Books

That’s the title of the book I’m working on for Yale University Press, and also the theme of two articles I published yesterday.

One, in The Conversation, looked at the potential benefits of remote work and the likely struggle over who will get those benefits. Key paras

For the most part, disputes over sharing the benefits of remote office work will be hashed out between employers, workers and unions, in the ordinary workings of the labour market.

But what about the other half of the workforce, who don’t have the option of working from home? In particular, what about the mostly low-paid service workers who depend on people coming into offices?

If the productivity gains made possible through remote work are to be shared by the entire community, substantial government action will be needed to make sure it happens.

The other article, in Inside Story, looks at the end of the goods economy and its replacement by an information and services economy, a transformation that’s been highlighted by the pandemic. An important implication is that investment demand by private firms is likely to stay low, even as greater public investment is desperately needed.

Tech firms like Microsoft, which now determine stock market values, don’t need much capital. The book value of Microsoft’s capital stock is less then 10 per cent of its market value. The rest is made up of intangibles, a polite word for monopoly-power network effects, intellectual property, and good old-fashioned predatory conduct.

Without any need for private sector investment, interest rates will remain low unless public investment picks up the slack. With the physical goods economy fading into the past, though, we don’t need more of the transport infrastructure projects governments automatically turn to at times like these. Rather, we need to invest in human services like health (mental and physical), education and childcare, and in information platforms that break the monopoly power of the tech giants.

These are the investments that will allow Australia to flourish in an economy dominated by information and services rather than industrial production.

In a couple of recent posts, I’ve been looking at returns to capital. First, there’s the fact that real returns on long-term (up to 30 year bonds) are now below zero in most countries. I argued that such a situation is inconsistent with the existence of capitalism in the traditional (say, pre-1970s) sense of the term. Then there’s the fact that the biggest contributor to corporate asset values is “intangibles” which is a polite word for monopoly.

An obvious question that arises is: if this is the case, why is the stock market doing so well, holding most of an already high valuation even as the pandemic raises the prospect of a long and deep recession? In one sense, there’s no puzzle at all here. Stocks generally yield higher returns than bonds (this is the “equity premium puzzle” on which I’ve written a lot), but if bonds are paying zero, then investors will be willing to buy stocks with a small (expected) positive return. That implies, for any given expectation of future returns, a higher share price. On this argument, the fact that sharemarket investors have done well in the last ten years or so doesn’t mean that they will do well in the future. Rather, at current stock prices, they will be taking more risk for less return than in the past.

All of this raises more questions about what is going on with corporations. Although corporate profits are increasing at the expense of wages, that masks growing inequality between firms. According to this study from 2017 (abstract over the fold). “Earnings of public firms have become more concentrated – the top 200 firms in profits earn as much as all [other] public firms combined.” Firms are also paying out more in dividends and share buybacks and investing less, implying once again that (at least as regards public markets) the scope for capital investments yielding positive returns has become more limited. I suspect (but haven’t yet got good evidence on this) that a growing share of corporate profits are being captured in privately-held firms (for example, those owned by private equity firms), where there is more scope for various kinds of arbitrage and rent-extraction.

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In a recent post, I pointed out that long-term (30 year) real interest rates on safe (AAA) bonds had fallen to zero, and suggested that this meant the end of capitalism, at least in the sense that the term was understood in classical economics. On the other hand, stock markets have been doing very well. So what is going on? This is a complicated story and I’m still working it out,
An important starting point is the fact that the most profitable companies, particularly tech companies, don’t have all that much in the way of capital assets compared to their market value. What they have is monopoly power, which has been increasing steadily over time. That benefits those who already own and control these firms, but it does not provide new investment opportunities.

I’ll start by looking at price-to-book ratios. Alphabet, which owns Google has a market value five times the book value of its assets https://www.macrotrends.net/stocks/charts/GOOG/alphabet/price-book The ratio is 15 for Microsoft and 21 for Apple. By contrast, for General Motors, the classic 20th century corporation, it’s just under 1.

For the corporate sector as a whole, the comparable measure is Tobin’s q ratio, which has been trending upwards since the late 1970s and is now near the all-time high reached during the dotcom bubble.

The value of companies like Apple, Google and Microsoft is made up primarily of “intangibles”. That term can cover all sorts of things, and is often taken to refer to some special aspect of the firm in question, such as accumulated R&D, tacit knowledge or ‘goodwill’ associated with brands.
R&D is at most a small part of the story. The leading tech companies spend $10 – 20 billion a year each on R&D https://spendmenot.com/top-rd-spenders/, a tiny fraction of market valuations of $1 trillion or more. And feelings towards most of these companies are the opposite of goodwill – more like resentful dependence in most cases.

A simpler explanation is that the main intangible asset held by these companies is monopoly power, arising from network effects, intellectual property, control over natural resources and good old-fashioned predatory conduct.

In this context, the crucial point about intangibles isn’t that they aren’t physical, it’s that they can’t be reproduced by anyone else. No one can sell a Windows or Apple operating system, even if they were willing to invest the effort required to reverse-engineer it. While there are competitors for the Google’s search engine (I recommend DuckDuckGo), there are huge barriers to entry, notably including the fact that the product is ‘free’ or rather supported by advertising for which all consumers pay whether they use Google or not.

There’s a complicated relationship here between the rise of monopoly and the development of the information economy in which the top tech firms operate. Information is the ultimate ‘non-rival’ good. Once generated by one person it can be shared with anyone else without diminishing in value. As the cost of communication has fallen, it’s become possible for everyone in the world to gain access to new information at essentially zero cost.
What this means is that there is very little relationship between the value of information and the ability of corporations to capture value from it. The protocols and languages that make the Internet possible are a public good, created by collaborative effort and made freely available. The information on the Internet is generated by households, business and governments using these protocols. Without these public goods, Google would be worthless. But because advertising can be attached to search results, ownership of a search engine is immensely profitable.

In turn, this means that traditional ideas about capital and investment are largely irrelevant in the information economy. More on this soon, I hope.

Below, a review essay on Jacob Hacker and Paul Pierson’s most recent book, “Let Them Eat Tweets: How the Right Rules in an Age of Extreme Inequality.” The essay tries to highlight and explain the political science arguments behind the book, and the kinds of political science research that would be needed to properly build out the agenda that the book implies. [click to continue…]

I received an email earlier today announcing a new book series, focussing on Politics, Philosophy and Economics (PPE). There has been a notable rise in the success of PPE – as can be seen from the multiplying numbers of PPE undergraduate and graduate programs and PPE scholarly activities in recent years. This series is a logical next step in the development of the multidisciplinary and interdisciplinary study of topics that are relevant to economics, politics and philosophy.

The new series, which will be published by Oxford University Press, has a website, five editors (Ryan Muldoon, Carmen Pavel, Geoff Sayre-McCord, Eric Schliesser and Itai Sher), and a long list of editorial advisors (and I’m honoured to be included there).

I’m not sure how long it will take them to publish the first book – given how slow academic publishing is, it might take a while – but in the meantime the editors welcome book proposals by scholars working in this area.

Although my book-in-progress is called The Economic Consequences of the Pandemic, a lot of it will deal with changes that were already underway, and have only been accelerated by the pandemic. This was also true of Keynes’ Economic Consequences of the Peace. The economic order destroyed by the Great War was already breaking down, as was discussed for example, in Dangerfield’s Strange Death of Liberal England.

Amid all the strange, alarming and exciting things that have happened lately, the fact that real long-term (30-year) interest rates have fallen below zero has been largely overlooked. Yet this is the end of capitalism, at least as it has traditionally been understood. Interest is the pure form of return to capital, excluding any return to monopoly power, corporate control, managerial skills or compensation for risk.

If there is no real return to capital, then then there is no capitalism. In case it isn’t obvious, I’ll make the point in subsequent posts that there is no reason to expect the system that replaces capitalism (I’ll call it plutocracy for the moment) to be an improvement.

But first let’s look at the real 30-year bond rate. The US Treasury is currently offering an inflation-protected 30 year bond at a rate of -0.3 per cent. That is, if you buy the bond at say, age 35, you can get your money back, less a 10 per cent reduction in real value, when you are 65. This rate has fallen from 2 per cent, when the bond was introduced in 2010, and started declining sharply in late 2018, before the pandemic, and while the Federal funds rate was rising.

In thinking about the future of the economic system, interest rates on 30-year bonds are much more significant than the ‘cash’ rates set by central banks, such as the Federal Funds rate, which have been at or near zero ever since the GFC, or the short-term market rates they influence. These rates aren’t critical in evaluating long-term investments.

The central idea of capitalism is, as the name implies, that of capital. Capital is accumulated through saving, then invested in machines, buildings and other capital assets to be used by workers in producing goods and services. Part of the value of those goods and services is paid out as wages, and the rest is returned to capital, as interest on loans and bonds or as profits for shareholders. Some of the return to capital is saved and reinvested, allowing growth to continue indefinitely. Workers, on this account, can become capitalists too, by saving and investing some of their wages. At a minimum, they should be able to save enough, while working, to finance a decent standard of living in retirement.

But what happens if there is no return to capital? The collapse of interest rates on government means that’s already true for anyone who wants a secure investment. And the situation isn’t any different for the two remaining AAA-rated corporate borrowers, Microsoft and Johnson and Johnson. Microsoft is currently offering a rate of 2.5 per cent on 30-year bonds, and has exchanged lots of outstanding debt for new bonds at that rate (paying a 40 per cent premium for higher-interest bonds). That’s a real return of 0.5 per cent if you assume that the Fed sticks to its current 2 per cent target and hits it on average. (There’s a lot more room for inflation to surprise on the upside, in my view). If you allow a 15 per cent risk that Microsoft will go bankrupt some time before 2050, the expected real return falls to zero.

To complete the picture of returns to capital, we need to look at stock markets and corporate profits. That’ll be the subject of another post.

Andrew Gelman has a post on the benefits of negative criticism, where he talks about the careful methodological demolitions he has done of others’ research that he has found to be slipshod.

if you want to go against the grain you have to work harder to convince people. My point is that this is the exact opposite of Cowen’s claim that following his advice “Avoid criticizing other public intellectuals. In fact, avoid the negative as much as possible” will force you to keep on thinking harder.

I’m in favor of a strong culture of criticism, but for a quite different reason: because serious criticism is probably the most valuable contribution we can make to the cognitive division of labour. There’s a possibly mistaken understanding of a truly excellent social science book behind this argument. [click to continue…]

As with most really neat sayings, the original (with billions, instead of trillions) is misattributed, in this case to the late Senator Everett Dirksen, a conservative Republican who nonetheless helped to write the 1964 Civil Rights Act. The saying can be traced back to an unsigned New York Times article in 1938, which said ““Well, now, about this new budget. It’s a billion here and a billion there, and by and by it begins to mount up into money”. This in turn improved on earlier versions going back at least to 1917
US GDP today (Over $20 trillion) is around 250 times as high, in dollar terms, as it was in 1938, so replacing billions with trillions isn’t much of a stretch.

With that in mind, what should we think about the $2.4 trillion pandemic relief package, and the likelihood of huge demands for public expenditure stretching well into the future? And how much of this analysis is applicable to the world as a whole, where large scale government responses have been the norm rather than the exception.
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The title of my book-in-progress, The Economic Consequences of the Pandemic is obviously meant as an allusion to Keynes’ The Economic Consequences of the Peace, and one of the central messages will be the need to resist austerity policies of the kind Keynes criticised in his major work, The General Theory of Employment Interest and Money. That title, in turn was an allusion to Einstein*, and the Special and General theories of Relativity.
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An addendum to my earlier post, to explain more directly why I am skeptical of the argument that public choice is a useful lens to understand the politics of the public during coronavirus. Shorter version: if the “public” is indeed some kind of equilibrium, then the underlying game is unlikely to be the kind of game that public choice scholars like to model. [click to continue…]

The website Five Books did an interview with me on the five best books on the politics of information. It was an interesting experience. Picking the best five books means that you have to go back and re-read them, and figure out how they fit together.

What I decided to do was to take this essay by Ludwig Siegele in the Economist’s Christmas issue, and start from the question: If you wanted people to build out from that essay, what books would you have them read? The essay is influenced by Francis Spufford’s Red Plenty, and the Crooked Timber seminar that followed from it (in particular: Cosma’s essay): what it sets out to do is to ask whether the socialist calculation debate helps us to understand current fights about democracy, autocracy, markets and machine learning. Like Ludwig, I believe that it does: “Comrades! Let’s Optimize” is an excellent starting point for understanding how people in Silicon Valley today think about the transformative power of software. I also think that Red Plenty is an excellent starting point for thinking about these questions because it is a novel rather than a tract. As Francis said in his reply, writing fiction gives you access to negative capability: rather than stating an argument or a principle, you can have a multiplicity of voices and experiences, providing a kaleidoscopic rather than a synoptic understanding of the problem. When it’s a complex problem, that’s helpful.

A certain kind of autobiography can pull off a similar trick: hence the structure of the interview is that it starts off with Red Plenty and finishes with Anna Wiener’s wonderful account of living in Silicon Valley, sandwiching the social science between these two more complicated narratives. It’s a long interview (about 10,000 words!) and has nothing about coronavirus (it was conducted in February), but I think it worked out well. Read if interested; ignore if not.

was once a demand made by Kieran on Chatroulette (remember Chatroulette?), but is now becoming an amateur spectator sport, as people scope out other people’s bookshelves on Zoom, and some of those other people in turn likely artfully arrange their books so as to present the best possible image of their serious or not-so-serious intellectual life. The Twitter commentary on this Pete Buttigeig bookshelf has already started.

huh pic.twitter.com/tYpvEyi7T0

— Emma Roller (@emmaroller) April 17, 2020

For me, the interesting bit was not the volumes of Dragonball, or the Piketty in and of itself, so much as the way in which Piketty and a few issues of N+1 bracketted a copy of Juan Zarate’s decidedly non-leftwing book on US financial power, Treasury’s War. Perhaps the message that was intended to be conveyed was of how a leftwing attack on the power of capital and global inequality might be organized around the awesome power of the US over the global financial system. Or, perhaps, that’s just me.

Either which way, one way to keep some of us occupied is to scope out each other’s bookshelves. Here’s mine (as the disorder suggests, I haven’t artfully rearranged it at all, though I have chosen the bookshelf in our house with the greatest concentration of intellectually ‘serious’ books).

Feel free to snoop, and to disparage my taste. Feel just as free to include links to photos of your own bookshelves in comments (it looks as though img src is disabled in CT comments, but links should work fine).

Attention conservation notice: below the fold is a lengthy and spoiler-filled response to William Gibson’s new book Agency. Probably best not to read unless you’ve already finished Agency, or have no intention of reading it and want to get some sense as to what the book is about. In either case, you’re likely better off reading Mike Harrison’s Guardian review, which covers much the same ground as below, but with more subtlety and fewer spoilers.

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Sometimes you are reading a novel and it is so extraordinary that you think, is this the best thing I have ever read? For me, that feeling probably comes on about once a year, so there are quite a lot of books that have evoked it. Still, that they do says something, and the latest to have sparked it is Anna Burns’s Milkman, the Booker Prize winner from 2018.

Milkman is, all at once, a tremendous linguistic performance, a triumph of phenomenology, am insightful account of sexual harrassment, a meditation on gossip and what it can do, a picture of the absurdities of enforced communitarian conformity, and a clear-eyed portrayal of what it is to live under the occupation of a foreign army and the domination of the necessary resisters to that army who are, at the same time, friends and family, sometime idealists but sometimes gangsters, bullies and killers.

Anna Burns’s sentences, the stream of consciousness of her 18-year-old narrator, loop back on themselves with further thoughts and reconsiderations. The voice is a combination of personal idiosyncracy and northern Irish English, i.e. comprehensible to speakers of other versions of English but sometimes odd or disconcerting. You can’t skim and get the plot. You have to hold on, read each sentence, and sometime start it again.
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