Saturday, January 29, 2011

Marginal Tax Rates & Effort

Reducing the marginal rate of income tax from 70% to as low as 15% for capital gains was going to release creativity and effort.  Consider this quoted from Bloomberg News (no link available). 

Wall Street firms’ soaring pay pushed traders to disregard risk and limited regulators’ ability to lure top talent to police banks, according to a panel probing the origins of the financial crisis. . . .
Stock-option bonuses motivated financial firms to use leverage to boost returns, and traders were given “aggressive incentives” to dissuade them from defecting, the Financial Crisis Inquiry Commission wrote in a 545-page book outlining its findings. Regulators had difficulty recruiting financial professionals, who could earn more working in the private sector, said the panel . . .
Pay at financial firms started to outpace other industries in 1980, when investment banks began converting from partnerships into publicly owned companies “trading with shareholders’ money,” the FCIC said. Total compensation at U.S. banks and securities firms had climbed to $137 billion by 2007.
. . .
Stock options and other incentives tied to a company’s performance encouraged risk-taking because gains for the employees were much greater than the workers’ potential losses, the FCIC said.
“These pay structures had the unintended consequence of creating incentives to increase both risk and leverage, which could lead to larger jumps in a company’s stock price,” the FCIC said in its report.
Should economic analysis have suggested the possibility of such perverse results?

I think, yes. 

Sunday, January 2, 2011

Narrative and Logic, Meaning and Function

People love stories, and always want to know "what it means" -- it is in human nature to organize our experience and understanding in stories  -- stories, which compound judgment, cause and effect, intent and effort, into meaningful, sequential drama, drama that satisfies our emotional needs.

Scientific analysis, on the other hand, of the functioning of a system?  Interesting in its way, but not compelling in the manner of a dramatic narrative, though analysis has enormous practical implications, in the relation of science to technology, for engineering the means to actually do things, to control the processes of production.

This poses a problem for Economics, and for politics and society, in general.  What is the relation of meaningful story to functional analysis?

The problem of meaning and function -- or meaning v. function -- is an intellectual one for the science of economics, and also, a problem of epistemology: how does one "know" something, or discover something, about the world, about social reality, about how the world functions?

The problem of meaning and function is also a practical problem, because stories are a means to organize and motivate people, drama is a functional part of the social systems of political economy.

One might naively imagine that the critical question is,  Is the Story True?

That question -- is the story true? -- tries to make the problem, a scientific one.  Not incidentally, it makes the Story of Science into a Quest for Truth, assigning dramatic meaning to the activities of scientists and their results, while dismissing pre-scientific understanding -- whatever its literary merits, psychological usefulness, or religious importance -- as Myth.  Truly epic political and cultural struggles have ensued, from Science publishing Truth, which contradicted Myth.

In fact, Science Overturning Myth is a defining myth of the modern age.

I don't know that the "truth" of a good and satisfying story is the same quality or quantity as the "truth" of a sound functional analysis.  The story tells us why, the functional analysis tells us how; the story organizes our subjective experience in a meaningful way, functional analysis organizes our understanding of how the world -- objective reality -- works.

Analysis of function is about identifying functional relationships, systems and mechanisms.  Stories are about meaning, values, purpose.

There's a deep entanglement of analysis and story in Economics, where story can be functional.  There's also a lot of confusion, where story, and its moral imperatives, are mistaken for mechanism and system.

The Analysis of Supply and Demand, which becomes a choice of Supply or Demand, followed by a Story of Supply or Demand -- the subject of a previous post -- is just one example of how Economics slides between analysis of mechanism and narrative stories, without much awareness.

Saturday, January 1, 2011

Economical Ethics

Some things are just too easy. 

News that the American Economics Association is going to take up the possibility of adopting an ethics code.

The impetus is a documentary film, in which embarrassing interviews are shown with Glenn Hubbard and Frederic Mishkin.

David Rucio, at Real Economics Review, notes that Economics, unlike other academic professions, has no ethics code.

Believing that Economics is a deeply corrupt enterprise, I'm not the pious sort, who think an ethics code is likely to do much good, by itself.  It is heartening that at least some professional economists were disturbed to see the whorishness of some of their most esteemed colleagues on the silver screen, but I think developing an ethics code is likely to be a kind of distraction, a way to re-channel substantive concern about the damage done to the economy into a pious and self-serving concern about the damage done to the Profession.

So, here's my take, my teeny-tiny effort to get folks not to look away.

The scandal is not that some economists get paid.
The scandal is not that some economists get paid quite a lot of money.
The scandal is not that economists who get paid a lot of money like to obscure their association with certain institutions that pay them.

The core of the scandal is that (many) economists know very little about the economy and get paid a lot of money to make unfounded claims about the economy, anyway, as a means of impeding public understanding and responsible state action.

A large part of the profession our society assigns the task of understanding political economy has evolved a "body of knowledge" that consists largely of null results and excuses for ignorance.

One can be absolutely certain that the American Economic Association will focus on the purely ceremonial aspects, like ritual disclosure, and ignore the purveying of ignorance, lies and poisonous ideas.

(h/t to the Sandwichman for being the tipping point that got me to feel I ought to create a post on this, as futile as feels.  Like all blogging isn't futile.)