A collage of images, featuring most prominently a person holding a sign reading "no justice no peace"

Category: Economics

Distribution / Economics / Old Blog

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Supply, investment, and the allocation of scarce goods: How not to argue against rent control

Access to affordable housing is widely recognized as a basic right or, at the very least, an important moral interest. At the same time, residents of many major cities are faced with spiralling housing costs. London provides a particularly striking example. During the last year alone, average rents in London rose by more than 10 percent. Since this figure describes an aggregate trend, rent increases faced by individual tenants are often significantly higher. (When the last flat that I lived in changed its owner, the rent went up by 30 percent, notably without any changes to the condition of the property.) In light of this situation, it is no surprise that calls to address the problem of rising rents have become louder. 

One straightforward way of addressing the problem would consist of policies that place legal limits on the extent to which rents may be increased. Yet, the idea of rent control faces outspoken opposition. Opponents often defend their view by pointing out that rising rents have an underlying cause in the shortage of supply of housing in a given area. Constraining rents, they argue, does nothing to alter the shortage of supply or, worse, exacerbates it by reducing the returns on investment for property developers, thus undermining the economic incentives for an increase in supply. This line of argument, however, appears unconvincing. 

Shortages of supply in housing cannot easily be solved in the short term and are partly determined by geographical factors that cannot be altered at all. To the extent to which rent control policies fail to address the underlying problem of supply without worsening it, why should they not be considered as an interim measure? It is, of course, easy to conceive of policies that would further exacerbate the problem, for example if they took the shape of absolute rent ceilings that would make it impossible for developers to recoup their investment. There are, however, obvious policy alternatives that would place limits on rents and rent increases while being flexible enough to ensure a sufficient return on investment. In fact, if policies were structured such that returns on investment in new developments are higher than returns on investment in existing properties, they could create additional incentives for the construction of new homes, rather than undermining them. The very lack of rent controls, in turn, can be seen as compounding the imbalance between supply and demand in that it creates demand for existing properties on the part of speculative investors that would not exist if rent controls limited the returns on speculative investment. 

A further prominent argument against rent controls, even if understood as second-best or interim measures, relies on the appeal of free markets as a mechanism for the allocation of scarce goods. If a good is in short supply and prices are left to move freely, they will rise up to the point at which an equilibrium is reached between the amount of goods available and the amount demanded at the price in question. From the point of view of economic theory, this process is often considered to be attractive on the basis that it ensures that scarce goods are allocated to those who value the good most highly. If the price was artificially kept low, in contrast, the allocation of goods would be determined by factors that may be less normatively appealing or left to pure chance. Applied to the present context, if there is a shortage of housing in a given location, would it not be a morally attractive outcome if tenants with the strongest preference for the location would get to live there? 

Maybe it would. As an objection to the regulation of real-world housing markets, however, the argument is fundamentally flawed. The claim that equilibrium prices allocate goods to those who value the good most highly is plausible only in conjunction with the idealised assumption that the bidding parties are roughly equal in their ability to pay. In a real-world context in which potential tenants differ significantly in their wealth and thus their ability to pay, differences in willingness to pay rent cannot be taken as a direct reflection of the subjective value that a give property has to them. Since the absence of rent control measures does nothing to ensure that housing is allocated according to strength of preference, the appeal to this allocative ideal cannot serve as an objection against rent controls. 

In the absence of other arguments, the controversy about rent controls appears to boil down to a conflict between the interest in affordable housing on the one hand, and the interest of property investors on the other. It seems clear to me that the interest in affordable housing is the morally weightier one. This is not meant to deny that investments made under existing rules may give rise to legitimate expectations. Honouring such expectations, however, should not prevent us from changing rules that apply to future investments.

Distribution / Economics / Old Blog

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Scoring For Loans, or the Matthew Effect in Finance

Scoring for loans, or: the Matthew effect in finance
 
 
source: wikipedia
Last year, we moved to a lovely but not particularly well-off area in Frankfurt. If we applied for a loan, this means that we might have to pay higher interest rates. Why? Because banks use scoring technologies in order to determine the credit-worthiness of individuals. The data used for scoring include not only individual credit histories, but also data such as one’s postal code, which can be used as a proxy for socio-economic status. This raises serious issues of justice.
Sociologists Marion Foucarde and Kieran Healy have recently argued that in the US credit market scoring technologies, while having broadened access, exacerbate social stratification. In Germany, a court decided that bank clients do not have a right to receive information about the formula used by the largest scoring agency, because it is considered a trade secret.
This issue raises a plethora of normative questions. These would not matter so much if most individuals, most of the time, could get by without having to take out loans. But for large parts of the population of Western countries, especially for individuals from lower social strata, this is impossible, since labour income and welfare payments often do not suffice to cover essential costs. Given the ways in which financial services can be connected to existential crises and situations of duress, this topic deserves scrutiny from a normative perspective. Of course there are deeper questions behind it, the most obvious one being the degree of economic inequality and insecurity that a just society can admit in the first place. I will bracket it here, and focus directly on two questions about scoring technologies.
1) Is the use of scoring technologies as such justified? The standard answer is that scoring expands access to formal financial services, which can be a good thing, for example for low-income households who would otherwise have to rely on loan sharks. Banks have a legitimate interest in determining the credit-worthiness of loan applicants, and in order to do so cheaply, scoring seems a welcome innovation. The problem is, however, that scoring technologies use not only individual data, but also aggregative data that reflect group characteristics. These are obviously not true for each individual within the group. The danger of such statistical evaluations is that individuals who are already privileged (e.g. living in a rich area or having a “good” job) are treated better than individuals who are already disadvantaged. Also, advantaged individuals are usually better able, because of greater “financial literacy”, to get advice on how they need to behave in order to develop a good credit history, or on how to game the system (insofar as this is possible). The use of such data thus leads to a Matthew effect: the have’s profit, the have-not’s lose out.
         There are thus normative reasons for and against the use of scoring technologies, and I have to admit that I don’t have a clear answer at the moment (one might need more empirical data to arrive at one). One possible solution might to reduce the overall dependence on profit-maximing banks, for example by having a banking system in which there are also public  and co-operative banks. But this is, admittedly, more a circumvention of the problem than an answer to the question of whether scoring as such can be justified.
2) Is secrecy with regard to credit scores justified? Here, I think the answer must be a clear “no”. Financial products have become too important for the lives of many individuals to think that the property rights of private scoring companies (and hence their right to have trade secrets) would outweigh the interest citizens have in understanding the mechanisms behind them, and in seeing how their data are used for calculating their score. In addition, social scientists who explore social inequality have a legitimate interest in understanding these mechanisms in detail. It must be possible to have public debates about these issues. Right now, the only control mechanisms for scoring agencies seems to be the market mechanism, i.e. whether or not banks are willing to buy information from them. But one can think of all kinds of market failures in this area, from monopolies and quasi-monopolies to herding behaviour among banks.
      One might object that without trade secrecy there would be no scoring agencies at all, and hence one could not use scoring technologies at all (note that this only matters if one’s answer to the first question is positive). But it seems simply wrong that transparent scoring mechanisms could not work. After all, there is patent law for protecting intellectual property, and in case this really doesn’t work, one might consider public subsidies for scoring agencies. The only objection I would be worried about would be a scenario in which transparency with regard to scoring agencies would reinforce stigmatization and social exclusion. But the problem is precisely that this seems to be already going on – behind closed doors. We cannot change it unless we open these doors.

Democracy / Economics / Old Blog

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Nudge, Nudge? Privatizing Public Policy

“Like all major changes to democratic accountability, it happened with a minimum of fuss. By the time we heard about it, it was already over.”

Photo: Illustration by Bill Butcher 

This week the government announced that the Behavioural Insights Team (BIT), commonly referred to as the ‘nudge unit’, has been ‘spun out’ of Whitehall into a mutual joint venture. The new “social purpose company” is now owned, in roughly equal shares, by BIT employees, the government, and Nesta (an independent charity established by the previous government using £250 million of National Lottery money). The privatisation deal has been described as “one of the biggest experiments in British public sector reform” (Financial Times), on account of this being the first time that privatisation has reached beyond public services and utilities to include an actual government policy team. My intuition, like many other people’s I would imagine, is that this marks a dangerous new precedent in the rise of private power over the public. But what precisely is it that is doing the work for this intuition?

(more…)

Distribution / Economics / Health / Liberty / Old Blog

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Capping Working Hours

Recently, the scandalous decisions of some investment banks to treat their employees like human beings by suggesting they take Friday nights and Saturdays off has raised much debate amongst financial journalists and their ilk.
The issue of long working hours is not limited to investment banks; a survey in the US of 1000 professionals by Harvard Business School found that 94% worked fifty hours or more a week, and for almost half, working hours averaged over 65 hours a week. With the increase of automisation in production chains moving labour into customer facing service roles, more individuals will likely face this challenge in their daily lives.
There are good reasons to think that these hours are not useful at all. Economists have long known that as working hours increase, the marginal production of workers fall – mistakes increase and the quality of work produced falls.
More importantly than the impacts on productivity however, are morally relevant considerations that are related to cultures of long working hours:
Industries with long working hours are typically biased in favour of those who do not have other commitments which limit their available time – most notably child care and currently, in our society, this means women. Economist Claudia Goldin finds that gender gaps in wages are greatest in those industries which exhibit “non-linear pay structures” – essentially those in which individuals who can work extremely long hours are disproportionately rewarded. This describes most jobs in the corporate, financial and legal worlds.
There are important health implications of longer working hours with significant evidence that those who work longer than 48 hours a week on a regular basis are “likely to suffer an increased risk of heart disease,stress related illness, mental illness, diabetes and bowel problems.”
Finally there are various employment related issues worth considering – for example would unemployment be decreased if each 100 hour-per-week job were split into two of 50? Would such a policy help reduce the concentration of power in organisations as key managerial tasks would likely have to be increasingly shared?
While our society may gain significantly from moving away from working long hours, it will always be incredibly difficult for any firm to act unilaterally in this matter due to substantial co-ordination failures in this area.
The appropriate response, I believe, is for Government to intervene with a hard cap of 48 hours per week that applies across almost all industries, with no built in exceptions beyond those which are absolutely essential. The current EU working times directive which is supposed to provide a similar function, is farcical in its ability to constrain individuals from working, due to the amount of exceptions and opt out clauses built into it.
A hard cap of 48 hours would be hard to implement, would have some uncomfortable implications (for example – forcing individuals who enjoy their jobs to go home and stop working) and would likely have some negative consequences on the economy. However there would seem to be substantial positive gains to be made and I believe that these are large enough to justify developing such a cap.

*Update: Marxist economist, Chris Dillow, has an excellent post describing how problems like long working hours can naturally arise without actually benefiting anyone.

Distribution / Economics / International / Old Blog

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Ethical trading as profit sharing: An alternative perspective on the terms of international market transactions

The increase in cross-border trade around the world during recent decades has been accompanied by a growing concern with the terms under which international market transactions occur. The claim that these terms are often morally problematic has come to play a prominent role in theoretical debates as well as in political initiatives such as the Fairtrade movement. While it is not always clear what the exact normative basis for this claim is taken to be, defenses most commonly focus on the low absolutelevels of welfare enjoyed by trading parties in developing countries. My aim in this contribution is to suggest that this focus tends to ignore what appears to be a justified independent concern with the relativedistribution of the economic benefits that result from international market transactions.
According to what appears to be the predominant perspective, the terms of international market transactions are morally problematic if they leave one of the trading parties badly off in certain absolute terms – for example, if the price that producers of coffee or other agricultural commodities are being offered is insufficient to provide for even their basic needs. Common as it is, this perspective faces a well-rehearsed objection. First, badly off as a party may be in absolute terms, she typically derives an economic benefit from the transaction; and second, it is not obvious why the mere act of engaging in a mutually beneficial exchange with a party that happens to be badly off should be taken to give rise to a particular (role-specific) responsibility for that party’s absolute level of welfare.
For the present purpose, I am going to set aside the question of whether this objection is successful or whether transacting parties can indeed be held responsible for each other’s absolute welfare. Instead, I am going to present an alternative perspective on the evaluation of the terms of market transactions that is immune to the mentioned objection and that seems to be neglected in current debates. According to this perspective, trading parties have a responsibility to transact at a price that ensures that each of them receive a fair share of the economic benefits that result from a transaction.
In rough terms, the argument in support of this view takes the following shape. International market transactions represent a form of mutually advantageous cooperation: they are typically beneficial for both parties involved, and the realization of each party’s benefit depends on the other party’s material contribution to the exchange. At the same time, trading parties generally face a range of possible mutually advantageous prices. The limits of this range are defined by the respective price at which an exchange would cease to be beneficial to each party, such that the choice of the price at which the transaction ultimately takes place determines the size of the benefit that each party derives from the transaction. Given the cooperative character of market transactions, parties ought to be disposed to transact at a price that ensures a fair amount of benefit to each of them.
This second perspective imposes clear constraints on the morally permissible terms of international market transactions even if we assume that parties have no responsibility for each other’s absolute welfare. In one way, the demand of a fair distribution of transactional benefits is more limited than the initial perspective described above. Conceptually, the demand is constrained by the range of mutually advantageous prices in a given situation, and it may well be that no price on this range is sufficient to fully provide for a party’s basic needs. There is another way, however, in which fairness in the distribution of transactional benefits is significantly more demanding. According to the first perspective, there would appear to be no moral constraint on the profit that a party may make as a result of a transaction above and beyond what is required to guarantee that each party enjoys the relevant absolute level of welfare. To stay with the example, provided that her foreign suppliers are sufficiently well-off, a European coffee importer would be morally free to make whatever profit she is able to obtain in the market. Any such profit, however, is a reflection of the price at which the initial transaction took place and thus subject to a fair distribution of transactional benefits. Following the perspective I have described, then, rather than focusing on absolute levels of welfare, we should think about ethical trading in terms of profit sharing.

Democracy / Economics / Old Blog

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Privatising Royal Mail: An Objection to Sub-Contracting a Commitment

Much has been written against the privatisation of Royal Mail. Often objections focus on one of two issues. First, majorities of both workers of Royal Mail and the British public were against it. Second, there are worries it will undermine the service it provides, with increased prices and decreased access in remote areas only two of the problems already cited. I sympathise with both worries, but my sense is that there is also a further difficulty, something that bothers me beyond concerns for popular sanction and proper provision.

There is clearly something problematic about sub-contracting certain actions. I should not, I think, appoint someone else, even someone who might do a better job, to write the message in my partner’s anniversary card. Such qualms can also arise in group actions. For example, if I am a member of a neighbourhood watch group, it does not seem appropriate for me to have a third party fulfil my duties. Some worry here regards proper provision; perhaps a third party would not have the same interests in doing the job aptly. But even aside from this worry, even if the third party was more reliable and more vigilant, I think the group could object to me outsourcing the task. “We did not agree merely that the job is done”, they might say, “we agreed that you would do it”. Unless I had good reasons for delegating the duty – that I was incapacitated by illness, for example – I think I owe them an apology. I seem to have violated some constraint assumed in our commitment.

Similar cases can arise in the citizen-government relation. It can be thought that government is justified, in part, by its contribution to realising collective goods. There are goals individuals cannot achieve alone, so they collectively empower an agent to coordinate these activities. Obvious examples include national defence and law and order. When a government assumes these roles, it provides a commitment to undertake these tasks on behalf of a population, and, again, there seem cases where sub-contracting this commitment is inappropriate. I suspect that it is something like this concern which explains the high numbers uncomfortable with privatising prisons. This function seems like a collective end handed to a collective agent that, through privatisation, it is not performing. Even if it is done effectively by the sub-contracted, I think we can say: “but we asked you to do it”.

Does this argument apply to the postal service? I guess it is most plausible to suggest that the relevant collective good asked of the government here would be ‘to provide a coordinated means of communication between dispersed individuals’. Mediums other than postage could meet this requirement. However, my sense is that when the government does not provide an alternative medium – whilst it does not, itself, provide, say, phone or internet connection to all – a case can be made that it should provide one means of communication for its population, a default option of sorts. We collectively empowered an agent to facilitate nationwide contact and when they sub-contract or privatise that role completely, I think we can say: “but you committedto providing at least some form of communications network for us”.

There are cases where a government would be excused this responsibility: 1) if the population agreed to sub-contracting; 2) if the government were unable or found it too costly to provide the service. 1 does not apply here since the population did not have a say, and, as noted above, were against privatisation. 2 does not apply to a business making profit. In the case at hand, I contend that privatising Royal Mail involves objectionably sub-contracting a commitment, and that there is some (additional) reason for the government to reverse that decision or provide an alternative default option for societal communication.

 

Distribution / Economics / Old Blog

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Rewards and Responsibility in the Banking Sector

The source of a particularly spirited 4-hour debate in a bar in Istanbul with Will Abel (we know how to have fun) – I thought I would bring this debate to a broader discussion in, dare I say it, a more intellectually rigorous environment.
In the lead-up to the financial crisis of 2007-8, senior executives at investment banks oversaw a system in which their firms reaped substantial rewards for selling products which they knew would ultimately lead to substantial losses for whichever firm was left ‘holding the buck’. The result of these actions we know all too well: an international financial crisis which has negatively impacted the livelihoods of billions of people worldwide.
The low number of criminal prosecutions for these actions appears to be due to a combination of the complexity of the financial products involved, the widespread and interconnected nature of the transactions and the fact that it is notoriously difficult to prove harmful intent.Thus, while their actions were dishonest, immoral and reckless, they were not technically illegal.
If a doctor were to knowingly take risks when treating a patient and that patient were to be adversely affected as a result, the doctor would be criminally liable for their actions. Likewise, if an individual takes the risk of driving when overtired or intoxicated and injures another person as a result, the driver would be criminally liable. Yet, in the case of banking, we require an additional proof of intentional malfeasance in order to prosecute.
At the current time, senior banking executives are entitled to large scale benefits while passing on the risk to their shareholders, the taxpayers who are (effectively) forced to bail them out, and a global community which relies on a banking sector in order to function. Sanctions, meanwhile, have focused on fining the offending institutions – punishing shareholders and reducing banks’ ability to lend to individuals and small businesses – rather than the individualswho ultimately made these decisions. 
I move that, given the banking industry’s importance to society and the large benefits bestowed upon its senior custodians, they have a responsibility to avert such systemic levels of risk and should be legally liable for creating such levels of risk, regardless of intentional malfeasance. Not only is this a more just alignment of power and responsibility, it is a more effective way to deter reckless behavior in the future, thereby benefiting society more broadly in the long term.
Admittedly, there are difficulties in defining exactly what level of risk is palatable for society, assigning responsibility to specific individuals (since in this case the practice was so widespread) and how to deal with rogue traders such as JP Morgan Chase’s Bruno Iksil. To an extent, however, I think that these issues can be resolved on a case-by-case basis – in a sector which perennially finds new and innovative ways to make money this may even be preferable. But by establishing a precedent that not just intentional malfeasance but a negligent attitude to risk is an illegal act, we can develop a more just reward-responsibility balance and protect the interests of society from the excesses of the few.
Finally, as much as I still hope to see prosecutions brought against individuals whose actions led to the 2007-8 crisis, I do not advocate for retrospective punishment and would intend for the standards outlined above to implemented only moving forward. As frustrated as I have been by the lack of widespread prosecutions, I take solace in the fact that the rule of law has been upheld in the face of strong public pressure. Conducting prosecutions based on retrospective law changes could ultimately create a broader ‘chilling effect’ on society which would be contrary to my intentions.

Economics / Old Blog

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The Moral Limits of Markets

In August 2012 five people went on trial in China for facilitating illegal organ trading after a student was found to have sold his kidney in order to buy an iPad. In the subsequent reporting of the incident, the case was held up as an example of the foibles of a world obsessed with consumption; a world in which everything has a price. Even though I agree that such transactions should be prohibited, the focus on whether or not people are materialistic somewhat misses the point. The salient question is not to do with the morality or immorality of consumerism, but rather a question about the boundaries of legitimate state intervention in the affairs of private individuals.
I’m going to outline a couple of reasons there may be for wanting the state to stop these sorts of transactions. One reason is that if a market in a particular good or service corrupts the social meaning of a good, then it is legitimate to restrict the sale of that good.  The main problem with this argument is that it is quite illiberal. It can permit the Institutionalised restriction of the rights of citizens on the basis of reasons with which they may radically disagree, even if those rights have no harmful implications for anyone else. So, for example, the argument could be deployed in a country where a majority of Christian citizens object to the sale of kidneys on religious grounds. The Christian citizens may attempt to restrict the commodification of kidneys because they believe that Cup human organs are a sacred gift from God which should not be ‘corrupted’ by monetary valuation. Now consider if there was a minority of atheists in this country. The atheist minority can reasonably disagree with the religious justification for the laws restricting wholesale nba jerseys their choice to sell their kidney. The atheist minority could protest that they are not being treated as equals; a comprehensive doctrine that they do not accept is being used to restrict their liberty. They are not being permitted Markets to act as they choose, despite these actions having no harmful implications for any other members of society. 
A second (and better) reason for restricting markets is that people may only sell particular types of goods or services when they were in situations of such dire economic necessity that it constitutes cheap nfl jerseys a kind of coercion. Michael Sandel sums up this position well, he writes ‘a peasant may agree to sell his kidney or cornea in order to feed his starving family, but his Proudly agreement is not truly voluntary. He is coerced, in effect, by the necessities of his situation.’ I suspect this is why most people, me included, may want the state to step and stop these Jerseys kinds of transactions. But people who are sympathetic to this view might want to consider a couple of problems with the argument.  The first thing to note about this argument is that it is not an objection to markets per se, rather it is an objection to markets which operate under highly asymmetrical Jerseys background conditions. Therefore, it Jerseys could not provide a reason to prevent a wealthy person selling their kidney. Another potential problem is that the Age transaction is paternalistic – it says that people who are in poverty are incapable of making a choice which they perceive as increasing their well-being simply cheap nfl jerseys because they have few resources.

Distribution / Economics / Old Blog

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Is Luck in Labour Markets an Issue of Justice?

Labour markets can be just and unjust in many ways that go beyond the distribution of income. One is luck and predictability. Their distribution is highly unequally, and I think that this raises issues of justice.
First, take individual predictability. In order to plan your life (where you want to live, with whom, whether/when to have children etc.) it is helpful to know what kind of job you can expect to have over the next few years. If job markets are to a high degree based on luck, rather than other criteria such as merit or age, they are less predictable. Now, whether or not labour markets could or should be structured around merit (and in what sense of merit) is a controversial question. But one Union? advantage is that you can have a reasonable guess, based on your prior achievements, of what your job prospects for the next few years will be. Psychological tendencies such as over-optimism or cognitive dissonance can of course kick in, but even more so if there is less predictability.
Second, collective predictability. There are factors in the legal and social set-up of labour markets that determine, for societies as a whole, how predictable labour markets are. For example, a government can take anti-cyclical measures in a depression that keep people in jobs. Or, as Albena Azmanova has recently pointed out, the welfare state can be Classic: designed in ways that increase or decrease individuals’ flexibility, maybe offering “universal minimal employment” as a fallback option.
My impression is that much goes wrong in these respects today, and that this raises issues of justice (in addition to many other forms of injustice in labour markets).
First, unpredictability gives greater power to employers, because employees will reasonably be more risk averse, and will try to keep jobs they have, even if the conditions are such that they would otherwise want to quit. This looks like an issue of justice as such, and it can have harmful consequences if it prevents people from 11 standing up to injustices within their job, blow the whistle, etc. Secondly, and more importantly, issues of unpredictability hit different groups in society with differential force. Depending on whether you have inherited wealth or not, marketable or less marketable human capital, a family rooted in one place or full geographic flexibility, etc., unpredictable labour markets make your life more or less difficult to live.
Nonetheless, it would not be worth raising these issues as issues of justice if they could not be changed, or only at the cost of violating other values. In designing policy instruments that make job markets more predictable, one would have to be careful – otherwise one might end up, for example, with an in-group with 100% predictability and an out-group with 0% predictability. Or one might, in the long run, stifle markets so much that the economic wellbeing of the worst off is endangered. But it seems worth experimenting with different models, and learning from the experiences in other countries, in order to see what can be done (maybe we can discuss examples below). And I think there can also be cases micro-injustices about predictability, for example if a boss tells three people that they have “good chances” to be promoted, while only one can really be promoted.
One thing, however, can and should change, in my view. The role of luck in the job market should be acknowledged, and professional success (or the lack of it) should not be seen as a sign of personal worthiness (or the lack of it). We are equal as human cheap jerseys beings and as citizens, and while some may work harder than others, or be more talented than others, these things do not determine our value. So while there might be arguments in favour of de facto trying to tie job market structures more to achievement, for the sake of predictability (although I think that collective measures are far more important), we should stop fetishizing professional success. The role of luck is always going to be there, and acknowledging it might lead to a bit more solidarity among co-citizens and fellow human beings.