The Filter^

Corporate Fraud

I've just been re-reading Malcolm Gladwell's New Yorker article on the collapse of Enron. He utilises a distinction between 'puzzles' and 'mysteries':

Osama bin Laden’s whereabouts are a puzzle. We can’t find him because we don’t have enough information. The key to the puzzle will probably come from someone close to bin Laden, and until we can find that source bin Laden will remain at large.

The problem of what would happen in Iraq after the toppling of Saddam Hussein was, by contrast, a mystery. It wasn’t a question that had a simple, factual answer. Mysteries require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much. The C.I.A. had a position on what a post-invasion Iraq would look like, and so did the Pentagon and the State Department and Colin Powell and Dick Cheney and any number of political scientists and journalists and think-tank fellows. For that matter, so did every cabdriver in Baghdad.

His point is that treating Enron as a puzzle means an increase in information, however the problem arose because of a lack of judgment about the content of existing information. As he points out, a 1998 business school project at Cornell reported that:

Enron was pursuing a far riskier strategy than its competitors. There were clear signs that “Enron may be manipulating its earnings.” The stock was then at forty-eight dollars—at its peak, two years later, it was almost double that—but the students found it over-valued.

This information was in the public domain

My immediate reaction it to tie this into the work of Henry Manne, who's work on insider-trading has greatly influenced my thoughts on accounting regulation. But the Gladwell article also brought up the role of the taxation system:

one of the critical clues about Enron’s condition lay in the fact that it paid no income tax in four of its last five years... Enron wasn’t paying any taxes because, in the eyes of the I.R.S., Enron wasn’t making any money.

If you looked at Enron from the perspective of the tax code, that is, you would have seen a very different picture of the company than if you had looked through the more traditional lens of the accounting profession. But in order to do that you would have to be trained in the tax code and be familiar with its particular conventions and intricacies, and know what questions to ask. “The fact of the gap between [Enron’s] accounting income and taxable income was easily observed,” Fleischer notes, but not the source of the gap. “The tax code requires special training.”

I recently asked a senior accountant at a large US company about Enron, and his response was intruiging: they had become suspicious about Enron's reporting and had long since stopped doing business with them. The real issue isn't how to improve the level of information, but to better utilise it. Those who looked could tell that Enron was overvalued, and yet it persevered. The question is how we can better utilise knowledge, so that the general public - the man on the street - is as close to the action as the professional. Insider-trading and a simpler tax code might help.

Charles Tilly (1929-2008)

I'm sorry to learn from Tyler Cowen that Charles Tilly has died. Permit me to repost:

• Personal Website
• Why? (2006) Buy from Amazon
  
• Lecture: Why (and How) Things Happen
• "How I Work" by Charles Tilly
• Major Works by Charles Tilly
• The Ideas Interview: Charles Tilly, The Guardian

Here's the Columbia announcement. Here's the NYTimes obituary. I like this:

Dr. Tilly once said his goal was to do sociology, history and political analysis at the same time, but he said it with what colleagues said was his typical intellectual humility.

“My efforts to harmonize all three have always failed in one way or another,” he said in an interview with Contemporary Authors, “but the failures, happily, are usually of the kind from which one learns something useful.”

Somebody shoot me!!

Will Wilkinson is investing heavily in 'Happiness research', and approvingly cites Alex Singleton for making the Misesian point that:

Far from being a major problem, there is something virtuous about being unhappy with our present circumstances.

Indeed it is uneasiness with our present situation that motivates us to act. If we were happy, we'd have no need for action.

A famous story:

I remembered reading something Kurt Vonnegut wrote about people actually wanting to die during peak experiences. He described a piano player during a great performance, screaming "Quick, somebody shoot me while I'm happy!!" As bizarre as it sounds, this all suddenly made sense.

Apparently that pianist was Fats Waller, but it's somewhat mythical.

This graphic demonstrating that material wealth is correlated to happiness, but there's one country that really stands out - Finland. Interestingly, students have pointed out to me that Finland has a high suicide rate (although it seems this is falling). I usually debunk happiness research by either pointing to evidence that material wealth improves subjective perceptions of happiness, or challenging the methodoligical foundation - but this deeper, philosophical point is also worth considering: what would a world look like where people had no uneasiness?

Why Politics?

I know it's easy for a non-partisan pundit to point score, but now that we've got television again I watched a couple of interviews with Gordon Brown this morning (firstly with Andrew Marr, then with Adam Boulton). I also saw interviews with Alan Duncan and Chris Hughn. What i'd really like is to meet someone who (a) isn't a libertarian; and (b) intelligent enough to realise that Labour, the Tories, and Lib Dems are comprised of egits willing to lie in order to appear to be what they deem as being popular. I'm frustrated because The Filter^ is frequented by people who fit into both categories, so please help me out...

I won't pretend that I have a quick-fix solution to rising food prices, but I know that the Competition Commission's investigation into the UK grocery market has nothing to do with it. The fact that Gordon Brown used it as an example of how he's solving the "silent tsunami" is ludicrous. Following the local election results the PM said that he'd "listen and lead". A journalist asked if he'd have a cabinet reshuffle. Brown repeated "i'll listen and lead". If only the journo had enough nous to say "will you have cabinet reshuffle?" to which Brown would answer "I'll listen and lead"...

I'll pause. And alliterate.

I've been challenged recently about my claim that Central Bank Independence is a highly politicised matter, and yet Brown defended his record on the economy by saying that "we've cut interest rates and injected liquidity". Who is "we"??

In the US John McCain's economic advisers are reassuring supporters that despite his public rhetoric he's in favour of lower taxes. The Tories here are similar, "we'll say what needs to be said to get elected, but rest assured when in office we're on your side". Even if you trust politicians who are willing to lie to get office, how can you support the democratic system that requires them to do so?

It'd be lovely if we could all agree to disagree, but the BBC won't let me. Even though I try my utmost never to watch their channels, if I wish to utilise the services of their competitors I am forced by law to pay for the BBC. Well at some point the level of service gets so frustrating, so bad that I'm willing to fork out for the BBC and their rivals. It's like buying a Dell laptop just for the right to then also pay for a MacBook.

Today I'm annoyed by all intelligent non-libertarians, because it's due to my deep and genuine desire to believe that government provision of fundamental services is right that has meant that I continue to subscribe to them. But any person unfortunate enough to rely upon those services knows that central planning is riddled with information and incentive calamities. I'm ashamed that I've been so willing to settle for the best that socialism can provide, and will in future work hard to ensue that I can buy MacBooks. I know full well that those who can't afford MacBooks will be left with inhumane service, but I no longer see the point of sitting at 3am in the waiting room of a crumbling building alongside them. Rest assured, your waiting lines will be quicker because I'll be elsewhere. Rest assured, i'll be arguing for economic freedom for all.

Income inequality is a contentious issue, but as someone who's relied on public services I am grateful that many people are wealthy enough to afford to opt out. It's precisely because of those who remain in the clutches of socialism that motivates me to make the case of economic freedom, because when I do opt out I want as many pragmatic people as possible to join me. Socialism should be for ideologues, not the poor,.

Economics is the pith of civilization

I've already mentioned Israel Kirzner's inspirational speech at the 2006 Southerns, but would like to share a similar quote:

Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns itself with every-body and everything. It is the pith of civilisation and of man's human existence
Mises, 1966[1949], p.878

Back to work...

Economic Rhetoric

If people mean "centrally-planned" why can't they just say it?

Dani Rodrick says:

the rapid rise in food prices is creating a severe problem for some of the world's poor and does require urgent, and coordinated response

What does he mean by "coordinated"? I read it to mean some for of government intervention, rather than a focus on free market forces. But is that a proper use of the term coordination? What about:

• Calculation and Coordination: Essays on Socialism and Transitional Political Economy

It reminds me of how bureaucrats so often like to use the term "robust". If "robustness" means that it works away from ideal conditions, then what about:

• Liberalism, Socialism, and Robust Political Economy

I'm not saying that there's a single "right" definition here, just expressing concern that people have developed a secret language I'm not aware of, where innuendo towards government is made and understood, despite using words that might also imply laissez-faire.

Liquidity Trap

I just saw the news and wanted to pre-empt the morons who in a couple of months time will start referring to a liquidity trap.

50 Greatest comedy clips

Are here. Very US-centric, but the challenge is to list the ones that should have made it. For me:

• The Two Ronnies - 'Crossed Lines'
• Newman & Baddiel's 'History Today'
• Does 'The Day Today' count?

What else makes you go ha-bloody-ha?

Sunday musings

This weekend I'm taking a foray into the print media, and two things have got my goat. Firstly, the Archbishop of Canterbury has expressed concerns about growing wealth inequalities:

He said that the disproportionate gap between rich and poor was causing envy and cynicism and that government ministers should be “a little more worried” about the high salaries of City high-flyers

Please, can someone explain this to me. The last time I check envy was a sin:

"Thou shalt not covet thy neighbour’s house; neither shalt thou desire his wife, nor his servant, nor his handmaid, nor his ox, nor his ass, nor any thing that is his." Exodus (20:17)

When I read the Sunday Times Rich List I do feel somewhat jealous of the wealth that's been accumulated. In many cases the economist in me reminds me that economic exchange is positive sum, and therefore their wealth has more likely increased my quality of life, than detracted from it. I also remember that most people work bloody hard for their wealth, and are highly skilled. Put simply, I wouldn't be able to do what they do even if I had the opportunity (which, of course, I do). But there's also those who've inherited their wealth, or come across it in some other fortuitous means. Again, it's easy to feel envious, but I remind myself that their wealth might be a mixed blessing. It looks a good deal in the glossy pages of a Sunday magazine but is money the root of happiness? If you think of the pressures and woe that so many of those people have to face, I don't think it's an unambiguous dilemma. Those who do seem quite content, but have just been born into a title, or born into an easy life - I don't even envy them, because I'm richer than the majority of the planet, and the majority of human history - as we all are. So yes, there is this slight tinge of envy as I read the Rich List, but it doesn't last long.

That's my secular, anti-theistic/agnostic worldview operating. I would have thought a Christian would find it even easier to cope with envy. But what do we see? The Archbishop of Canterbury positively encouraging it! He's propagating the myth that "high net worth" in a financial sense equates to "high net worth" in a moral one. He's not only validating people's envy, he's campaigning for the State to reward it. If you're neighbour comes home with a new ox - one that's bigger and better than yours = the State should confiscate it and give it to you. Incredible.

And secondly, why has every news flash on 5 Live this afternoon been telling me that some petrol stations in Scotland have started to run out of petrol? I was quietly minding my own business, oblivious to events in a separate country, but have been repeatedly told not to panic. What does one do when someone keeps telling you not to panic? Put it this way - I have about half a tank of petrol which should last about a week.

• If local petrol stations were able to anticipate a possible shortage and begin to ration existing stocks through a price rise, it wouldn't be worth me filling up. I'd figure that even if it takes more than a week to sort out, I'll just get the train into work. I'd leave my car in the garage.
• If, on the other hand, local petrol stations don't raise their prices, then it'd be sensible for me to fill up just in case. That means less petrol for you.

We thus see a self-fulfilling prophecy, brought about by (i) a hysterical media looking for a crisis; (ii) a government that at the hint of a move away from "ideal conditions" reduces the scope for markets to allocate resources; (iii) a general public who's negative attitude towards "profiteering" underlies the entire situation. So let me get this off my chest:

Dear People of Hertfordshire,
The reason that I have contributed to a possible petrol shortage by filling up my car even though I don't really need to is because we're ignoring Econ 101. If prices are free to fluctuate there cannot be a shortage. No-one likes to see the price of something rise, and it's tempting to believe that preventing this from happening will cure the underlying problem. But it won't. When a petrol station needs to replace it's fuel it must do so in the current market conditions, therefore if fuel becomes scarcer, the stuff in his forecourt is more valuable. By raising his price people that don't really need it - people like ME - won't buy it, and there'll be some available for those that really do. He doesn't owe us petrol at yesterday's price. We don't have a right over his property.
If you happen to waste your time queuing for petrol, or if you become massively inconvenienced because of a shortage, please help to avoid it happen again and support profiteering
Ever,
aje

Consumer Surplus

"Consumer Surplus" is the difference between how much you pay for something, and how much you'd be willing to pay for it. I ask my students to remember this concept when they're doing their shopping - it certainly helps to put you in a cheerful mood. For instance, I just bought Curb Your Enthusiasm series 3,4 and 5 through Amazon. We don't have television at the moment and have been re-watching series 1 and 2. Having just christened my new American Express I've realised that there's 10 episodes per series, and it's cost me under £30. That's less than a pound per episode. My consumer surplus might not quite be as high as Bryan Caplan's, but happy days...

Enterprising Britain

Here's a deeply frustrating anecdote via Jeff Frankel:

A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more.

It's a sad case where someone is seeking to create wealth, but facing financial incentives not to do so, and these real examples are important because it's rare to see such concrete figures. Indeed barriers to growth can become so embedded that we don't even notice them. The counterfactual possibility of wealth-creation and growth is never realised, and thus ignored.

I recently co-authored a policy paper on entrepreneurship, called "Enterprising Britain" (press release), in which we sought to uncover the barriers that exist to growth. One of the biggest misapplications of economic theory is to associate a healthy entrepreneurial environment with a high number of business start ups. In short, the UK is a fine environment to start a new company, but as soon as you need to employ people, pay taxes, and expand into genuine wealth/job creation, it becomes very difficult. The report seeks to uncover some of these key barriers, and by reducing barriers policymakers can effect the entrepreneurial culture and expectations of potential entrepreneurs.

I appreciate that writing an independent report for a political party isn't the best way to generate consensus, but I was disappointed to hear the response of the Treasury spokesman (from The Telegraph):

The World Bank rates the UK as one of the best places in the world to do business and we have the lowest corporation tax rate of any G7 country.

I don't expect the Treasury spokesman to actually read the report prior to commenting, but we had highlighted those very facts and discussed why they were complacent and misleading:

• Where suitable we compared the UK environment to relevant benchmark countries, however it is important to realise that our motivation is not to improve the UK’s relative ranking. We do not feel that our objective is to “compete” with rival nations. Rather, the guidelines being discussed should be compared to the state of the country if these policies are not introduced. There are two visions of British policy: one that merely reacts to competitive pressures, and one that leads the way on facilitating enterprise. Regardless of the situation in other countries, whether the UK is ranked first in the world or last, these policies should be introduced because they will improve the entrepreneurial climate and thus facilitate social development. (p.8-9)
• Although the UK rate of corporate taxation is not significantly higher than other G7 countries (28% from April 2008), global tax competition is increasing and the UK is losing ground to European neighbours (p.50)
• Headline rates of corporation tax mask an increase in other forms of indirect taxation that stifle business growth (p.55)

The report has had more positive feedback from other places: Dan Martin (Editor of BusinessZone) used the report as evidence to challenge the Chancellor over the CGT furore; and the FPB’s national chairman Len Collinson used it to accuse the government of fudging numbers (here, here). It's providing an interesting glimpse into the role of research in politics.

More Lego classics

"Classics in Lego" is a Flickr set that uses Lego to recreate iconic photographs.

Also try the Life Aquatic set. Great stuff.

Inflation

I wish the general public had enough economic literacy to demand that journalists and politicians use - where relevant - the term 'CPI' instead of 'inflation'.
Mike Moffat reports a readers unhappiness with About.com's definition of 'inflation':

I suppose if you are using the new definition, according to Merriam Webster’s dictionary, inflation is the increase in the price of a basket of goods. However, for hundreds of years the inflation – even in Webster’s, was increasing the money supply. It seems like an odd coincidence that the definition was changed and that it just happens to prevent inquiring minds from figuring out that inflation is something the Federal Reserve knowingly does, rather than something that “just happens.”

If you seek proof of this claim, simply look in an old dictionary. I know that as late as the 1980’s, inflation was still defined there as “increasing the money supply.” You will find the same definition in dictionaries from the 1950’s, 1930’s, 1913, and so on. It is only recently that the definition has changed. Didn’t George Orwell write about changing the meaning of words as a tool of the totalitarian state to prevent people from having ideas that were dangerous to the state?

I've previously mentioned Gordon Brown's decision to use the CPI as the proxy for inflation instead of the RPI (here and here).

Addendum: Here's a graphic from a recent Economist, "If RPIX and the former target of 2.5% were still being used, Mr King would once again have had to explain an embarrassing overrun."

 

Cultural Theory in a Nutshell

The Spectator:

If you want Dame Mary's Cultural Theory in a nutshell, it takes only two ideas and a pencil to understand. With the pencil, draw a vertical axis marked Grid and a horizontal axis marked Group. Group is the force that holds people together (either by defining themselves in opposition to the outside world, or through the pressure on them from the outside). Grid is the amount of classification that is imposed on people - what they wear or eat, where they live. So, high up on the axes of both Grid and Group, you find hierarchical societies. Low down, with little evidence of either Group or Grid influences, are the free-moving entrepreneurs. Where Grid is weak but Group is strong you find the sectarians, the enclavists.

I'm writing some early drafts on applying Cultural Theory (CT) to organistional management (an ultimate ambition is to come up with something similar to Hood's "The Art of the State"), and struggle with definition slippage. Since Mary first introduced the terms "Grid" and "Group", through to when the Grid-Group framework became known as "Cultural Theory", to the many applications of CT - I am struck by a lack of uniform usage. It is only slight deviations, but if one sits down with 10 books on CT it's not impossible to find slight contradictions. I'm sure these are unintended. My claim is that it stems from a desire for empirical application, and attention to the issue at hand rather than pursuing truth-maintaining statements. Ultimately, any use is a restatement. Conflict is inevitable. What to do?

The FA: oh dear...

David Moyes, in October:

“I’ve since seen it a few times but I know the real story and what’s really gone on from the referee and his comments to me so if the FA really want to hear the real comments than I can explain them.

“It was also witnessed by John Barnwell of the LMA so we know exactly what was said and what the referee’s thoughts were because I got a chance to speak to him 30 minutes after the game.”

The FA has now formally warned him.