth revolution is occurring as a result of a confluence of three forces: failure, competition and opportunity.
  • The West has to change because it is going broke:“Debt and demography mean that government in the rich world has to change. … For the foreseeable future the Western state will be in the business of taking things away – far more things than most people realize”
  • Competition from the “Asian alternative” is prompting change:“Chinese-oriented Asia offers a new model of government that challenges two of the West’s most cherished values: universal suffrage and top-down generosity. This ‘Asian Alternative’ is an odd mixture of authoritarianism and small government, best symbolized by Singapore’s long-term ruler, Lee Kuan Yew”.
  • There are opportunities to “do government” better: “New technologies offer a chance to improve government dramatically, but so does asking old questions such as the most basic question of all: “What is the state for?”

So, what will government look like after the fourth revolution? The authors would like to see greater individual liberty emerging as a consequence of reforms that reduce government spending and relieve governments of some of their responsibilities. I would too, but we need to be careful not to confuse what we hope will happen with what we see as most likely to happen.

Micklethwait and Wooldridge published their book a couple of years ago, but it was apparent even then that many voters were becoming cynical about politicians representing the mainstream political parties. The European Union had become a breeding ground for populists who were speaking out against “incompetent and arrogant elites”. Even then, that cynicism was also apparent elsewhere. The authors suggested:
Such cynicism might be healthy if people wanted little from the government. But they continue to want a great deal. The result can be a toxic and unstable mixture: dependency on government on the one hand and disdain for government on the other”.

Perhaps the victories that the populists appear to be winning at the moment will cause the elites to become less complacent, and less incompetent and arrogant. The political cycle may be turning, as Tyler Cowan suggested in The Complacent Class (recently discussed here). Over the longer term, the elites may come to embrace dynamism, rather than protection of their professional turf, so we might see the battle lines being drawn more clearly between dynamism and stasis. That might correspond broadly to Tyler Cowan’s depiction of the political battle as between talent (human capital) and authoritarianism, stemming from underlying fears of disruption. Since this is also a battle between talented young people and fearful old people, in my view the odds favour talent in the longer term.

It would be easier to predict what government will look like after the fourth revolution if some western democracies provided models of a successful revolution in government. Micklethwait and Wooldridge suggest that reforms in Sweden, necessitated by economic crisis, have produced “a highly successful update of the old middle way”. New Zealand provides a model of what effective government can achieve following a natural disaster. The response to crisis in Sweden and New Zealand provides better protection for citizen’s rights than would adoption of something like Lee Kuan Yew’s model of technocratic government. However, democratic government in Sweden and New Zealand might well revert, within a few years, to taking upon itself more responsibilities, until another economic crisis ensues.

It seems to me that the fourth revolution is likely to involve changes in the rules of democratic politics. This might require constitutional change in some countries, but revolutionary change might be possible in Australia and other countries similarly afflicted by voter cynicism and political fragmentation, if the major parties were to adopt a convention for accountable government. What I have in mind is that the major parties should agree that whichever party wins government has a mandate from the people to implement the tax and expenditure policies it has taken to the election. What could be more democratic than that?

Saturday, April 1, 2017

What reasons do we have to look forward to the future?

In his book, Progress: ten reasons to look forward to the future, Johan Norberg spends a lot of time looking back on progress that has been made. 

In brief, his ten reasons for optimism are:
  1. The incidence of famine has declined. Only a few hundred years ago famine was a fairly regular phenomenon, occurring more than twice a century even in countries like France. In recent years the death toll from famine has been only about 2% what it was a century ago, even though the world population has increased fourfold.
  2. Sanitation improvements since the “Great Stink” in London in 1858 have helped improve longevity and reduce infant mortality over much of the world. About two-thirds of the world’s population now has access to proper sanitation facilities.
  3. Average life expectancy in the world is now 71 years, having risen from 31 years in 1900.
  4. Poverty has declined because of economic growth. In the early part of the 19th century the standard of living of the average world citizen was equivalent to that of the average citizen in the poorest countries today (e.g. Haiti, Liberia and Zimbabwe).
  5. Violence has declined. For example, the annual European homicide rate declined from 30 to 40 per 100,000 people in the 14th century to around 1 per 100,000 in recent years.
  6. Although environmental damage tends to increase initially with economic growth it subsequently tends to decrease as people become wealthier. Technological advances seem likely to enable future generations to reduce climate change risks and still enjoy higher living standards.
  7. Literacy levels have risen with economic development. The global literacy rate rose from around 21% in 1900 to 86% in 2015.
  8. Freedom has increased. Slavery is now banned just about everywhere. Democracy now limits the abuse of government power in many parts of the world. Economic freedom has risen: the global average rose from 5.3 to 6.9 on the Fraser Institute’s ten-point scale between 1980 and 2013.
  9. There has been growing recognition of equality of rights, irrespective of ethnicity, gender and sexual orientation.
  10. Children are now seen as worthy of being given the best conditions for a long and happy life, rather than as resources for the household economy to exploit.

Many readers of this blog will probably be thinking at this point that they already knew most of that. However, readers of this blog tend to be exceptionally well informed. In the epilogue of his book Johan Norberg provides evidence that in the broader population most people consistently underestimate the progress that has been made. For example, in the U.S. apparently 66% of the population think that world poverty has almost doubled in the last 20 years, and only about 5% are aware that it has almost halved over that period.

This book provides a vast amount of useful ammunition for those of us trying to get the message across that “the good old days” were not so great.

However, I doubt whether the ten reasons provided will actually encourage many pessimists to look forward to the future. It is too easy to acknowledge the progress that has been made and yet to hold to pessimistic views of the future. The author acknowledges that being worried about the future may be in our genes:
The hunters and gatherers who survived sudden storms and predators were the ones who had a tendency to scan the horizon for new threats rather than those who were relaxed and satisfied”.

The author also acknowledges threats to progress such as large scale war, more extensive terrorism with advanced technology, climate change and more large scale financial crises. He is most concerned that “people led by fear might curtail the freedom and the openness that progress depends upon”.

On a more optimistic note, he observes that in our era of globalization many countries now have access to the sum of humanity’s knowledge and are open to the best innovations from other places. “In such a world, progress no longer depends on the whim of one emperor”.

Johan Norberg’s message is not one of complacency. He claims that the book was written as a warning not to take progress for granted and that is the message of his final sentence:
If progress is to continue, you and I will have to carry the torch”.
That means, in my view, that we will need to encourage people to contemplate optimistic visions of how the future might evolve.

Monday, March 20, 2017

Is the cycle of political complacency beginning to turn in the United States?

The villain in Tyler Cowen’s latest book, The Complacent Class: The self-defeating quest for the American Dream, is “us”. Tyler is writing about America, but much of what he has written is relevant to other high-income countries. The problem, as Tyler sees it, “is that peace and high incomes tend to drain the restlessness out of people”. Many people have become complacent – “satisfied with the status quo”. Most people don’t like change much and “they now have the resources and the technology to manage their lives on this basis more and more, to the country’s long run collective detriment”.

Tyler has not persuaded me that complacency is a problem of itself. It would be nice to be able to feel more complacent. (According to Tyler’s questionnaire - international version here - I am a striver: “You embrace newness, but you need to strive harder to break the mold”.) As I see it, complacency only becomes a problem when people are complacent about things that they have good reason to be alarmed about.

Tyler provides a fair amount of evidence that Americans have become more complacent. For example:
  • ·         People now switch jobs less frequently.
  • ·         Geographical mobility has declined.
  • ·         There has been a decline in start-ups relative to total business activity.
  • ·         There are fewer unicorns (miracle growth firms).
  • ·         Market concentration has risen.
  • ·         There is more pairing of like with like e.g. people are choosing marriage partners with similar education levels, and housing is more segregated by income and race.
  • ·         Upward mobility in income and education has stopped rising.
  • ·         People are now more inclined to stay at home and use delivery services.

That is all very interesting. It changes my perceptions about America. I have to get used to the idea that Americans are no longer as mobile and innovative as they were a couple of decades ago. But that does not necessarily mean that complacency is a problem. If peace and high incomes have made Americans more complacent, isn’t that a good thing? There is not much point in striving for more of anything once you are satisfied with what you have already. How is complacency leading to bad outcomes?

When Tyler looks in detail at some of these changing characteristics, he points to the failure of political decision-making to cope with interest groups seeking to protect themselves from change. How does complacency come into that? The NIMBY advocates who are using their political muscle to protect their interests against higher density building can hardly be described as complacent. The people at Donald Trump’s rallies who are supporting his policies to protect jobs - by reducing immigration and constraining import competition - do not seem complacent. The complacency must lie with the general public, who are not yet sufficiently outraged by the stasists to cast their votes for candidates who will constrain their political influence.

Tyler’s discussion of declining geographical mobility provides a good example of political market failure. He points to research showing potential for a substantial increase in GDP if more people were to move from low-productivity cities to high-productivity cities. Regulatory constraints prevent this from happening:
“Residents in Manhattan, San Francisco, and many other high-productivity locales just don’t want all of those new people moving in, and so they have passed overly strict building and land use regulations or in some cases they have limited infrastructure so that adding more residents just isn’t practical. Without good bus or subway connections, for instance, a lot of neighbourhoods just don’t work for people with jobs downtown”.

Tyler uses the terms ‘stasis’ and ‘dynamism’ quite frequently in this book, but I couldn’t find any reference to Virginia Postrel’s pathbreaking book on this topic, The Future and Its Enemies, published 18 years ago (my discussion here). I would have been satisfied with a footnote to explain how Tyler’s views build on, or differ from Virginia’s views. Similarly, it would have been nice to see a footnote discussing the affinity between Tyler’s views and Mancur Olson’s argument that stable societies tend to accumulate distributional coalitions that slow down their capacity to adopt new technologies and reallocate resources. See: The Rise and Decline of Nations.

Early in the book Tyler suggests that “the growing success of the forces for stasis” are linked to complacency. That argument has most force it the final chapters of the book where he discusses politics.

Tyler makes the point that much of the U.S. federal government budget is locked in to spending programs that are politically untouchable. Political change occurs at the margin and is the result of complex battles among interest groups, political manoeuvring and use of public relations campaigns. The Trump administration is unlikely to change this situation much. The pre-allocation of tax revenues will ultimately become unsustainable:
“At some point this country will face an immediate crisis, and there won’t quite be the resources, or more fundamentally the flexibility to handle it”.

Tyler presents a view about the tendency of governments to take on more responsibilities than they can cope with effectively that is similar to the view I expressed in Chapter 8 of Free to Flourish. I argued that there is a growing gap between the expectations that many people have of what democratic governments can deliver and what they are capable of delivering.

However, Tyler seems to present a more optimistic view of the ability of western democracies to reform themselves rather than to collapse and to be replaced by authoritarian regimes. That is just my impression. I find it hard to point to particular passages that support that view. The scenario that Tyler presents of a possible future that would be more dynamic does not feature less dysfunctional government, although smaller government may be implied.

Although I'm not sure why, after reading the book I was left feeling hopeful that the cycle of political complacency has reached its peak and that, over the next few years, American politics might become less shrill and more focused on problem solving. Perhaps the actions of the Trump administration will further erode political complacency in ways that will lead to a public reaction favouring a more constrained role for government. So, democracy will probably survive in the U.S. I’m also reasonably confident that a fiscal crisis in Australia will eventually result in rule changes needed to make democracy sustainable in this country. I’m less complacent about the future of democracy in some of the countries of southern Europe. 

Tyler Cowan has provided some grounds for optimism in a recent Cato article entitled "Between authoritarianism and human capital". An extract:

"So we’re going to see a kind of intellectual war, and possibly war in other, more violent forms too. That war, using that word in the broadest sense possible, will be between today’s amazing accumulated stock of human capital — and the emotional momentum behind authoritarianism, which is encouraged by the political fraying that stems from underlying fears of disruption.
Right now, I’d still put my money on the positive side of talent and human capital. But in recent times, I can’t say I’ve seen the odds moving in my favor."

Friday, March 10, 2017

Should trade policy be about "the art of the deal" or about facilitating economic growth?

"We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs.  Protection will lead to great prosperity and strength" - Donald Trump, Inaugural Address, Jan. 20, 2017 

How should the Australian government respond to the potential for the crazy trade policies of President Trump to take the world into a new era of trade protectionism? Since Trump’s inauguration the depth of his commitment to trade protectionism has become clearer. In my view we should be prepared for the unravelling of much of the international trade liberalisation encouraged by the U.S. in the latter half of the 20th Century.

If the Australian government continues with the current directions of international trade policy – viewing trade policy from an economic diplomacy perspective – there is a real risk that it will take ill-considered retaliatory action to foreign protectionism. Politicians who put their faith in trade diplomacy – the art of the export deal – think that they are pursuing the national interest when they make access to the Australian market contingent upon foreigners allowing our exporters to gain access to their markets. In terms of that mindset, if foreigners restrict access to their markets, it would appear logical for us to retaliate.

By contrast, political leaders who view trade policy as part of economic growth policy are more likely to keep in mind that the substantial trade liberalisation effort that Australia has made over the last 40 years has occurred unilaterally, rather than as part of any international deal. A growth policy perspective recognises the contribution that unilateral trade liberalisation has made to our prosperity.

The substantial trade liberalisation efforts made in Australia since the beginning of The Tariff Review, established in 1971, have all occurred for domestic reasons. Except for the 25 percent tariff cut of 1973, which was motivated primarily by macro-economic objectives, all of the reductions in industry assistance have occurred primarily to promote the micro-economic reform objective of providing incentives for greater productivity throughout the economy. That applies to reductions in non-tariff barriers, including reform of agricultural marketing arrangements, as well as reductions in reductions in tariff barriers.

As with other microeconomic reform policies, trade liberalisation efforts in Australia have not been pursued with equal enthusiasm by all governments. However, a sustained push toward trade liberalisation was initiated by Bob Hawke (then prime minister) and Paul Keating (treasurer) in May 1988 as part of a major package of microeconomic reform measures. In delivering the statement, Keating commented:
The way forward for Australia is not to be closeted and sheltered, but to be open and dynamic, trading aggressively in the world. Only this kind of economy can provide the employment and rising living standards that Australians aspire to”.

In the light of the toxic political environment currently prevailing in Canberra it is worth remembering that those reforms were facilitated by support from the Liberal–National Party Opposition.

The trade liberalisation that was being undertaken in pursuit of microeconomic objectives was subsequently ­offered, and accepted, in Uruguay negotiations as our market-opening contribution to global trade reform. As the Tasman Transparency Group has noted, this approach enabled us to secure all the gains available from trade negotiations — the major gains in efficiency from reducing the barriers protecting our less competitive industries, as well as those available from access to external markets. That exercise should have provided the model for all subsequent international trade negotiations.

Unfortunately, the opportunity for further gains from the pursuit of microeconomic reforms has been missed in subsequent trade negotiations. Australia’s agenda in recent negotiations establishing a range of preferential trading agreements (PTAs) was simply a market access wish list. Following the conclusion of PTAs, governments have measured their success solely on the basis of whether the outcomes improved access to external markets.

The academic research that the Department of Foreign Affairs and Trade is now sponsoring on “the effectiveness of economic diplomacy in contributing to Australia’s exports and inflow of foreign investment” does not seem to be directed at answering a comprehensible, policy-relevant question. Research being undertaken by the Productivity Commission on implications for Australia’s trade policy of possible international shifts towards a more protectionist stance seems more likely to provide a basis for sensible policy development.

Previous research on the consequences of PTAs suggests that there are no grounds for complacency that the economic benefits even exceed costs. For example, using an analytical framework developed by the Productivity Commission to assess our much-heralded trade agreement with the United States, Australian National University economist Shiro Armstrong found that the agreement was responsible for reducing — or ­diverting — $53.1 billion of trade with the rest of the world. He has suggested that “the data shows that … Australia and the United States … are worse off than they would have been without the agreement”. 

Recent Australian governments have at times acknowledged that trade policy should be part of a wider productivity promoting agenda. Nevertheless, the government seems to have been at a loss to know how to counter the argument that Australian governments should be seeking to provide a level playing field for domestic industries vis a vis subsidized foreign competitors. This argument has figured prominently in lobbying in some quarters for further government assistance by way of anti-dumping action and government procurement preferences. The government has been slow to point out that if we are to use a playing field analogy – and our interest is in promoting the wellbeing of Australians rather than conducting trade wars – the relevant basis for comparison is the relative assistance levels of different Australian industries. As a rule, if industries need assistance to compete internationally, they can’t be making efficient use of resources. 

If the Australian government is serious about its commitment to lift national productivity it should place trade policy in the Treasury department – the department with central responsibility for facilitating economic growth. This would add some much-needed economic discipline to the conduct of trade policy as we face a more difficult world trading environment. The last thing we need in this environment is a bureaucratic structure for trade policy that is biased toward mindless deal-making and retaliation

Saturday, February 25, 2017

Is a fixed mindset more realistic than a growth mindset?

Before I got far into Carol Dweck’s book, Mindset, I was confronted by the thought that the author might classify me as having a fixed mindset rather than a growth mindset. Dr Dweck is an eminent psychologist who has conducted a great deal of research on mindsets. She suggests that if you believe that your intelligence “is something very basic about you that you can’t change very much” you have a fixed mindset, but if you believe that you “can always change how intelligent you are” you have a growth mindset.

In considering those propositions (along with a couple of other similar ones) my mind turned initially to research showing that for most people IQ tends to remain fairly stable throughout life. That must mean that existing IQ is a good predictor of future IQ. If you choose an individual at random it would be safe to bet that their IQ is not likely to change much. 

However, after a few moments I realized that I was adopting what I call a spectator mindset. I was considering the relevant literature like a spectator who is not personally involved. I had overlooked the fact that the author was asking whether I agreed with certain beliefs about the potential for my intelligence to change.

When I began to think from a personal perspective, books by Norman Doidge on brain plasticity came to mind. From a personal viewpoint, I think it makes sense to view your intellectual capacity in much the same light as your physical fitness. Your brain is like a muscle – use it to make it strong. Or, at my age, if you don’t use it you lose it!

As I read further into the book I discovered that, like many other people, I alternate between fixed and growth mindsets.

I was induced to read Mindset, by an article by Nela Canovic on the Quora site where people were discussing the most important thing they have learned in life. The article got me wondering how closely Carol Dweck’s distinction between fixed and growth mindsets corresponds to the distinction between spectator and player mindsets that enabled me to greatly improve one aspect of my life about 14 years ago. It makes sense for a spectator to focus on what she or he expects to happen, but to be successful at anything you need a player mindset – to focus on your intentions. That is one of the most important things I had learned from life. (I have recently written about it on this blog.)

My concern in this post is with the realism of different mindsets because I don’t think it serves us well to maintain delusions about ourselves.  As I see it, human flourishing depends, to a large extent, on realism – seeking understanding about important aspects of your own life and human life in general, and being disposed to act on that understanding when circumstances permit. As previously discussed on this blog, that view has been reinforced by my reading of Wellbeing: Happiness in a Worthwhile Life, by Neera Badhwar, a philosopher.

As I see it, fixed and growth mindsets must both be closely related to the meanings that people give to their experiences, and how those meanings or interpretations shape their intentions and future behaviour. Is a growth mindset more realistic than a fixed mindset?

Carol Dweck suggests that the fixed mindset – the belief that your qualities are carved in stone – “creates an urgency to prove yourself over and over”. She adds:
“If you have only a certain amount of intelligence, a certain personality, and a certain moral character – well, then you’d better prove that you have a healthy dose of them. It simply wouldn’t do to look or feel deficient in these most basic characteristics”.

The book emphasises is that this mindset gives people one consuming goal – proving themselves: “Every situation calls for a confirmation of their intelligence, personality, or character”. In this mindset people tend to avoid coming to terms with reality if reality doesn’t validate their views of their own qualities.

What about the people who have a fixed mindset which involves labelling themselves as stupid, erratic, neurotic, lacking in willpower, or manifesting some other quality associated with poor performance? The author doesn’t give much attention to the potential for people to develop fixed mindsets which involve labelling themselves as poor performers. That could be because she sees fixed mindsets as stemming largely from attempts by parents and teachers to boost the self-esteem of children by telling them how clever they are, and so forth.

In her discussion of willpower, the author’s main emphasis is on the potential for people who believe they have strong willpower to fall into the trap of firmly resolving to do something, then failing to act according to their intentions because they make no special efforts to do so. She doesn’t mention that people who have come to label themselves as lacking in willpower might give up making resolutions to do things that could improve their lives. Perhaps that point is too obvious.

When I went looking in the book for recognition of the potential for people with fixed mindsets to label themselves as poor performers, I did find some. For example, there is recognition of this in the author’s discussion of the higher incidence of depression among students with fixed mindsets, and in her discussion of the learning potential of inner-city children who have been labelled as retarded or emotionally disturbed. The author also writes:
People tell me they start to catch themselves when they are in the throes of the fixed mindset – passing up the chance for learning, feeling labelled by a failure, or getting discouraged when something requires a lot of effort. And then they switch themselves into the growth mindset …”.

Carol Dweck explains:
The growth mindset is based on the belief that your basic qualities are things you can cultivate through your efforts. Although people may differ in every which way – in their initial talents and aptitudes, interests, or temperaments – everyone can change and grow through application and experience”.
The author refrains from making unrealistic claims about what can be achieved with a growth mindset. She suggests that people with a growth mindset don’t believe that with proper motivation and education anyone can become an Einstein or a Beethoven. They believe that “a person’s true potential is unknown (and unknowable); that it is impossible to foresee what can be accomplished with years of passion, toil, and training”.  As discussed in an earlier post, practice in being alert to opportunities could also be expected to expand growth potential.

In the growth mindset people accept both failure and success as providing learning opportunities. The most important questions: What can I learn from that experience? How can I use it as a basis for growth?

Mindset contains important messages about ways in which parents, teachers and coaches can encourage children to adopt a growth mindset. Carol Dweck considers the message of praising effort rather than outcome to be too simplistic.  She now advises teachers and parents “to praise a child's process and strategies, and tie those to the outcome”. In my view she is encouraging realistic appraisal of personal performance and potential for improvement.

My bottom line: Don’t fool yourself that you are being realistic if you adopt a fixed mindset about your intelligence, personality or moral character. Everyone is a work in progress. We make progress by learning from experience.

My attention has been drawn to a study by Yue Li and Timothy Bates that has failed to replicate Carol Dweck's findings regarding praise of intelligence of children and children's beliefs in the malleability of their basic ability. Please see comments below for further information.

Saturday, February 4, 2017

Does Henry George have the answer to funding basic income?

The idea of a government-funded basic income or social dividend has been around for at least a couple of centuries. It has been supported by some prominent advocates of individual liberty as well as by collectivists. For example, it was proposed as an alternative to existing welfare systems by Milton Friedman in the 1960s (as a negative income tax) and by Charles Murray (as an unconditional basic income for all adults) in In Our Hands, published in 2006. More recently Elon Musk among others, has suggested a government-provided unconditional and universal basic income (UBI) as a solution to the hypothetical problem of ensuring that people have adequate incomes when their jobs are displaced by automation.

That problem is hypothetical because it seems reasonable to expect - at a national level and over the longer term - that jobs displaced by automation will be replaced by more highly paid jobs. That is what happened with jobs displaced by mechanisation during the 19th and 20th centuries. No persuasive evidence has emerged to support the view that the effects of automation will differ in that respect. Nevertheless, UBIs might appear to be an attractive social/political insurance policy, just in case automation does result in widespread loss of income-earning opportunities.

The idea that one day most of the population will depend on UBIs as their main source of income strikes me as inherently unappealing. Historically, individual human flourishing has been closely related to the self-respect that comes from earning a living, which is absent when people are able to live on “sit-down money” – an appropirate term used by some Australian aborigines to describe welfare benefits.  Robert Colvile has provided references to research relating to disincentive impacts of UBIs in a recent FEE article.

I want to focus here on a question of practicability: Is there some easy way for a government raise sufficient additional revenue to fund a UBI to reinforce expectations that the benefits of future economic growth will be widely shared? How could substantial additional revenue be raised without stifling the economic growth process? As I contemplated those questions the thought crossed my mind that if I was back working in the Australian public service (heaven forbid!) and was asked to recommend a way to raise more tax revenue, I might suggest more reliance on taxes on the unimproved value of land, as proposed in Australia's Henry report, and as suggested much earlier by Henry George in Progress and Poverty (first published in 1879). Land taxes get a fair amount of support among economists, including some who write for The Economist.

At some point it occurred to me that I should actually read Progress and Poverty – or at least, the 2006 version, edited and abridged by Bob Drake – rather than rely on second hand reports. As I read about Henry George’s theory of wages and interest it became clearer to me why he was viewed as a crack-pot by some of the people who taught me economics. For example, by rearranging the identity, Production = Rent + Wages + Interest, he concludes: “wages and interest do not depend on what labour and capital produce – they depend on what is left after rent is taken out”. Of course, if you rearrange the terms another way, rent would appear as the residual after payment of wages and interest. Modern economists should not be overly critical, however, because George wrote Progress and Poverty before John Bates Clark had made his contribution to the marginal productivity theory of distribution - and Clark apparently attributed his conception of the marginal productivity of labour to George’s theory of rent.

Henry George provides an interesting discussion of the way site rent rises with economic development. He asks readers to imagine a vast unbounded savanna. Every acre seems as good as any other for the first family to arrive, so they make a home somewhere, anywhere. When other families arrive, one location is clearly better than the others, that is close to the family that has already settled. Having a neighbour provides opportunities for the families to help each other. As more people arrive, a village is established to enable people to obtain advantages from local specialization and trade. As the village grows into a town and then into a city, the productivity of the original land increases. As a consequence: “Rent – which measures the difference between this increased productivity and that of the least productive land in use – has increased accordingly”. The original owners of the land become rich “not from anything they have done, but from the increase in population”.

George recognised that advances in technology, improvements in manners and morals and government policy reforms (e.g. free trade) also increase the productivity of land, and increase rents.
Following David Ricardo and John Stuart Mill, George argued that a tax on rent would fall wholly on land owners. He went further, however, in suggesting that all rent could be taxed away for the benefit of society without ill-effect. He suggested that returns to labour would thereby be enhanced:
When all rent is taken by taxation for the needs of the community, equality will be attained. No citizen will have an advantage over any other, except through personal industry, skill, and intelligence. People will gain what they fairly earn. Only then, and not until then, will labor get its full reward, and capital its natural return”.

Henry George was correct to argue that, from an economic efficiency perspective, rent taxes are superior to most other taxes because they have a smaller impact on productive effort and investment. However, it is hard to see how a large increase in land taxes could be viewed as providing an equitable sharing of tax burden. Consider two people who have equal wealth, the wealth of A is in entirely in land and the wealth of the B is entirely in shares in companies that do not own land. Would you view it to be equitable for a government to introduce a tax that would take away a large slice of the wealth of A, while leaving the wealth of B unaffected?

Perhaps that inequity could be overcome by announcing that the new land tax will only apply to future increases in land values. However, the deadweight costs of a tax on future increases in land values would not be negligible. For example, consider a firm that is planning to build a very fast train and considering whether a stopping point along the route should be at City X or City Y. The firm is buying land along the route because it needs to capture some of the expected appreciation in land values to make its investment worthwhile. The firm’s investment appraisal suggests that City X would be the best location. However, it subsequently learns that City X is contemplating a substantial tax on future increases in land values, while City Y has no such plans. That information obviously has potential to tip the balance in favour of City Y, resulting in a less efficient allocation of investment.

The potential deadweight costs of land taxes have been explored in more depth by others, including Bryan Caplan and Zachary Gochenour.

My bottom line: Land taxes are better than many existing taxes (much better than taxes on land transfers) but they don’t offer a costless way to fund the substantial additional revenue that would be required to fund an unconditional basic income sufficient to meet reasonable expectations of a widely-shared dividend from future economic growth. If land taxes can’t do it, I doubt whether any tax-transfer proposal can achieve that objective. One way or another, even when robots do most of the work currently done by humans, humans will still need to earn the bulk of the incomes they live on - including by inventing and improving robots, servicing and managing them, and owning them.

Monday, January 23, 2017

Does your constitution mandate free trade?

The Constitution of Australia, like that of the United States, mandates free trade – up to a point! Both constitutions mandate free trade between the states, and leave federal governments free to impose barriers to international trade to the extent that they wish.

It is debatable whether a constitutional requirement for free international trade would have made a huge difference to trade policy in either country. The requirements for free trade between the states have not guaranteed free trade between the states - judges have not always ruled against trade barriers imposed by states to protect local interests. Many judges seem to capable of being highly imaginative in their interpretation of concepts such as free trade.  

The relevant constitutional question is whether free trade is mandated by the real constitution - the set of dispositions that influence what most citizens will accept as legitimate actions by politicians and bureaucrats who make up the government. That depends ultimately on the views of individual citizens.

Why should your constitution mandate free trade?  I hope you share with me the belief that individuals have a natural right to engage freely in mutually beneficial transactions with one another, even though third parties may be disadvantaged. If so, you would probably consider it to be objectionable for a government to levy a discriminatory tax on the sales of the producer from whom you wish to purchase, in order to encourage you to purchase from a rival producer. You may well assert that you have a right to choose to buy from whatever source you wish, for whatever reasons you might have, free from any such third-party interference.

The logic of this argument does not cease to apply merely because buyers and sellers may be separated by national borders. National borders are artificial constructs that do not alter the natural right of individuals and firms to engage in mutually beneficial transactions. Donald Boudreaux has written persuasively on this topic: “International Trade Is Simply One Manifestation of Competition”.

Should an exception be made in situations where foreign governments subsidize their exports? No, if foreigners are sufficiently misguided to subsidize their exports there is no reason why domestic consumers should not benefit from any price reduction that this causes. In a market economy, if foreign subsidies result in an expansion of total imports, this can reasonably be expected to result in exchange rate and relative price adjustments to make exporting more profitable and bring about an expansion of exports. Production for the domestic market that is displaced by increased imports will be offset by increased export production.

Some economists still, no doubt, maintain that unilateral free trade is not optimal on grounds such as the optimal tariff argument, and the potential for the use of existing trade barriers as bargaining chips to obtain better access to foreign markets. Policy advisors who recommend departure from free trade to obtain such gains risk opening the way for much larger economic losses because they are dealing with fallible real-world governments, rather than the omniscient and benevolent governments assumed to exist in their economic models. In the real world of politics every departure from a simple rule opens up opportunities for interest groups to advance their interests at the expense of the broader community. 

However, there is one argument that makes it difficult for the real constitution to mandate free trade. With great reluctance, I am now willing to concede that it may be becoming more difficult for politicians to endorse free trade because many people are choosing to cast their votes for candidates who oppose it. Even though the gains from free trade vastly outweigh the losses, the uneven distribution of losses makes the outcomes of free trade seem unfair to many people. A substantial proportion of voters in many countries now seem to be saying that their disposition is to favour protection of existing jobs rather than the opportunities that free trade offers.

Over the longer term, the pursuit of policies to preserve existing jobs will, of course, be inimical to the specialization and technological progress which provide the basis for everyone’s future prosperity. Nevertheless, many voters and their representatives seem to be more concerned to preserve existing jobs than to promote future prosperity. Our democratic systems seem to be mutating from systems of social cooperation to promote the interests of everyone, to arenas for the “war of each against all” that Thomas Hobbes imagined as the only alternative to an all-powerful dictator “to keep them all in awe”. Are we powerless to prevent this war of each against all?

This poses the kind of constitutional dilemma discussed by one of the 20th Century’s best economists, James M Buchanan, in The Limits of Liberty: Between Anarchy and Leviathan, 1975. Buchanan wrote:
If there exist potential structural changes in legal order which might command acceptance by all members of the society, the status quo represents a social dilemma in the strict game-theoretic terminology. Even if we consider ourselves far removed from the genuine Hobbesian jungle, where life is brutish and short, the status quo contains within it elements or features that are in principle equivalent. Life in the here and now may be more brutish than need be, and certainly more nasty. If after examination and analysis, no such potential for change exists, the legal-constitutional order that we observe must be judged to be Pareto optimal, despite the possible presence of discontent among specific members in the body politic”.

Buchanan was particularly concerned about ways to reform the rules of the political game to promote fiscal responsibility. That problem has worsened since the 1970s. The type of reforms he hinted at involved agreement by those who sense that they are vulnerable to having wealth expropriated via the political process to a mechanism for limited wealth transfer on condition that others agree to rules that overtly limit governmentally directed fiscal transfers.

I doubt whether rules to promote fiscal responsibility are feasible in the absence of a broad consensus concerning the role of government in distribution of the benefits from economic progress. Perhaps that is also a context in which the real constitution can mandate free trade. Current proposals being advanced in various quarters for guaranteed minimum incomes are relevant to this discussion. It seems to me, however, that proposals to ensure widespread opportunities for those displaced by import competition and technological change to improve their skills, and earn higher incomes, are probably more deserving of support. I might try to spell out reasons for that view in a later post. 

Sunday, January 15, 2017

What is the most important thing you have learned in your life?

As I begin to answer this question I am wondering whether it was such a good idea after all. I still have many things to learn and, hopefully, I have a few more years left to learn them. I can claim to have been only moderately successful, so the wisdom I can offer may not be worth a great deal. Readers can make up their own minds about that. Some might think I am on an ego trip, but I am better placed than anyone else to make judgements about my own motives.

The most important thing I have learned in life so far is that when you are thinking about your future performance - in any aspect of your life – you are more likely to achieve to your potential if you think like a player rather than a spectator. That means paying attention to your intentions rather than your expectations. This chart might help me explain.

 If you ask spectators how well they think any player will perform in some forthcoming event they are likely to start talking about her or his past performance and trends in past performance. From the spectators’ viewpoint past performance is the best predictor of future performance. It can even make sense for spectators to attach labels to players based on past performance. One player might be showing great promise, while another is past his prime, or prone to choke, and so forth.

It is counterproductive for a player to go into a game with the mind-set of a spectator - focusing on expectations about the outcome based on past performance. If recent performance has been weak, dwelling on expectations based on past performance will tend to make them become self-fulfilling prophesies.  If recent performance has been strong, over-confidence is likely to get in the way of the focus required for further improvement. It is also distracting for players to be speculating about the judgements that spectators – including coaches and selectors – might be making as they observe the game.

To play well it is obviously necessary for players to focus on their intentions – what they need to do to realize the potential they have displayed in their best past performances. That doesn’t mean trying to exclude the possibility of poor performance from your mind.  It is inevitable for speculations about outcomes to arise in the minds of players. An appropriate response is to acknowledge that you are prepared to accept any outcome, but your focus is on what you intend to do and what that will feel like as you do it. Why not include the intention to enjoy using your skills?

It is obvious that the distinctions between player and spectator mind-sets is important in playing sports, but how widely does this apply to other aspects of life? It seems to me to be important in many aspects of life. An example that came to my attention recently helps to make the point. Here is an extract from an article by Jeff Wise, entitled “To Change YourLife, Learn How to Trust Your Future Self”, published in Science of Us:
In the mid-1970s, psychologist Stephen Maisto conducted an experiment that would be forbidden today. He gave recovering alcoholics either a spiked punch or a similar-tasting virgin one. He then told half of each group that they’d just consumed alcohol, and the other half that they had not. As you might expect, half the test subjects experienced a sudden surge in craving. But it wasn’t strictly the ones who’d consumed alcohol. Whether they actually had or not, it was the ones who believed they had. The alcoholics who thought they’d had a drink believed that once they fell off the wagon they’d be hopeless, and therefore couldn’t bundle. So they couldn’t.

In this context “bundle” means to identify with your future self (or your potential). As I see it, the subjects who had a sudden surge of craving, despite having not had any alcohol, had adopted the stance of spectators rather than players. Spectators have sound reasons to expect that when recovering alcoholics fall off the wagon they are likely to become hopeless. The results of the experiment suggest that there is no physical reason why an alcoholic who has had a drink cannot choose to focus on his or her intention to behave more like the person he or she wishes to become.

I learned about the importance of distinguishing between player and spectator mind-sets about 14 years ago when trying to help myself to become more fluent when speaking in public. As a child I developed a severe stutter and was unable to say more than a few words without blocking. My fluency improved greatly in my teen years, but I still had a tendency to block when it seemed most important to speak fluently e.g. in public speaking situations.
Looking back now, it seems obvious that I was tripping myself up by adopting a spectator mind-set. I was overly concerned about how the audience would judge me if I blocked. On the basis of past performance there was a high probability that I would experience disfluency, so that was what happened.

I experienced fewer problems after I began to focus on how I intended to speak, and learned how to trust my ability to speak fluently. It is certainly desirable for public speakers to have regard to audience reaction, but they do this most effectively when they focus on their own intentions – whether they are attempting to entertain, inform, persuade or inspire the audience. Spectators still see still see plenty of room for improvement in my public speaking performance – but I get a great deal of satisfaction from knowing how far I have come!

I am not sure where I picked up the distinction between player and spectator mind-sets. The related distinction between acting according to intentions rather than expectations came from an article by John Harrison, a public speaking coach who was once a stutterer, entitled “How expectationscan sink your ship”. I can remember reading about perceptual positions in NLP and Neuro-Semantics literature, but the idea of the player/spectator distinction, as discussed above, might have come from Tim Gallwey’s inner game books. Gallwey’s equation: performance equals potential minus interferences, is certainly highly relevant. The interference Gallwey was writing about comes from the inner coach (Self One) who is constantly distracting the player by telling her or him to be careful not to make a mistake. I found sporting metaphors from Tim Gallwey’s books – particularly The Inner Game of Golf - a great source of inspiration. (The Inner Game of Golf might even help me to improve my performance on the golf course if I played more frequently.)

Perhaps the second most important thing I have learned in life so far is that if you are having difficulty in understanding or explaining a problem it often helps to think of a relevant sporting metaphor. 

Sunday, January 1, 2017

What policies will be pursued by the author of "The Art of the Deal"?

After reading Trump:The Art of the Deal it seems to me that the best way to start thinking about how to answer this question is to ask yourself what Mr Trump could do to further promote his own reputation as a political leader. His policy choices are likely to be determined largely by the potential they offer for the further self-promotion required to enable him to win a second term in office.

Some may wonder why I see a book written about 30 years ago as providing guidance about Mr Trump’s current priorities. Although his co-author, Tony Schwartz, claims that he actually wrote the book, it is clear that Donald Trump strongly endorses the ideology of The Art of the Deal and sees his experience in negotiating business deals as highly relevant to the presidency. In announcing his candidature, he said: “We need a leader that wrote ‘The Art of the Deal’.”

The Art of the Deal conveys the impression that the prime motivating force in Mr Trump’s life is self-promotion. The book is itself a promotional exercise designed to enhance his reputation as a person with the capability of doing deals under difficult circumstances. Trump is the hero, using publicity as a weapon to defeat incompetent and evil opponents. He emphasizes the importance of giving the media a good story. He even views critical stories as providing valuable publicity. Most tellingly, he acknowledges:
The final key to the way I promote is bravado. I play to people’s fantasies. People may not think big themselves, but they can still get excited by those who do. That is why a little hyperbole never hurts”.

If you think that makes Mr Trump sound more like a politician than a business leader, consider the way in which he emphasizes that it is important “to deliver the goods”:
You can’t con people, at least not for long. You can create excitement, you can do wonderful promotion and get all kinds of press, and you can throw in a little hyperbole. But if you don’t deliver the goods, people will eventually catch on”.
The quoted passage is followed immediately by reference to two former presidents, Jimmy Carter and Ronald Reagan, as examples of leaders who were good at promotion, but not so good at delivering the goods. This guy obviously thinks like a political leader, but it remains to be seen whether he will be as good as Ronald Reagan at delivering policy outcomes that are worth having.

The new president will recognize that to have any chance at re-election he will have to deliver some of the “goods” expected by the people who voted him into office. There will no doubt be a flurry of activity to take specific actions he has proposed for his first 100 days. Over the next few years there will probably be some real policy change e.g. cuts in corporate tax cuts, increased infrastructure spending and more restrictive immigration policies. In the foreign policy arena, application of the Trump doctrine of doing deals with the big players might end up favouring closer relations with China, as well as Russia, despite recent anti-Chinese rhetoric. That might make life more difficult for China’s neighbours, but is probably preferable to the alternative of deepening tensions between the U.S. and China. In many other policy areas, including trade policy, we are likely to see major re-branding exercises, with little actual policy change. Every policy deal will have Trump’s name written all over it – just like his real estate developments!

When I decided to read The Art of the Deal one of my objectives was to see to what extent he sees deals as involving winners and losers rather than mutually beneficial outcomes. There is some of both.  A substantial component of the “art” endorsed by Trump is actually an entrepreneurial function that will be recognizable to fans of Austrian economics. The entrepreneur sees an opportunity to make a profit that others have not seen, and then proceeds to use his negotiation and management skills in pursuit of that profit. If the entrepreneur succeeds, many others also benefit, including original owners of sites and the air space above them, financiers, contractors, building workers, and the people who own or rent space in the building. Everyone involved can be a winner.

The added complication in the entrepreneurial art practiced by Donald Trump is the prevalence of  government regulation impacting on the property development that he has been involved in. As I was reading The Art of the Deal I began to realize that Donald Trump and Tony Schwartz were writing about the entrepreneurial function in rent-seeking environments – the highly regulated property development market in New York and gambling industry in Atlantic City. For the benefit of readers not familiar with the concept, the idea of a rent-seeking society was developed by Gordon Tullock and Anne Krueger to describe societies where government regulations play a large role in determining the distribution of incomes, and substantial resources are expended by individuals and groups – rent-seekers - lobbying to have the coercive powers of government used to their advantage at the expense of others. The U.S. is not one of the first countries that comes to mind when I think of rent-seeking societies, but rent-seeking is rife in the industries where Donald Trump learned the art of the deal.

I am not the first to recognize that The Art of the Deal is about entrepreneurship in rent-seeking environments:  Adam Davidson made similar observations in an article in the New York Times Magazine in March 2016. However, I don’t think Davidson’s view of Donald Trump was entirely accurate. He suggested that Donald Trump “is not just a rent-seeker himself; his whole worldview is based on a rent-seeking vision of the economy, in which there’s a fixed amount of wealth that can only be redistributed, never grow”. The Art of the Deal portrays Trump’s real estate development activities as being about adding value to sites rather than just obtaining benefit at the expense of others. Even allowing for his hyperbole, Trump seems to see his role as that of a capitalist hero, like a character out of an Ayn Rand novel, who is using his skills in self-promotion and his legal team to fight the rent-seekers who are trying to obstruct economic development.

When he talks about public policy issues Mr Trump sometimes seems to allow his desire to present himself as a person with a kind heart to get in the way of clear thinking:
Unlike most developers, I don’t advocate eliminating rent control. I just think there ought to be a means test for anyone living in a rent-controlled apartment”.
I wonder whether Trump really sees rent-control as a good way to provide economic assistance to poor people. A cynic might suggest that his support for means tested rent control was a rent-seeking ploy to further his own interests in evicting wealthy tenants from the rent-controlled premises that he wanted to re-develop.

Adam Davidson might be close to the mark in suggesting that at an international level Donald Trump’s world view is governed by the idea that what one country gains another loses. Some passages in The Art of the Deal reflect that view. Trump claims that the Japanese “have become wealthier in large measure by screwing the United States with a self-serving trade policy that our political leaders have never been able to fully understand or counteract”. These days he expresses similar views about China.

 From an economic perspective, Donald Trump’s desire to put America’s interests first in trade policy would be desirable for Americans (as well as people elsewhere in the world) if only he knew where America’s interests lie. It is hard to believe that this builder of innovative modern buildings in New York thinks he can make America greater by transforming its manufacturing industry into a museum of mid 20th century technology that can only survive sheltered behind high import barriers. If he sees America’s interests as providing widespread opportunities for Americans to enjoy greater prosperity, he should hire some competent economists to suggest what policies are most likely to contribute to that objective.

If Donald Trump believes his own rhetoric about asking lots of questions, keeping options open and thinking big, perhaps he could even end up as an advocate of unilateral free trade, rather than re-branded bilateral trade deals. In my view the odds are strongly against that, but it could happen! 


A couple of months later, I think I was excessively optimistic in suggesting that we are likely to see major re-branding exercises in trade policy with little actual policy change. There are two reasons for this. First, Trump’s most influential advisers strongly favour protectionism and will not be satisfied with the kind of re-branding that might satisfy the President. Second, as Barry Eichengreen has pointed out, Trump is likely to focus on trade policy because it is “the one set of economic policies a President can pursue without close congressional cooperation”.

It now looks as though the world might be about to enter a new era of trade protectionism. Some suggestions regarding appropriate Australian policy responses are in a later post.