Why the free market is not meritocratic

The price system does not reward ability. If you want people’s earnings to reflect their ability, therefore, you can’t have a free market.

This simple point is both obvious and universally ignored. Consider:

Bonuses for executives and traders have increased over the past 30 years - can anyone really claim that traders and executives now are actually “better” than traders and executives from 30 years ago?

(Traders and execs now have access to better tools, but surely this is an argument for paying the providers of said tools more rather than the people who use them?)

The point about the free market is that it signals demand. It does not reward past performance, but indicates what people *should* do in the future.

As the free market does not reward past performance (90 year old retired executives can’t go back to their former employers and demand more money from them now because they weren’t paid as much 30 years ago as their replacements are now) the free market cannot be a meritocracy.

The best thing about the free market is the way it matches supply to demand. It is this very thing that means it is not meritocratic.

The best social worker in the country probably earns no more than the average taxi driver.

The End of Politics: a review

I stumbled across Chris Dillow's blog (entitled Stumbling and Mumbling) after reading repeated references to managerialism in The Yorkshire Ranter and DSquared Digest.

A brief read of Dillow's blog suggests he is clearly too clever by half and, which is more, he knows that intelligence is irrelevant if you don't pay attention to empirical observations, or further are incapable of making accurate empirical observations.

Which leads into The End of Politics - Dillow's book.

Dillow's thesis is that, contrary to the standard caricature of being "all spin and no substance", New Labour does have a distinctive ideology.

This ideology holds that it should be possible to combine equality and economic efficiency, and that there is no trade-off between these two goals. Any problems that emerge can be dealt with through effective management.

Dillow calls this ideology managerialism. Managerialists believe that the job of government is to behave like managers of a company. Managerialists do not perceive the inherent trade-offs and conflicts of interest that are endemic to politics, and are indeed the reason for the existence of politics. Managerialists believe conflicts of interest can be resolved with good leadership and appeals to a well-defined national interest.

Managerialism is distinct from the scientific management of Frederick Winslow Taylor, which was concerned with organising resources effectively. Rather managerialism is the belief that there exists an abstract concept of "good management" that can be applied to every situation, regardless of the underlying organisational substrate.

Managerialists are obsessed with the idea that the world is new and constantly changing, thus simultaneously justifying managerialist action and ensuring that it is impossible to objectively test the efficacy of a managerialist policy because by the time it is implemented things will have changed.

Dillow also draws a link between Old and New Labour, describing how they are defined by their desire to achieve equality and economics efficiency simultaneously.

Dillow argues that there are trade-offs in politics that can't be managed away.

Further he argues that notions of "economic efficiency" or "equality" or even "rationality" are ambiguous and incoherent in and of themselves. He cites Newcomb's Problem to identify areas where traditional conceptions of rationality are limited.

Dillow shows that the arguments that globalisation have changed everything are false, and that concern over globalised capital and labour is as old as Adam Smith.

Instead, globalisation is used to justify New Labour's managerialist schemes.

Globalisation isn't necessarily irreversible, as the existence or non-existence of tariffs or immigration controls are at the whim of politicians.

Dillow shows that the evidence as to whether the national minimum wage destroys jobs is inconclusive, but taken as a whole, the research generally seems to indicate that the national minimum wage does destroy jobs but this is difficult to detect in aggregate economic data.

The attempts by the Beveridge-report inspired postwar settlement to achieve full employment lead to worker militancy and increased inflation, as workers campaigned successfully for higher and higher price rises in response to increased inflationary pressures that were in fact being caused by inflationary pay rises.

Dillow's arguments are a recurrent theme in what I've been reading. The Black Swan by Nassim Nicholas Taleb, The Origin of Wealth by Eric Beinhocker and now The End of Politics all have in common an empirically-supported belief that the powers of human rationality are more limited than we tend to assume. That centrally-planned projects often fail and that extensive government oversight of the economy is generally a bad thing.

So if the capacity of political leaders to manage things is inherently limited in all sorts of ways what is to be done?

The title The End of Politics is appropriate: Dillow pours flammable liquid over all the most cherished ideals of all politicians and sets everything alight.

Given the robust and thoroughly empirical nature of this book I am entirely persuaded by Dillow's arguments that most political projects are stillborn. There is never enough information for politicians to make good decisions, even if they were capable of doing so, or even had a clear idea about what qualifies as a "good" decision.

As an alternative to top-down managerialist politics Dillow argues in favour of the open society: that decision making should be as democratic as possible, simply because no centralised authority can possess all the necessary information to make good decisions.

Dillow believes hospitals should be run by doctors and nurses, and schools run by teachers, because no centralised manager in Whitehall can possibly predict "the facts on the ground."

He also suggests the intriguing idea of a citizens basic income as a way of partially solving the problem of welfare vs. working tax credits. It's an interesting idea, and one that appeals to the dilettante in me.

The basic lesson of The End of Politics is that in the complex world in which we live political and business leaders need to be more humble in the face of the inherent limitations of centrally directed institutions.

The best way to get anything done is to create the circumstances by which effective solutions can be evolved from the interactions and daily business of all the millions of people and machines in the world.

Nowadays, as professions become more and more specialised, it is important to hand control back to the professionals. Just as David Allen's Getting Things Done system was defined by Wired magazine as "Taylorism for the modern knowledge worker."

Just as the study of productivity has shifted emphasis from centrally-directed institutions to professional individuals Dillow argues that the response to increasing complexity in the world is to decentralise politics and business.

Both The End of Politics and The Origin of Wealth convey the message that economists and policy makers need to be more humble about the extent to which the economy can be controlled and that the best laid plans gang aft aglay.

Dillow advocates an open society and more genuinely democratic debate in which heterodox views and those who stand to lose out from policies are given a fair hearing. Political debate is likely to be fairer if things are done in the open.

My response to this book was initially fatalistic: if the world is so complex that we can never hope to control it, why bother attempting anything?

Dillow's answer is that government has a role in creating the circumstances in which innovation can take place. But it is not the role of government to attempt to change people or manipulate the economy, because it is incapable of doing so effectively.

In a broader context it is clear that our conception of human nature is changing and altering. We are coming to realise that we are not wholly rational, and even that rationalism itself is a canard.

Dillow has an excellent blog: Stumbling and Mumbling.

Thoughts on "The Black Swan"

Having read "The Black Swan" by Nassim Nicholas Taleb (his website is here) I have come to a few conclusions:

1. I spend too much time reading newspapers and on trivial and timewasting exercising (writing this blog post does not qualify as it counts as practice in writing and helps me organise my thoughts).
2. Much of what I believe about the world isn't based on any kind of objective reality, but rather a collection of superstitions, cognitive biases[link], and predjudices.
   
3. In certain non-empirical fields there is little value in deferring to experts if your intention is to accomplish something (like building a bridge, or making money).
4. The value in the "free market" has less to do with competition and more to do with the resultant levels of "stochastic tinkering" that have the potential to lead to hugely influential but unpredicted developments.
   

The Book Itself

Taleb is arrogant, irreverent and amusing - all qualities I value in anyone. He writes engagingly, occasionally dipping into anecdote (for illustrative purposes, not necessarily to support his argument).

The Black Swan

A Black Swan is an unpredicted event that has a huge impact. Human beings tend to ignore Black Swan events when making decisions about the future, despite the fact that Black Swans tend to have an overwhelming effect in history, science, business, finance, and individual lives.

Black Swan events are outliers, they have an extreme impact, and third human nature has the tendency to attempt to "explain" the Black Swan after the fact, making it seem predictable and obvious.

Extremistan and Mediocristan

Taleb defines two areas of human experience: in Mediocristan things tend to behave in a fairly orderly and predictable manner. The distributions of height in a large population, for example, remain relatively close to a normal Gaussian bell curve even if you were to add the world's tallest man to the population - because he is not 3 kilometres tall he does not effect the overall distribution.

In Extremistan, on the other hand, outliers have a disproportionately large effect. The distributions of personal net worth in a large population, for example, will be completely thrown out of whack if you add Bill Gates to the population.

Power Laws and Guassian Bell Curves

In Extremistan, power laws (Pareto's Principle, Zipf's Law) and fractal relationships are the norm. In Mediocristan Guassian bell curves are the norm.

Taleb believes the bell curve is misused in it's application in investing (I wasn't aware the bell curve was used extensively in finance).

Scalable and Non-Scalable Professions

Inequality tends to follow a power law. The richest 1% own 50% of all assets, whereas the poorest 10% own substantially less than 10% of all assets.

With regard to income some professions lend themselves to black swans and power laws, and others don't. Medical doctors and priests will tend to earn roughly a certain amount, which will fall somewhere on the bell curve of income for that particular profession.

Writers, venture capitalists, entrepreneurs, and scientists, on the other hand, all occupy extremistan, or black swan territory. Some writers (like J.K. Rowling or Terry Pratchet) earn collossal amounts of money per hour worked whereas the vast majority will struggle to earn anything.

Empiricism and the Problem of Induction

How do we know that what happens in the past will continue to happen in the future? Taleb likes empirical philosophers like Francis Bacon and Karl Popper, and Sextus the Empirical. In trying to find knowledge about the world it is better to prove conclusively that something doesn't work than that it does - in fact you can't prove that something always works.

Knowledge, therefore, emerges from negatives. Disproving something adds to knowledge.

Platonism and Theories

Taleb rails against creating a theory and then selecting evidence to fit the theory. He dislikes the application of game theory to economics, and portfolio theory to investment. He describes the mistake of focusing on elegant, tractable mathematics at the expense of empirical knowledge as platonicity, and any knowledge divined from such abstract mathematical theorising is "nerd knowledge."

Cognitive Bias and the Narrative Fallacy

Correlation does not equal causation. Post hoc ergo propter hoc.

Terry Pratchett and Taleb

Pratchett comments extensively on the human desire to create stories (the Discworld is a world that runs on narrative, rather than physical laws) and on the fact that million-to-one chances occure nine times out of ten.

Also Pratchett's uber-politician Lord Vetinari is the embodiment of the knowledge that in an unpredictable world what people really, really want is for tomorrow to be pretty much the same as today.

Arthur Koestler and Taleb

Skimming through The Sleepwalkers by Arthur Koestler (which I have read) I can see many parallels between Taleb's dislike of platonism and Koestler's similar criticism of excessive theorising in physics.

Taleb refers to Koestler's book in The Black Swan in the context of the inadvertant nature of much scientific discovery.

Koestler was also intensely critical of the dogmatic nature of theoretical physics (as he perceived it). Koestler's problem was that, unlike classical physics, quantum electrodynamics involved fields and quanta that could be one or the other or something else, depending on your perspective. I personally think the problem is more to do with the fact that QED is counter-intuitive. We humans have evolved in a quasi-classical environment and just aren't set up for thinking in terms of the quantum environment of the very small.

Hayek and Stochastic Tinkering

Taleb believes the value in free markets lies in their ability to generate new idea in a process of stochastic tinkering. This apparently is what Hayek thought.

Taleb is also a fan of Francis Bacon and Karl Popper. Does not like Platonism - mistaking the map for the territory and overextending the use of models.

Whither singularity?

Both Kurzweil and Taleb are obsessed with the fact that humans tend to have an "intuitive-linear perspective."

Taleb doesn't comment on the singularity directly. He does refer to the importance of power laws and such.

Conclusions

There is a lot of food for thought in this book, and I intend to read a lot more about the various topics that Taleb raises.

As ever at this stage in my education any new knowledge raises more questions and than it answers.

However as Taleb's central point is that the world is in many ways fundamentally unknowable and unpredictable perhaps this is a good thing.

The objective of learning is not simply to know a load of facts, but rather to become comfortable with the limits of your understanding. To transform unknown unknowns into known unknowns and to cope as best you can with those things that remain unknown unknowns.