Degrees, Money and the Future

For a long time, it was politically incorrect to protest the huge increase in university/college attendance across developed nations in Europe and North America. University attendance went from approximately 14% in the 1970s to over 40% today. Tony Blair famously wanted 50% of youngsters to attend university. A degree was lauded as a springboard to socio-economic mobility, and graduates were supposed to boost GDP growth and tax revenues by taking up high-skilled jobs.

But the reality is turning the dream into a nightmare. The sad truth is that the number of graduates exceeds the number of graduate jobs, and many graduates—particularly from some of the humanities and social sciences—end up under-employed. Furthermore, the burden of college debt acts like a vice on the economy. It doesn’t matter whether the debt is private debt (like in the US) or public debt (like in most European countries). Most obviously, debt harms consumption. It has knock-on social effects on fertility and demographics; young people burdened with debt start a family later (or don’t start it at all), and struggle to afford a house. Moreover, from a macroeconomic perspective, the loans are dangerous, since a lot of them are bad—that is to say, many debtors won’t repay the full amount, or the interest, or repay within the expected maturity period.

The hard truth, that young people, parents, and policymakers don’t want to hear, is that high-skilled, university-level jobs make up at best 20% of the available jobs. I am also highly skeptical that this will increase in the future. The percentage may increase, but only because the total number of jobs will decrease as more jobs are destroyed by automation (high-skilled jobs are much more resistant to the effect of automation). The jobs that require a degree are highly technical and/or vocational: medicine, pharma, nursing, dentistry; programming; engineering; data science; and so on.

Automation, AI and the post-scarcity economy are things that have been discussed elsewhere in more detail than I will go into here. The long and short of it is: we are heading towards are a post-scarcity economy. We are not there yet, and the process will take time. Also, let me be clear that a post-scarcity economy does not mean the end of scarcity; some goods and services will remain scarce, but the majority will be available in abundance. To give you an idea: food, energy and consumer goods will be abundant. Heck, they are already pretty abundant right now. Have you ever seen a shortage of nails? Nails, like many other goods, can be mass-produced for a very low price, and they require almost no human input in their creation. Other things will remain more scarce, especially things that require a lot of high-skill human labour.

That’s the key, the salient point of this little essay: labour. Historically, we have regarded labour, work, as something valuable and worthy. An entire religion, Protestantism, revolves around the value of work. Work means steady payment; a livelihood. But labour is inherently tied to scarcity. Humans have to labour because things are scarce: food, shelter, medicine and so on. So what happens when all the work is done by robots and software? Let’s assume that everything could be done by robots or computers, just for the purposes of this thought experiment.

Ideally, we would live in a utopia; humanity would never want for anything. In reality, the barrier lying between us and this utopian vision is capitalism. We admire capitalism because it has worked well for the last two centuries or so—with government regulation and the managing of natural monopolies, of course. Adam Smith was more or less right. He was misunderstood by the braying free market neoliberals; Adam Smith never argued that the “invisible hand” would make markets self-regulating in general (only if a very specific set of criteria were fulfilled). A mixed market+command economy is the way to go. This is something that France, the UK, Scandinavia and Germany understood, but which the US and Soviet Union did not.

Unfortunately, I think the economic model of the past century may no longer function in this post-scarcity future, because it is still predicated on the idea of renumeration for labour. To put it bluntly: in the future, many, perhaps most, of the population will be unemployed. They will be unemployed for no other reason than that they will have nothing to do.

I believe that we will need a Universal Basic Income at some point in the not-too-distant future. Moreover, I think a successful economic model of the future will still have capitalism (i.e. capital, companies, competition etc.) but in a far more diminished way. Capitalism will be limited to areas of rapid innovation, scarcity, and high differentiation. Everything else will be administrated by organs of the state, be it local, regional or national governments. Money will still exist, so this will be socialism, not communism. The state already administers 40–50% of the economy measured by GDP, so this should not be a big pill to swallow (newsflash, Americans). Why will it be adminstered by the state, you ask?

This leads onto the next point. Capitalism is unstable and destructive. It creates a small number of winners and a large number of losers. (Sorry, right-wing Americans.) In the future, this tendency will be exaggerated until society will fray apart. An industrial reserve army of the unemployed—an army of losers—will be created. There are only three possible scenarios. One, capitalism tries to maintain itself through coercion. Two, socialism prevails. Or three, massive social unrest results in anarchy, and the post-scarcity economy is destroyed, bringing us back to the status quo ante… by which I mean something before 1770: the medieval world. This scenario seems more likely in third world countries that are politically unstable.

Let’s go back to square one, and the original point of this essay. More university degrees will not lead to better pay or employment. There are powerful economic and technological forces at play that are leading us to a world with high unemployment. Instead of creating more debt and broken dreams, policymakers need to focus on managing the transition to a post-scarcity economy based on UBI, the provision of basic goods, and reduced inequality.

What does this look like, in practical terms? Well, it won’t be a world of perfect equality. I don’t believe such a thing is possible or even desirable—and I say this as a staunch socialist. Natural inequality is the reality of the world we live in. Some humans are smarter than others, or more talented, or hardworking; they should be rewarded. So the economic situation will look like this. Everyone will be guaranteed a basic income of, say, 2000 euro a month. They can earn extra by participating in the labour market when possible. Some people will earn high salaries, like 3K, 4K, 5K a month because they do something difficult (and they will pay taxes on their income). And there will be a few millionaires or billionaires, but fewer than there are today. The state’s revenues will shift from being predominantly taxation funded to being funded more by the sale of goods, e.g. food and housing. This is because there won’t be enough taxpayers to fund public goods like healthcare and (obviously) UBI itself otherwise.

Money is hard to understand for the layperson. Money is not scarce; it can be created at will. But scarce things do have a higher price. This is why creating more money causes inflation: there is more money, but the number of goods does not increase.

How can the state fund UBI? It’s not through taxation: you can tax UBI, but since that money comes from the government, there is no mathematical way to fund UBI with itself. Rather, the state can simply print money and ensure that the supply of goods (which it controls) matches up. The state will also tax corporations that make large amounts of money through the sale of goods and services. This system will ensure that basic goods are provided, but also that people have disposable income to spend on more whimsical things—art, fine dining, holidays, whatever—at their discretion. Remember that this will not be a truly post-scarcity society, just a “mostly” post-scarcity one. Provided that the money supply is managed sensibly, this system will work very well.

Now that I think about it, this system could already be partially implemented in the world we live in today, since we are already approaching post-scarcity in some ways. But to accomplish this, we have to have political awareness. We cannot allow our politicians to further the interests of the rich, and pull the wool over our eyes. People are not unemployed because they are lazy, or because they don’t have a degree, or because they don’t know how to code. Only 1% of the population knows how to code, and demand is at most 2 or 3%. People are unemployed because of technological growth.

Some people will not like what I am saying about degrees. Humanities people in particular think that humanities degrees are being devalued in favour of STEM. But actually my argument has nothing to do with funding one or the other. It is true that humanities degrees do not pay as well as (most) STEM degrees, so that is a good argument to avoid going into debt for one. But I would very much be in favour of subsiding degrees so that the best humanities students can study for free. The real problem—which I want you, the reader, to understand—is when we make 1 in 2 youngsters get a degree just for the sake of it. Believe me, all those psychology students (psychology is one of the most popular majors) don’t really want to be doing a degree; they just want to party. Them getting a degree, however, prejudices bright students who are genuinely interested in learning. It strains financial resources and devalues the worth of a degree.

Thanks for reading this far. If you have some thoughts to share, please comment below.

Why Economic Models are Bullshit (Part II)

Hello readers!

Previously, I wrote a post entitled “Why Economic Models are Bullshit (Part I)”. Therein, I covered one of the problematic areas of macroeconomics: namely, that students are badly taught the subject. But that does not tell us enough about the other side of the coin—the reason why macroeconomic models are, by themselves, problematic (aka “bullshit”). In this post, I explain just this.

Before I begin, and in case you are wondering: yes, I am progressing with Fallen Love. I am about halfway through the revision process; I will post an update later on. For the time being, I am extremely busy both with the book and with my university studies. Consider this my final update for the month.

Anyway, onto the topic of today’s post...

The Follies of Macroeconomic Models

I am not the first to criticise an economic model, and in particular, I am not the first to criticise the discipline of economics as a whole. Some critics speak from a position of ignorance; they sometimes make good points, but cannot articulate their criticisms beyond relatively vague generalities. (A few examples: economic models don’t work because you can’t put people in an equation. Or, economics is not a science. Both hold a grain of truth, but are not extended upon beyond platitudes.)

Some critics, however, are economists. Thomas Piketty and Ha-Joon Chang are good examples of the latter, though the venerable Steve Keen is my personal favourite among the rebels. If you have had read these economists, you may detect some of their criticisms among my own; though I quite fancy that I am original. Anyway, vanity is a vice, so allow me to get to the meat of the arguments...

Problem No. 1: economic models are not dynamic. To clarify, by “dynamic” I mean that the models do not explicitly refer to time—either graphically, mathematically, or even in argument. Some economists (especially those who have never done a proper science, like physics or chemistry) seem to think that economic models are dynamic because... time is in there somewhere.

Of course time is present in these models, in some way—they wouldn’t make any sense otherwise. (They make little enough sense as it is!) The problem is that this relationship is dreadfully ambiguous; there is absolutely no clarity about what happens when, and this leads to a number of conceptual errors and oversights.

The above graph is a clumsily drawn example, representing an IS–LM model of a small open economy, with e (nominal exchange rate) on the vertical axis and Y (national income) on the horizontal axis. The two sloping lines are IS-curves, while the vertical line is an LM curve. The shift of the IS curve outwards represents a ceteris paribus fall in taxes.

The moral of this story is that, in a small open economy with perfect capital mobility, fiscal policy doesn’t work: you can’t change national income with fiscal policy measures. Even if we assume this is true (there are economists who do not agree with this assessment), the problem is that the graph is extremely obtuse.

There is a whole time dynamic involved here. First, a fall in taxes leads to an increase in Y, which in turn leads to an increase in r (interest rate) as the money supply is fixed. The increase in r leads to a situation where r>r* (the domestic interest rate is higher than the international); this leads to an influx of capital, which in turn drives up the exchange rate e. The appreciation of e leads to a fall in NX, which brings Y back down to the initial Y.

None of that is shown on the graph. We only see a new equilibrium point at e2 and Y. Great explanation there!

Problem No2: economic models confuse cause and effect. If you look at the IS–LM graph aforementioned, you might be forgiven for thinking that somehow Y (national income) affects e (the nominal exchange rate). In the sciences, we put the independent variable on the x-axis, and the dependent variable on the y-axis.

To peruse one of many examples from physics:

The story here is pretty straightforward: you apply a force, and the material stretches in a particular way dependent on its material properties.

Occasionally in physics, some graphs don’t follow this convention, usually for reasons of convenience.

The problem is that nearly all economics models have it backwards: they put the independent variable (the causation, the mover) on the Y-axis, and the independent variable (the observed change) on the X-axis. This small change makes economic graphs unnecessarily confusing. In the IS–LM model, e affects Y because e affects NX and Y is dependent on NX; however, there is no clear relationship going the other way round.

In formal logic notation,

(x → y) ≠ (x ↔ y)

This says that (x implies y) is not the same as (x and y imply each other). Or to put it in more comprehensible terms: if I sleep through my alarm I will be late; but if I am late, that doesn’t necessarily mean I slept through my alarm (I could have been stuck in traffic!)

Problem No3: economic models make overly idealised assumptions. This is a big one. Economists say that the art of economic modelling is choosing good assumptions; but if so, economists must be terrible at their job.

Let’s look at the previous model I showed: the IS–LM model under conditions of a small open economy with perfect capital mobility. You may now observe that, actually, well—capital isn’t perfectly mobile. You can’t do a runner with a house. What’s more, houses take time to sell (again, dynamic systems!) and the resale value is not always high (risk element). In many parts of the world, there are restrictions on foreigners buying houses.

Because the assumption of perfect capital mobility is wrong, the aforementioned conclusion is wrong as well. Fiscal policy does have an effect on national income—just look at the UK under austerity. It is thought by many economists that Osborne’s economic policy cost the UK a lot of lost income growth. The Sterling did not depreciate and net exports remained pretty dismal (the former stayed high and the latter stayed negative).

A more useful assumption would have been: assume that some capital assets are mobile while others are not. Determine the share of mobile-assets for the economy you are looking at. This way, you get a much better grasp for what’s actually going on.

Problem No4: vagueness. This is a problem that I have rarely seen mentioned, perhaps because it is of a slightly more philosophical nature. Essentially, what I have noticed in economic models is that they can be quite unclear as to what a concept or variable is referring to.

Take the example of r*, which represents the going interest rate across the globe. Or even just r, which represents the going interest rate in a national economy. My question is: which interest rate does it represent, exactly? Investments have many rates of return. We all know that some investors make a fortune on the stock market; others make a loss. Bonds have different returns based on their maturity period.

If we just take a weighted mean of all these different interest rates, we risk missing some important constituent details.

If we look at the globe, we... observe that there are many interest rates, across both private sector and government investments. Even if we confine ourselves to only government bonds, we see that there are large discrepancies based on the countries’ riskiness (Argentina or South Africa have higher interest rates on their bonds than Germany or the US).

At this point, economists just thought: “Aha! We can model interests rates as being r* + P, where P is the risk premium.”

Except it’s not that simple; the concept of risk premium is itself vague. How do you quantify a risk premium? No one knows. Investors make investment decisions based on their perception of that risk, but the risk itself is uncertain; the interest rate we observe is just the expression of a social belief, not some neat numerical correction.

To put it in philosophical language, the ontological status of the risk premium (and numerous other macroeconomic concepts) is misunderstood. And the consequences are not just philosophical; they can lead to a number of conceptual errors with serious policymaking implications. One prominent example is in neoliberal economics, and its belief in the divine importance of the market price.

In a debate about rent prices in London, the neoliberal economists might say: “All these social housing schemes are nonsense. Why should the state interfere and distort the housing market price?” The use of the word distort is very important—it suggests that the market price is almost like a physical quantity, a reality that should not be meddled with. In reality, of course, the housing prices of London are really just a reflection of the (deluded) expectations of property owners on future prices, among other things.

Problem No5: the role of risk, uncertainty, and expectations. This is another area of economics that is under active research, and in which we are starting to see improvements. I’ve decided not to go detail here; the topic is quite technical, and anyway, I’m doing research on it right now. Perhaps I will cover it in a future post. Until then, I will (again) recommend reading the venerable Steve Keen, along with various other economists such as Frank Knight and Gunnar Myrdal.

Concluding Remarks

What I have written ultimately only scratches the surface; there are much more fundamental questions to be asked about macroeconomics and its ability to accurately model and predict real world economies. Nevertheless, I think the five key problems I have highlighted constitute a good set of methodological problems with macroeconomics—and they are problems that can be feasibly solved.

My conclusion for students, policymakers, and other economists is this: presently, economic models are pretty rubbish. They are in urgent need of improvement—or else economists will find themselves stuck in the credibility crisis they are now in. But better models will demand the work of newer, wiser, and better educated thinkers.

In other words, we need a twin revolution; a revolution in the way we teach economics, to attract stronger students from a wider variety of fields, and a revolution in the way we do economics. Will the field rise up to this challenge? Perhaps. People like Steve Keen give me hope. On the other hand: there are a lot of economists who prefer to keep their head in the sand. What can I say? I hope they die quickly.

Why Economic Models are Bullshit (Part I)

Hello dear readers!

Previously, I wrote on a number of topics, chiefly among them: my exams, and Fallen Love, my upcoming novel. Alas the former has prevented me from working on the latter; Fallen Love will probably not be finished until January, as I stated. Still, with my exams finally over, I can get back to working on it.

You may be wondering as to the title of this post. Your guess would be correct—this post is indeed a brief argumentative essay (read: rant) about economic models, on which I have spent the last week of my life revising for. I am taking both micro and macroeconomics, but this post will mainly be about macro; I will get onto why in a moment.

A Pedagogical Disaster

The simplest reason for my particular hatred of macroeconomic models has to do with teaching. That’s the simple reason, but the more complicated reason has to do with content (though the two are, of course, tied together).

To put it simply: the teaching has been disastrous. More than half of our class failed the first exam—this is in a selective university, mind you, with many of the student body having attained excellent grades in secondary school. One reason was the teacher. We had two teachers, and the first was quite dire.

“That’s one bad apple,” you say. “There are bad teachers in the world. That doesn’t mean macroeconomics is bullshit.”

This fact alone does not prove my point—except that this is not a single, isolated phenomena. Economics students across the world routinely struggle with their courses, complaining that they do not really understand it; that indeed, “it”—macroeconomic models—don’t make any sense. One bad teacher is one thing. But can the entire pedagogical structure of economic teaching be at fault?

I would argue yes. The most common complaint I’ve heard in my university is that (and I am paraphrasing only slightly) “I draw the graphs, but I don’t know what it means or why.” There are a few reasons for this. To begin with: concepts. Macroeconomic concepts are strongly under-explained. The course introduces things like “inflation”, “GDP”, “unemployment” and (my personal favourite) “money”—but these macroeconomic concepts differ significantly from the prima facie conception that students begin the course with.

A case in point: a number of students conflated the AS–AD model with the supply-and-demand model from micro economics. They even sound similar—one is “aggregate” supply and demand, the other just vanilla supply and demand.

Although they look extremely similar, they aren’t the same. The microeconomic model has P (prices) on the vertical axis and Q (quantity) on the horizontal axis—this arrangement is problematic, but I’ll get to that. Anyway, the AS–AD model has P (price levels) and Y (real GDP, output) on the respective axes. These are different concepts. Price levels are a measure of weighted, generalised prices across a macroeconomy (usually they are calculated in the form of the CPI)—they’re not the same thing as the price in a market. Y, representing real GDP, is sometimes called output, leading students to conflate it with quantity output.

Money is the worst, however. Students have no idea what money actually is (in fact a lot of economists don’t understand what money is, but students are even worse). In a macroeconomic context, money doesn’t just mean the euros in your pocket; it represents a wide range of things, from liquid assets held in bank accounts (M1) to savings accounts (M2) to more nebulous concepts of money that are too technical to go into here.

This is also why students struggle with the IS–LM model, which rests on a complicated set of assumptions about money and what money does in an economy.

Anyway, onto the next pedagogical error: mechanistic teaching and oversimplification. Our teachers presented all of these models as a series of mechanical steps, expressed in equally mechanical equations. “What happens if taxes increase under the classical model?” (Some curves shift.) “What happens if labour supply increases under the AD-AS model in the short-run and long-run?” (A complicated mess.) “What happens in the Mundell-Flemming model if, under a fixed exchange rate condition...” (I give up.)

There was very little explanation of why all these things happened. Why would a government want to increase taxes anyway? Why does the model look at these variables? What explanatory power do these models have, and what assumptions do they make?

These are all key questions that remained unanswered. This leads me onto the third pedagogic mistake: not teaching history. These models did not fall out of the sky. They were developed by economists—in a particular time and place, in a particular intellectual climate, and in a particular historical context. It’s difficult to understand these models, much less criticise them or apply them, without this precious context.

Yet, even without all these mistakes of pedagogy, there are more fundamental reasons why macroeconomic models are difficult for the students to comprehend. To repeat the title of this post: macroeconomic models are bullshit.

Conclusion Part I

I realise that you are probably tired of reading this, dear reader, so I will save my juicy critique of macroeconomics for the next post (titled “Why Macroeconomics is Bullshit, Part II”). For the time being, I will let you ponder the parlous state of economics teaching in our schools and universities.

Until then, make sure to check out Fallen Love in case you haven’t already.

My Review of Capital in the 21st Century, Part Two

Hail readers!

I am at last back to civilisation, and will remain here for the next week or so. Although I am very busy—I need to pay my tuition fee to Amsterdam, I need to procure various documents, and of course there’s work to be done on the Ark—I have taken the effort to continue writing here on the Magical Realm. As part of these efforts, here is the second part of my review of Thomas Piketty’s Capital. (For the first part, look here.)

My review of Capital in the 21st Century, part two.

Previously, I wrote a review on the first third or so of Capital that I had read. As you may be able to guess, this review will concern the theses presented in the next third of the book—as well as to elaborate further on some of the initial theses, which reoccur throughout the book.

In Capital, Piketty presents a number of new topics. He moves away from the definition of the capital income ratio, its evolution throughout time, and other abstract macroeconomic indicators; instead he treats inequality in a more visceral, recognisable sense: he talks about what kind of incomes and wealth the upper and lower deciles possess.

For example, the top 1% of a nation’s earners get anything from a couple of percent of national economy (equating to a wage of about 5 or 6 times the average)—as was the case in 1970s Sweden, the most egalitarian nation on record—to as much as 20% (as is the case in the United States presently).

In terms of capital, the picture is more stark and has always been so. In the heyday of inegalitarianism—such as in Belle Epoque France or, worse, 1900s Britain—the top 1% held about 60% of all the nation’s wealth. Note also that the yields of this capital was potentially even more unequal—as Piketty shows, those with large fortunes get better returns than those with more modest ones.

Piketty goes on to detail at least three more very important features of inequality. Firstly, capital income is much more significant than wage income the higher up the social strata you go. For the lower class—about half the population—capital income is insignificant. For the middle class (the top 40% or so) capital income is more significant but still small.

But go up to the 1%, and capital income is significant—though a minority. By the time you get to the top 0.1%, capital income makes up the majority of that class’s income.

Secondly, Picketty reveals that the ‘middle class’ phenomenon was very real and relatively recent. Up to the turn of the twentieth century, the top 10% of society owned as much as 90% of the nation’s wealth—as was the case in Britain. But by the middle of the century, the top 40% of society owned about 35% of the nation’s wealth. The bottom half of society still owns close to nothing—not much has changed in that regard—but it is interesting to note that a middle class does exist.

Thirdly, Piketty links inequality of capital directly to the macroeconomic metrics of the capital/income ratio, the rate of return on capital, and the rate of growth of the economy. He explains why inequality became noticeably less pronounced after the war—in no small part because of the political consensus that developed, but also because of the high growth and large shocks to capital that the period saw—and why the 21st century, with its slower growth and higher capital ratio, is becoming more unequal.

Anyway, the point of all this is that Capital in the 21st Century is an extremely relevant and very persuasive work of non-fiction. Piketty’s vast reams of detailed, long-term (think 200+ years) and highly considered data are a masterpiece. Other economists—such as Kuznets—are like pygmies in the presence of a giant like Piketty.

Nevertheless, I do have one or two nitpicks with Piketty—most notably when it comes to the role education plays in inequality, and more so, on the public policy that has been the norm for the past couple of decades where it concerns education.

Is Education Unequal? And if so, what?

Piketty believes unequal access to education—and, in particular, university education—is an important driver of inequality. However, I disagree with this, for two reasons. On a first point of order, I think that university education in most European countries is as equal as it’s ever going to be. (I will elaborate on this shortly.) And on a second point of order, I think Piketty—like most of the political class—is wrong to focus on education as the remedy.

But firstly, allow me to clarify what I mean when I say that university education in Europe is as equal as it’s ever going to be. Piketty, when arguing that university education is unequal, focuses on the usual metrics: the parent’s income and education as predictors of the child’s education and future income. The fact that the two are correlated—as most of us know, kids from well-educated and rich families are more likely to end up in university than other kids—is something Piketty doesn’t like.

But two things need to be clarified. Firstly, the philosopher in me needs to point out that this may be an inequality of outcomes and not necessarily an inequality of opportunity. Throughout most of Europe, there are negligible tuition fees. There also grants, loans, and scholarships to help disadvantaged pupils. In Denmark, they even pay students to attend university.

(Note that I do not include Britain when I say ‘most of Europe’. Here, the government has abolished grants, there are very few scholarships, and tuition fees are very high. Going to university involves accruing large amounts of debt if you’re not from a well-off family, and that debt disproportionately affects poorer students.)

The fact that university education in Europe is available to all is enough to make many centre-right minded people happy. If there is equality of opportunity, it is reasoned that any inequality of outcomes is because the poorer students don’t want to go to university and don’t want to work as hard.

I for one am skeptical of such an argument, which is why my disagreement with Piketty is of a different sort. I fully agree that poorer students are disadvantaged in going to university—for the simple fact that their parents don’t value university education. If you’re from a poorer, manual-labour background, it is hard to understand why university education is valuable.

So yes; we can certainly complain about this, and formulate policy to try and encourage students from poorer backgrounds to go to university—to inculcate that sense that education is valuable.

But ultimately, none of this is as important as Piketty makes out. Such a scheme may increase social mobility, but it will not change inequality—and indeed, it may have unintended consequences.

This is because of the very simple fact that while well-paying professional jobs—like engineers, doctors, programmers, what have you—do indeed require university-level education, they are ultimately finite. We can’t all be engineers and doctors. Making millions of young people go to university is therefore a waste of valuable time and money.

As many young graduates are discovering, going to university only to end up doing a job you could have done without a degree is the ultimate disappointment. It is grossly wasteful, too: going to university for three years costs the graduate and the taxpayer around £30,000—and the figure is rising. Going for four or five years to do a Master’s (as many increasingly are) adds another £20,000 onto that. But that’s just the tip of the iceberg. Going for four or five years to do a useless degree followed by a useless master also stops you being in the labour market for four or five years. Once more, this means tens of thousands of pounds of lost earnings. It means thousands of pounds of lost tax revenue. And it means less experience doing a job.

I’m not even done yet! This in turn has social externalities. It means getting a mortgage later; it means less money to pay for pensions. It frequently means waiting longer to have a child—hence the lower fertility rate of many European countries. (Caveat: this is of course just one factor of many.)

So you see, I think Piketty is deeply mistaken to place so much faith on university education. University is increasingly becoming a tool for social disunity rather than progression.

So What Should Be Done, Instead?

Although I disagree with Piketty on the issue of education, he is right about two other things. For one, capital: its tendency to grow increasingly concentrated and bring increasingly large returns is a major force for ‘economic divergence’ (i.e. rampant inequality). Therefore, Piketty is absolutely right that an important way to reduce inequality would be through the taxation of income from capital, and—also—the taxation of inheritance.

Piketty also uses that data to reveal that inequality is also, of course, from wages as well as from capital. Indeed, the reason that current day Europe is more egalitarian than the present day US is not because of capital—which in any case is larger in Europe—but because incomes are more compressed. Since income from wages makes up about three quarters to two-thirds of all income, a more compressed wage restructure results in a much more equal country (even if capital incomes are very unequal).

So, it logically follows that we also need to compress the wage structure. In fact, I propose that is a far more important goal than putting students in university.

How can this be done, you might wonder? Piketty has one obvious answer: fight against the supermanager. Piketty shows than in the Anglo-Saxon countries, increasingly large CEO compensation—directly in the form of pay-packets, but even more so through stocks and bonuses—is an important reason for why inequality of wages has increased since the 1980s in Britain and the United States.

CEO compensation is an issue of the complex social structures and institutions that exist in firms. One way to reduce CEO compensation would be to change the structures of corporate governance: to give workers and unions more say in management’s pay (to move to a ‘stakeholder model’ as in Germany, in other words) and to give shareholders more say in CEO salaries. (The latter, albeit, will tend to increase CEO compensation in times of strong stock market performance, but it will at least prevent CEOs from increasing their pay packets when firms are actually doing badly.)

Another way would be to change social norms. Firms, like everything else, operate in the social structures that exist in that country. If huge CEO pay-packets are frowned upon—as they are in Switzerland and Sweden, for example—then it is the case that supersalaries are less common.

A final, and simpler way to reduce CEO salaries would be to tax them. Piketty shows that when the Anglo-Saxon nations had high rates of marginal taxation—as high as 98%, which was the case for Britain in the 70s—CEO pay-packets were a lot smaller. (Why? Because the firm’s management aren’t going to give their money away to the government.)

Personally, I think we could go even further. Of course lowering the insane CEO compensation would leave more money for the rest of us, but who will get that money? The middle-management lower down? Or the workers—the janitors, the people at the tills, the rank and file?

That’s why I think Piketty needs one more ingredient in his egalitarian soup: unionisation. This also ties in with my point regarding education. We can’t make everyone a doctor or a lawyer. But what we can do is make sure that even the burger-flippers at McDonald’s get paid a decent wage.

Indeed, the Scandinavian countries do this, and with considerable success. Unionisation is why the Danish McDonald’s workers gets paid around 240,000 Danish Kroner—that’s €30,000 or $40,000—instead of $20,000, as they do in the US. Double the workers’ wages and you’ll find greater social cohesion. And nor will you have to obsess over who goes to university: you won’t need a degree to live a reasonably comfortable life.

The International Element

Another aspect that Piketty makes clear is that any means to reduce inequality—through taxation especially—will have to contend with the global reality of capital and highly-paid workers. Piketty believes that a tax on capital should be Europe-wide, or even global.

Can this be achieved? I believe so. The EU can certainly mandate minimum taxes—it already does so, in fact: every EU country must have a primary VAT rate of at least 15%. They have to apply fuel duty at a minimum level. It doesn’t seem implausible that the EU could, say, mandate a minimum 15% rate of corporate tax, or require a minimum tax on income from capital.

And the EU might even strong-arm other countries into doing the same. Tasty trade deals for the US might come with strings attached—minimum rates of tax. I’m sure the EU could also negotiate deals with the South American countries, Japan, and possibly India—with which it has very good relations.

Final Words

As I’ve said: Piketty’s Capital is a fantastic work of non-fiction. It approaches the issue of income inequality with a rigorousness, nuance and intellectualism that few can manage. It turns abstract and misinformed public debate into concrete data.

I do disagree with some of Piketty’s conclusions, but so far I am keen on reading more.

Jo Cox, Brexit, and Nazi Germany

Note: after I wrote this post, it was subsequently released that Jo Cox’s killer had Nazi paraphernalia in his house along with publications from American white supremacist groups. This comes as absolutely no surprise, as my post will show.

Most of you have probably heard of the murder of Jo Cox. If not, the short version is that a Labour MP for West Yorkshire, Jo Cox, was murdered by a 52 year old who is believed to have shouted ‘Britain first!’

The news of course is shocking in itself. Murder is never pleasant, and the murder of a young woman, a humanitarian and a Labour MP makes it all the more disturbing. But this is also an act committed out of ideology—this is important and must be understood.

Of course, the man was a nutter. I will not be so crass as to suggest that he is representative of the whole Brexit movement.

Nonetheless, history has lessons to teach us. The murder of Jo Cox was motivated by nationalism. Nationalism was what fueled the rise of the Nazi party; and indeed many others have committed many much more heinous acts out of a deluded sense of ‘defending the nation’.

And nationalism, I’m sorry to say, is obviously a great motivator for the Brexit campaign. ‘Take it back!’ they cry. (What, you may ask? The nation, of course.) With pictures of Dover and rivers of migrants they speak; their cartoons vulgar and fatuous.

Indeed, Brexit shares many other features with National Socialism. Both blame foreigners for the country’s social and economic ills; both promise that great promise, that great lie—that if only the nation were free from Europe, or the Jews, than the prosperity of the good old days is bound to follow.

In reality this is a delusion. Migrants are not to blame for the country’s unemployment and housing crisis, nor the Jews for the troubles of the Weimar republic. Such problems are the fault of national governments. Blaming the foreigners is no more than a convenient scapegoat; a failure to admit to the sins of one’s own country.

Let us abandon the notion that great invisible forces are conspiring against the nation—either in Brussels or in the international Jewry. Let us instead stick fast to reality and reason. Jews did not cause hyperinflation in the Weimar, nor draft the treaty of Versailles. Europe does not make our houses few and expensive, inflated by artificial limits on building and unprincipled lending by banks. Europe does not make us underfund our NHS or impose draconian contracts on junior doctors.

Let us also not pretend that Brexit is a vote for democracy or the future of Britain. The EU is no less democratic than this country—a country with an unelected House of Lords, until recently hereditary, First-Past-the-Post, and the gall to lecture the European Union on democracy. Let us remember that the EU was created under the principle of democracy: a principle hard fought for in those dark days of WW2.

The European Union is based on solidarity and peace between the nations of Europe. Brexit is based on the age-old trope of violent nationalism. Which would you rather choose?

Note: this is a special post that is not in my usual Magical Realm style. If you want a more pragmatic and detailed argument, see this

Addendum: you may also find my first political poem, That Great Continent, to be of interest.

On Picketty’s Capital: Part One

There is a substantial amount of literature already in existence concerning Thomas Picketty’s Capital in the 21st Century. Although it may seem a little superfluous, then, to add my own thoughts, I have two good reasons for going so. The first is that as an A-level economics student, it is beneficial for me to gain a good understanding of the theses presented in Capital; and what better way to do that than by writing on it?

The second is that I have a number of minor observations regarding Picketty’s work, especially in historical terms, which I feel I ought to share.

So, with that, allow me to present my thoughts.

Capital in the 21st Century: A Bold Proclamation

The most obvious thing that immediately strikes me when reading Capital is the sheer scope of the thing. Picketty, unlike many economists, doesn’t bother with narrow micro-analysis of what is, in both historic and economic terms, an insignificant period of time. Picketty’s work spans centuries of data, not decades.

I feel this gives Picketty a perspective very much lacking in the works of other economists. Whereas other economists make bold proclamations on the basis of insufficient data—for example, by heralding a new age of growth following only two decades of postwar economics—Picketty can take a much more long term and nuanced view of economic history.

It’s particularly fascinating to see how the so-called ‘conservative revolution’ of the 80s very much resembles the economic order prevalent throughout the 19th century and into the Great Depression. I therefore find it ironic that Thatcherites claim to be ‘modern’ (and the leftists backward, by implication) when their economic orthodoxy is the very same that dominated the Victorian era all the way up to the Great Depression.

Picketty’s work also sheds light on what we’ve known for some time, but which too many economists still fail to realise: the three postward decades known as the Trente Glorieuse were Europe playing catch-up, hence the high rate of growth. A very similar thing seems to be occurring in China.

Picketty, interestingly, predicts that Europe and America’s currently high share of world output (close to half, for little more than a tenth of the population!) will decline due to two factors: firstly, nations like China and India closing the gap on per capita economic income; and secondly, low demographic growth in Europe and America compared to the rest of the world.

I feel Picketty’s analysis, while not unreasonable, is perhaps a little optimistic. I for one don’t share Picketty’s belief that the rest of the world will catch up to Europe, Japan and America too soon. China’s growth seems to be stalling (though the time period is too brief to be sure) and I suspect political factors will keep Africa and the Middle-East trapped in 3rd world conditions for time to come.

That’s the thing with economics: politics matters. Terrorism and religious fundamentalism, not to mention civil war and regional conflict, will plague the Middle-East for the foreseeable future. I’m not sure how far China can get with its approach to education, workers’ rights and business practices. And Africa’s success in combating corruption and foreign ownership has been mixed.

Speaking of foreign ownership, Picketty does make some strong points. In particular, he debunks the neoclassical theory of international investment:

In theory, the fact that the rich countries own part of the capital of poor countries can have virtuous effects by promoting convergence. If the rich countries are so flush with savings and capital that there is little reason to build new housing or add new machinery (in which case economists say that the “marginal productivity of capital,” that is, the additional output due to adding one new unit of capital “at the margin,” is very low), it can be collectively efficient to invest some part of domestic savings in poorer countries abroad. Thus the wealthy countries—or at any rate the residents of wealthy countries with capital to spare—will obtain a better return on their investment by investing abroad, and the poor countries will increase their productivity and thus close the gap between them and the rich countries. According to classical economic theory, this mechanism, based on the free flow of capital and equalization of the marginal productivity of capital at the global level, should lead to convergence of rich and poor countries and an eventual reduction of inequalities through market forces and competition.

This optimistic theory has two major defects, however. First, from a strictly logical point of view, the equalization mechanism does not guarantee global convergence of per capita income. At best it can give rise to convergence of per capita output, provided we assume perfect capital mobility and, even more important, total equality of skill levels and human capital across countries—no small assumption. In any case, the possible convergence of output per head does not imply convergence of income per head. After the wealthy countries have invested in their poorer neighbors, they may continue to own them indefinitely, and indeed their share of ownership may grow to massive proportions, so that the per capita national income of the wealthy countries remains permanently greater than that of the poorer countries, which must continue to pay to foreigners a substantial share of what their citizens produce (as African countries have done for decades). In order to determine how likely such a situation is to arise, we must compare the rate of return on capital that the poor countries must pay to the rich to the growth rates of rich and poor economies.

On top of that, he also provides an empirical argument:

Furthermore, if we look at the historical record, it does not appear that capital mobility has been the primary factor promoting convergence of rich and poor nations. None of the Asian countries that have moved closer to the developed countries of the West in recent years has benefited from large foreign investments, whether it be Japan, South Korea, or Taiwan and more recently China. In essence, all of these countries themselves financed the necessary investments in physical capital and, even more, in human capital, which the latest research holds to be the key to long-term growth. Conversely, countries owned by other countries, whether in the colonial period or in Africa today, have been less successful, most notably because they have tended to specialize in areas without much prospect of future development and because they have been subject to chronic political instability.

On Points of History

Since Picketty’s work draws from data as early as 1700, and even as far back as year zero, historical knowledge and accuracy is obviously relevant to his analysis.

Picketty draws a surprising amount of data from literary sources. Jane Austen and Balzac feature in particular. I find these literary sources absolutely fascinating: it reveals a world where money was not only near constant and inflation minuscule, but also in which inequality is well known and quantified.

For example: Picketty mentions that in Jane Austen’s works, a person was only considered wealthy if he or she were able to afford a house, a minimum number of servants (especially maids) and were able to buy proper clothing and arrange suitable transport. To do that, by Jane Austen’s approximation, one needed around the order of 900 pounds a year.

The average worker wage at that time was 30 pounds a year.

What’s especially fascinating to me is not only how well known and extreme the level of inequality was, but how it compares to the 21st century. These days, you don’t need to earn on the order of 3/4 of a million pounds a year in order to afford a nice house, car and clothes; or indeed a vacuum cleaner.

But why is this? Evidently, clothing and domestic chores have become cheaper owing to mass production and the invention of washing machines.

But inequality—is it really that different from the Victorian era? There are people earning a good deal more than £750,000 a year in the world.

Anyway, this is a topic I suspect Picketty will address in later chapters.

I did find a historical point to quibble. Picketty claims Americans have a more benign view of capitalism than do Europeans because the former have always had private property rights—the US government at one time had high rates of marginal taxation and public investment programmes, but it never had the kind of sweeping nationalisation that Britain and France did following the war.

After all, in America the state did not own half of the people’s homes (as it did in Scotland for some time), it did not own car companies like Renault, it did not own banks, it did not own telecom, rail or airlines companies.

But I think Picketty is ignorant of American and European history here. America has always had the Free Man (TM) complex: as Picketty himself mentions, Jefferson had that idea of a nation of free landowners living in equality. These free landowners owned their own land, their own houses, and could live largely indepedently from the government.

We Europeans, on the other hand, see capitalism as something deeply Victorian in nature. We see the work houses of the poor; the vagabonds looking for work, persecuted by the authorities; child workers; and factories with 60 hour weeks, abysmal working conditions, and squalor. The European view of capitalism is Dickensian, not Libertarian.

America’s capitalist fantasy (and it is a fantasy, make no mistake) came about because of a transient state. America, when founded, was a vast territory that experienced high population growth, both internally and from immigration. As Picketty himself makes clear, the abundance of land and the high demographic growth were strong convergence forces that kept inequality under control.

But while the American Dream may have been plausible in the 18th and early 19th centuries, it was bound to run into the realities of capitalism sooner or later. America’s useful land wasn’t infinite. Massive population growth (from 3 million in the 1770s to 300 million today) and massive CO2 pollution—America has one of the largest per capita CO2 emissions in the world, at 17 tonnes per year—cannot be sustained indefinitely by the planet. There are no more Indians left from which to steal land and gold. (See: Oklahoma Land Race, and the Black Mountains of Dakota.) The days of slavery are over.

Picketty himself covers some of this quite well. He has extensive data on how much capital slaves constituted in the Southern states, for example—up to 300% of national income, which is a considerable figure.

But he hasn’t yet put these points together.

My Early Conclusion

So far Picketty’s Capital has proven illuminating, intriguing and relevant to the modern world. I feel much of his analysis is spot on, in part because of the vast amounts of historical data he’s amassed—but also because of his ability to clearly and logically formulate arguments and see problems in other arguments. His points regarding neoclassical international trade theory are especially adroit, but his ability to draw on literary sources as a way of enriching our understanding of economic history is also impressive.

That said, there are a few minor flaws. The first is that thus far, he’s made a few assertions which he hasn’t really backed up a posteriori or indeed a priori. For example: he claims that inequality has forces of divergence and forces of convergence. The most important example of the latter he claims to be the ‘diffusion of knowledge and skills’. Unfortunately, that seems a bit vague to me, and he hasn’t elucidated on what he means either through empirical case studies or with thought experiments.

I suspect he may detail this later on, though, so I’ll refrain from giving firm conclusions at this point in time.

Anyway, those are my thoughts so far. If you found this interesting, keep following: I’ll be writing more as I progress.