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Book Review: Mariana Mazzucato: The Value of Everything: Making & Taking in a Global Economy [2018]

image credit: green kozi CC BY-NC-ND 2.0 https://flic.kr/p/aaEYAY

Taken from Henry George, the title of this post refers to economists who make good points but don’t get to their logical conclusion. Mariana Mazzucato may be another. We may start by looking at some of the main themes of her book.

  • Value extractors are obtaining a large and increasing share of wealth produced, resulting in a smaller share for those who actually produce valuable goods and services. This problem has several interlocking causes.
  • Measures of national product (GDP) conceive value as equal to price, meaning that any profitable activity adds to national product even if it’s essentially an extraction of value rather than production of good or service of value. In recent decades, opportunities for private value extraction have multiplied.
  • One effect of this increase in private value extraction is that the extractors now have effective control of much of the government. Lobbying by value extractors changed national income concepts to include their extractions in GDP.
  • Further, the conventions of national income calculation tend to understate the value of government work. This is because the value of a private company’s production necessarily exceeds, on average, the cost of labor and capital inputs (otherwise the company would have no profit). A government’s production, by contrast, is treated as equal to the cost of the inputs, even if the value of the product is much greater.
  • Partly as a result of this undervaluation, some services previously provided by government have been “privatized,” which means, in most cases, are still funded by taxes but are performed by employees of private firms under contract.

Some examples of the problem:

  • As retirement income becomes based on earnings of assets, pools of assets grow and opportunities for value extraction multiply. This includes fees for managing investments, and various side-hustles.
  • As governmental functions are “privatized,” the quality of service drops along with the earnings of people who provide the service. But costs typically don’t decline because of contractors’ profits and lobbying expenses.
  • Patent privileges have been vastly expanded in recent decades. This provides more opportunities for value extraction, but actual useful innovation seems to be retarded by patents. Also, as patent offices have become understaffed relative to the workload, patents become easier to obtain.
  • Governments (or their banker overlords) seek to reduce the deficit/GDP ratio by reducing spending, failing to recognize that some kinds of government spending actually facilitate an increase in GDP far in excess of their cost.
  • The dominant neoclassical economic ideas assume that rent can be competed away, and that unemployment is voluntary. They further fail to recognize “the collective and cumulative processes behind innovation.”

The remedy? According to the author:

  • “We” need to “define and measure” the “collective contribution to wealth creation,” to overcome the “price=value thinking…” and recognize that most of the “…creation of value is collective.”
  • “We” should also recognize that the current structure of corporations, controlled by shareowners thru boards, with no formal role for employees, customers, and other “stakeholders,” is not the only possible or practical way to arrange things.
  • The role of governments, as well as nonprofits and cooperative organizations, in value creation needs to be recognized.
  • Tax laws need to be modified to advantage actual value creators rather than value extractors. In addition to changes in income tax laws, a small tax on financial transactions would be helpful.
  • Patent laws need to be modified to discourage abuse. To encourage particular kinds of innovation, bounties might be substituted for patents.
  • Portraying government as “investing, not spending, can eventually modify how it is regarded.” [of course this little trick has been used by U S politicians for many years.]
  • “We” need to develop a vision of what society needs, and set government priorities regarding infrastructure, services, and regulations to achieve it.

So what is the value of this book?

  • It does give some history of concepts of national income, going back to the 17th century and summarizing views of William Petty and Gregory King as well as Adam Smith, the Physiocrats, Ricardo, and (with special admiration) Marx and Keynes. It does discuss rent, mostly in an accurate way. There’s no mention of Henry George, perhaps because this part of the book is euro-centric, or perhaps for other reasons. She does mention some important Americans, including Elinor Ostrom.
  • It identifies the problem of accumulated privilege, resulting in value extraction, which impedes real progress.
  • It clearly describes some principal means by which value is extracted.
  • It taught me a few things about the way GDP is calculated, and the history of patents.
  • It clarifies that there’s nothing “natural” or “inevitable” about the way our economy is set up; many different arrangements for such components as corporations and patents could work, and some would be a lot better than what we have.
  • In a description of VW and the “dieselgate” affair, she acknowledges some of the limitations of her proposals.

As a Georgist, I see two big shortcomings with this book:

(1) Even tho nowadays the value extractors have effective control of governments and other powerful institutions, the author seems to assume that somehow these forces will be overcome once the people come to understand that government really is useful, and that the benefits it provides are far greater than is reflected in GDP. Furthermore and related, there is the assumption that the bulk of government expenditure is good, that government is for the most part honest and reliable. There is also almost no mention of the huge waste on military, punishment, and other expenditures which an honest and efficient government would need to eliminate. So, once proper understanding is achieved, the government will wisely set priorities and provide appropriate infrastructure and services. No method is proposed for accomplishing this, and the alternative of decentralization really gets no attention.

(2) While rent is mentioned, and for the most part correctly characterized, there’s no discussion of how rent can be used to properly fund services and eliminate other taxes. It’s true, of course, that some privileges are best eliminated, but for use of real estate parcels, electromagnetic spectrum, and other natural resources the wise policy in most cases is to allow private ownership but collect virtually all the rent for public use.

And then there are a few little nits to pick.

  • She does not like corporations to distribute profits to shareholders. Partly this seems to be because share buybacks are one of the several ways that corporate management contrives to reward themselves excessively, but also she displays a fundamental belief that corporations should reinvest in their business, apparently without regard for whether management believes worthwhile opportunities are available.
  • “A recent study by researchers at the University of Pennsylvania…” is referenced on page 219, but without footnote or citation.
  • On page 44 she describes rent as including “what you pay a landlord to live in a flat.” This is inconsistent with the way she uses the term elsewhere in the book, since only part of what you pay to live in a flat is to cover the proportionate share of the land it occupies; much is for use of the structure (capital) and services (labor).

In conclusion, this is a pretty good book for understanding how some means of wealth extraction work and why it poses a danger to the rest of us. It encourages us to consider alternative ways for organizing our communities. But it’s weak on practical solutions.

additional note: Mariana Mazzucato has recently been interviewed regarding this book on Econtalk and Alphachat.

another additional note: Font sizes may appear a bit screwy herein because I haven’t figured out how to enlarge the teeny font that seems to be the default in WordPress lists under the new Gutenberg editor. Someday maybe I will.

“The hero turns out to be Henry George”

Ray Kroc’s first McDonalds in Des Plaines, IL, is now a historic site. Image credit: Matt Thorpe CC BY-NC-ND 2.0

I’ve complained before about Russ Roberts’ Econ Talk failing to note the importance of economic rent and land costs.  So I was pretty pleased to hear his guest Philip Auerswald say

I think the hero in all this, and I talk about this in The Code Economy, turns out to be Henry George. I mean, I think he really, you know, the 19th century U.S. economist–and he really anticipated these phenomena more clearly than anybody.

Pleased enough to read Auerswald’s new book. And he does get a lot of what George wrote about.

Auerswald’s main point seems to be that an economy doesn’t just have inputs and outputs, but what’s more important is the methods by which the inputs are used to produce the outputs. That’s “code,” and folks have been using it for 40,000 years.  In recent centuries, standardization and automation of various kinds have increased productivity — the amount of stuff which a given amount of inputs could produce.

And, as we see computers and machine-driven processes increasingly capable of replacing human labor, what will humans do?  He endorses Henry George’s analysis that, as productivity increases, rents will increase.  And he supports the citizens’ dividend (tho he does not use the term), to be funded by a land value tax.

But his concluding pages seem to assume that, of course everyone will have a guaranteed income from land rent, no problem there, but what will people do with their time? To George, the problem was to get a fair distribution (not redistribution, because by right the rent belongs to everybody) of wealth, which he expected would result, over time, in social progress and a more constructive community. When I look at Wikipedia, Flickr, some blogs and a bunch of other internet resources, I tend to agree with George. Auerswald assumes the wealth distribution, but doesn’t assume that people and the community will improve.  If I looked at Facebook or some other sites I might agree with him.

Auerswald also makes interesting use of the concept of comparative advantage, applying it to humans exchanging work with machines. Machines can do certain kinds of work millions of times faster than humans, so logically machines should do such work.  In other tasks the difference might be much less, so those tasks would remain with humans (tho I would guess at much lower wages than currently.) And then there are some “low-volume, high-price” tasks which might remain human monopolies.

*****If you’re not the editor of Auerswald’s book, stop reading here*****

This book is full of irritating errors.  On page 2 is a list of ingredients for chocolate chip cookies, comprising butter, sugar, water, salt, and chocolate chips — but no flour. Page 92 says “slavery was abolished in the British Empire in 1807,” while Wikipedia provides various dates, depending on your definition, in the 1830s or 1840s. Page 120 places Ray Kroc’s first McDonalds in “Desplaines, California.”  Page 175 calls Zipcar a “ridesharing” platform, corrected on page 213 to “car-sharing.”   “As Henry George understood nearly a century ago” on page 232 doesn’t seem likely regarding a man who died in 1897 mentioned in a 2017 book. There are probably more, that historians or various kinds of geeks would notice.

 

GMO crops don’t even increase yield

 

image credit: Stuart Williams via flickr (cc)

image credit: Stuart Williams via flickr (cc)

Here’s a program note from ABC indicating that yield of GMO crops is no greater than conventional crops.  Unfortunately there is no formal citation of the source article, nor is it available on line as far as I can tell, and ABC tends to remove their program notes after a few weeks.  However, the article, from the International Journal of Agricultural Sustainability, was written by Professor Jack Heinemann of the University of Canterbury in New Zealand, which might be enough information to locate it. Heinemann’s web page links to an article which may even be the one in question.

How China and Wal-Mart Help the Poor to Pay more Rent

Good interview last week on EconTalk, with Enrico Moretti who has a new book, The New Geography of Jobs. Some places are growing and innovating, some stagnating and declining.  Which one would you rather live in? Enrico seems to prefer the innovative one, where workers are more educated (at least in the credential sense), jobs are available, and even if you’re working in a local service job — barber, dentist, whatever — your wage will be higher.  Host Russ Roberts keeps Moretti pretty much honest, sure wages will be higher but so will — they don’t dare use the phrase — economic rent. And so if you’re a homeowner, you benefit (assuming of course that you bought before the innovative, growing local economy was widely recognized), while if you’re a renter, perhaps not.

From the interview, it appears that the book includes some analysis of how working people benefit from low-cost imports and big-box stores. I don’t doubt it, if the working person can afford to support an auto-centric way of life then these developments do benefit her/his standard of living.

Moretti suggests that places will be better off if their workforce has more formal education.  Roberts is at his best here, pointing out that, sure, college professors would say that.  Moretti does seem to recognize that, as more people get credentialed (“skilled”), this will tend to reduce the earnings gap between the unskilled and the specialised. He does not say that it does so by reducing earnings of the skilled, but we can figure that out.

The most irritating part, for anyone who understands political economy, is the assertion that wages for service workers are higher in innovative, growing regions because service workers are more productive there.  I don’t know if they’re more productive, maybe a dentist fixing the teeth of $100,000 engineers is more productive than one who does the same for $25,000 laborers, I have no idea.  But regardless, wages aren’t determined by productivity.  They’re determined by the alternatives: If the employer can get competent labor for less, she almost certainly will do so, over time if not right away. And if the worker can find a job that, all things considered, is more satisfactory, why wouldn’t he take it?

Bast drafts Henry George for Green Bay

image credit: freedigitalphotos.net

image credit: freedigitalphotos.net

Longtime HGS  supporter Joseph Bast, head of the Heartland Institute, has a new policy brief (pdf), with a podcast overview, recommending that fans of professional “sports” own the teams thru nonprofit corporations.  The only actual example of this is the Green Bay Packers, which originated as a for-profit organization but was bought out of bankruptcy by a fan-organized nonprofit.  They would never leave Green Bay since the owners cannot profit by moving them. Thus the main lever used by for-profit teams to extort new stadiums and other favors would be broken.

Pointing out that teams currently extract monopoly rents from the community, Bast mentions Henry George but rejects George’s idea that natural monopolies should be municipally-owned.  Of course, George never applied this concept to professional “sports,” which existed in his day but was nothing like what we see now. The closest I can think of is that George considered the idea of a publicly-subsidized theater to be so absurd, that he compared it to subsidy of various other industries to illustrate the absurdity of the latter.

So why don’t fans establish nonprofit teams?  My personal theory is that most fans of professional “sports” are masochists and like to be abused.  But perhaps I’m wrong.  Bast suggests routes around other barriers including opposition of major leagues, high cost of setting up a team, and existing taxpayer-subsidized facilities which are controlled by existing monopolies.

Did you hear the one about the two economists….

…who spoke for over an hour about cities, development, migration, and density, and asserted that America would be more productive if our cities were denser, and did not mention economic rent nor land value?

They did it here, on econ-talk, and you can download the podcast or just read a pretty good text summary (I do not recall them using the word “land” either, but it appears several times in the text summary so I must have missed it). The book itself seems to be available only on Amazon Kindle, which as I understand it means I cannot buy it, but only license a copy to read. But from the interview I gather that author Ryan Avent has determined that American cities (and some suburbs too) are not as densely developed as they “should” be, and that this is due to local governments’ reluctance to allow development at optimal densities.

Now certainly there’s no question that local governments, usually reacting to neighborhood concerns, often refuse to allow development at densities which are physically workable. I recall one suburb where a proposal would have had single-family houses on lots of 9000 square feet.  Community reaction was that the kind of people who would live on such small lots would not be desirable neighbors, even tho in many other cities such a lot would be considered oversize.  These concerns are often stated as “property value” arguments, and perhaps they really are.  That’s an expected consequence of an economic system where ordinary people cannot expect to accumulate much money by working and saving, and must hope to profit from rising prices of the real estate they occupy.

And it’s not unknown for the politicians whose approval is needed for major developments to take advantage of the opportunity for personal gain, legal or otherwise but surely wrong.

So how is it to be decided what the optimal density is? In  Science of Political Economy, Henry George observes that, for each kind of production, there is an optimal density at which to work.  That density depends on what is being produced, the technology applied, the number of workers available, their skills, the quantity to be produced, etc., so it will change over time.  Avent may be correct that we would be better off if higher densities were permitted in some already-dense desirable places, but he certainly didn’t offer much evidence in this podcast.

But let us assume that higher density would be a good thing (and I am certain that in some places it would be), how is it to be achieved? Avent seems to assume that a reduction in land use regulation would be the proper method, because the market is efficient and so density would rise to the appropriate level.

But communities are more complicated than that, and you can’t, or at least shouldn’t, ignore externalities.  The first builder to put a high-rise in a desirable townhouse neighborhood may profit nicely.  However, not only does the character of the community start to change, but different infrastructure is needed.  Can the streets handle the traffic, or can acceptable public transport be provided? Will the sewer and water system handle the load? What are the other effects on the larger community, and how can they be dealt with? There are loads of reasons why it makes sense for the community, acting thru its local government, to have a major say in its development.

But to really irritate those who understand political economy, Avent says:

[I]f you had a sort of density charge–I hate to tax density in that way but in terms of being realistic about the distribution of cost–you could channel some of that into investing in local amenities: could be parks, could be transit, something to try to convince local stake-holders that density is going to be in their interest. So normally we think of taxes as discouraging an activity–which it would. It would make it more expensive for developers to make urban areas more dense.

Yes, some way for the community to share in the benefits of increased density. Can you say “land value tax?” It doesn’t tax development, it taxes development potential.  It pressures landowners to build at appropriate densities, but doesn’t punish them for doing so. Supported by competent and realistic zoning, it guides density to the places where is works.

Somebody told me once that the Economist, for which Avent is a correspondent, is a pretty good source of economic news except that it refuses to acknowledge the possibility, let alone the benefits, of a land value tax. I still haven’t seen anything that contradicts this assertion.

Heartland podcast seeks government action

Heartland Institute publications and web pages usually position it as anti-government, or at least pro-less-government-than-we-have-now.  But their podcasts are a bit less controlled, sometimes just providing an interesting take on something we might not have thought about (There was a great one about “how much does the Burning Man Festival have to pay for insurance?” that seems to have disappeared from Heartland’s site).

Now we have one insisting that the government needs to break the Google monopoly and vigorously enforce “privacy” laws against Google. The mp3 of this interview with Scott Cleland, author of Search and Destroy: Why You Can’t Trust Google Inc is here.

Cleland seems to want government to protect us from the threat that Google is.  I agree that Google can be a threat, as they really do want to organize all the information about all of us, and seem to be pretty good at it. But I think the real threat will happen when Google and Government merge.  Until then, we are probably best advised to use the good cheap or free alternatives to Google’s services, and to work without signing in to Google to the extent possible.

My own experience with Google Adsense, btw, occurred when trying to buy some traffic to the Henry George School web site.  People concerned about “poverty” might be interested in us, so I tried that keyword.  The problem was that most of the news articles Google coded as “poverty” were about crime and criminals.  So I excluded some words, I think it was “gun”, “police,” and a couple others.  Adsense failed to recognize these exclusions.  On one of the google discussion groups I found other people who have experienced similar problems.  Eventually, Google said something to the effect of “if you want to keep advertising with us you’ll have to pay more money per hit.”  I guess we would have had to pay enough to justify having a Google Human get involved, and that was too expensive, so the project was put aside.  The dollar cost was modest but the benefit was more modest.