Development: what's the point?

Over the space of a couple of weeks in 1996 I travelled between two extremes of the public transport spectrum. At one end were the busses of rural Sumbawa – grumpy, diesel-spitting creatures that lurched their way around potholes taking interminable amounts of time to get anywhere, let alone their destination. As a means of transport they were inclusive though. Want to take your surfboard? no problem. Want to travel with freshly caught fish? fine. Want to move your goat – trussed up and still trying to kick? just pay your fare. And if the bus ever got full, you were invited to sit on the roof.

At the other end of the spectrum was the London Underground. Trains were frequent and – despite everyone’s complaints – mostly on time. You could only travel with surfboards off peak and, though I never tested the hypothesis, I suspect goats and fish were prohibited outright. Yet the tube got you where you wanted and it got you there quick. It was safe, efficient and no one ever asked you to ride on the roof. Compared to the bus riders of Sumbawa, all but the poorest travellers on the London Underground were wildly wealthy too. And healthy: no Malaria, nor cholera, nor typhoid; life expectancies in the mid 70s. Almost all of them were literate and many could expect to travel overseas. They got to elect their leaders (something denied to Indonesians during the Suharto years) and their human rights were reasonably well safeguarded.

And yet they were miserable. Or, at least, they appeared that way. Silent, pale, staring at their shoes. The Sumbawan bus travellers, on the other hand, were full of cheer. The bus rang loud with talk and laughter, and delays which would have driven Londoners to apoplexy were cheerfully dismissed.

For a long time contrast between these two scenes led me to question the very merits of development itself. If London was wealthy but glum and Sumbawa poor but happy, then maybe we should abandon development and all aim to live like the Sumbawanese. Over the years I engaged in plenty of this anti-development thinking. It’s common currency on the backpack trail and surprisingly prevalent amongst some sectors of the development community too.

It is also mistaken. My own error was to compare two snapshots of life that were both subtly different but also not representative. At least part of the boisterousness of the Sumbawan busses came from the fact that most everyone knew each other. On the Underground people are silent because they are among strangers. Of course, if Sumbawanese and Londoners lived their lives as they travelled (amongst companions in the case of the former; isolated and alone in the case of the later), this would be a real issue. And it is certainly easier to end up lonely in a large city than a small village, but London is hardly atomised – you only have to go into any bar, or restaurant, or football stadium to see people interacting amongst friends.

And, of course, a bus ride is not someone’s life. What I didn’t see on those buses were the dirt floors of people’s houses, or the absence of running water. Nor did I feel the anguish of loosing a child to Malaria, or the pangs of hunger at the end of the dry season, or the anxiety of living with only the barest social safety net. I didn’t feel the frustration of being unable to afford basic medicines or of having to deal with corrupt officials. On the other hand, much of what London has to offer – comfort, food, the NHS – I have had all my life. So I took it for granted.

None of this is to say, of course, that London is all good, or that village life in Sumbawa has no merits. All I’m saying is that the modern misery / happy poverty dichotomy, and its variants – views held by a considerable number of people – are wrong.

In other words, there is such a thing as Development, and it matters. Countries can be better or worse places to live and, taken as a whole, for the majority of their people, the best places to live aren’t those with per capita incomes of a few hundred dollars per year.

To say something exists and that it matters is not, of course, the same as saying that it is straight forwards or even that it can be easily defined. One has only to look at the many very real problems of London to realise that development can’t possibly be a nice linear journey from rural Sumbawa to the South-East of England.

So what is development? Let’s start with its purpose.

As a Utilitarian I believe that the purpose of politics – and, it follows, development – should be to increase happiness/wellbeing in a manner that is, ultimately, sustainable. Utilitarianism is far from a perfect political philosophy so I’m open to being dissuaded from it, but the very first question I would want answered from anyone trying to do this is, would your alternative end-goal for development really be worth holding if it made people’s lives more rather than less miserable? Personally, I can’t think of any principal I would want societies to cling to if it could be shown that it consistently, across time, made life less happy. You can argue that your alternative purpose won’t suffer this problem; that it won’t make people worse off. But by doing this you are tacitly admitting that your purpose is a second order one. That it is worthy for it what it might do for people’s wellbeing rather than for any intrinsic value of its own.

At a practical level, because suffering is so my easier to define and identify than wellbeing or happiness, it makes sense to me that the purpose of development (as practiced) should be to increase wellbeing by focusing on the reduction of suffering.

So if we know what we want from development, can we also paint a rough picture of its essential ingredients? Those things that with distinguish more developed countries and communities from less? Simon very wisely argues for some flexibility – good development will look different in different places. I think, though, that – despite the importance of context – we can lay down some universal ground rules.

The first being the protection of human rights. It might seem strange that a utilitarian would put human rights up front. After all, didn’t the founding utilitarian, Jeremy Bentham, refer to the French revolutionaries’ talk of inalienable rights as ‘nonsense on stilts?’ (Surely, one of the best phrased insults in the history of political philosophy). Bentham’s critique though, at least as I understand it, of rights for rights sake – rights because they are given to us by god, or by virtue of us being human beings – and, even if wellbeing is your central concern, then rights remain important. Not because of some intrinsic worth of their own but simply because history has shown us time and time again that when they are grossly violated suffering ensues. Think Rwanda, or the Holocaust, or the Gulag. It follows then that countries that protect and promote their citizen’s rights will be less likely to experience suffering.

Suffering also clusters around extreme poverty. So the second essential ingredient of development is the reduction of extreme poverty, followed by the reduction in poverty in general. There’s not space here in this blog post to explain Amartya Sen’s capabilities approach to poverty but I do want to emphasise that the reduction of poverty is not the same as merely increasing one’s wealth. Wealth is an important component, but it needs to be set amongst others, including increasing the meaningful choices that people have in their lives. We want to reduce poverty of opportunity as well as material poverty

The third essential ingredient for development will be the protection of the environment. Despite all the advances of technology we humans remain dependent on the world we live in – and if we destroy it suffering will follow. In saying this, I’m not arguing for extreme sustainability that prohibits any environmental destruction but rather that we don’t damage the environment in a way that either significantly harms us now or which bequeaths a mess to future generations. (As a tangential point, where it is in any way avoidable, I’m also against irreversible environmental damage such as species extinction).

Finally, development needs to provide space all those other, less-quantifiable things that matter to human beings – social interaction, opportunities to have fun, a sense of meaning in one’s life.

It all sounds so simple on paper doesn’t it? But that sad fact is that for the vast majority of people living on our planet at present, development remains a long way off. Even so-called developed countries have problems sufficient to suggest that the very term ‘developed country’ has arrived prematurely. All of which begs the question, why are we still so far away from living in a developed world? That, time permitting, is the subject of another post.

Paul Krugman

If you're interested (and I won't blame you if you're not) I have a review of Paul Krugman's Conscience of a Liberal up at the Scoop Review of Books.

Our leaders will save us...

...Johann Hari thinks not. (And I only partially agree, but that's the subject of another post).

Anti-Capitalism, Distopia and the Absense of the State

Once, in the days before this blog, I ended up in an email argument with an economics professor. My reward for daring to ponder the political impacts of trade liberalisation was a diagnosis. I suffered, I was told, from a latent hostility to capitalism. The only cure, apparently, was a regular dose of Hayek and Freidman.

Now I've spent a fair bit of time with doctors over the years and been told some pretty strange things about my auto-destructing body. So I'm well aware that it's natural, when on the receiving end of bad medical news, to think "no! that's not right! that's not me!" But, even taking this into account, I still think he was off the mark.

Certainly his prescription seemed unlikely to cure me of anything. Hayek and Freidman are very smart and Hayek not quite the libertarian his followers claim, but their utopian vision of unfettered markets strikes me now, as it did then, as completely unconvincing.

On the other hand, the social democracy of economists as diverse as Paul Krugman and John Kenneth Galbraith, seems like a capitalism that could and, indeed, almost does, work.

Krugman also has the best argument in capitalism's favour that I've read. This is simply a paraphrase of Churchill. Capitalism is "the worst system we've tried except every other system we've ever tried". Private property and markets, tempered by democracy and the welfare state aren't always pretty but we've lived through an awfully ugly century and maybe it's time to settle for second best.

And yet: "ever tried" and "might ever try" are two completely different things. So, at the same time time, I'm still interested in alternatives even if I'm not convinced that they exist.

In this fascinating paper on utopias and the left Erik Olin Wright provides an excellent system for evaluating leftwing alternatives to the status quo.

We should evaluate utopian projects he argues in terms of desirability, viability and achievablility.

Desirability - is the proposed world one we'd really want to live in an ethical sense?
Viability - could the proposed world ever actually work?
Achievability - could we get there from here?

One alternative to capitalism that has been proposed but never put into practice over long periods of time on a large scale (and which, therefore, emerges unscathed from the last 100 years) is Anarchism.

Anarchism certainly, I think, passes the desirability test; in an ethical sense a world free of coercion and held together by cooperation sounds beautiful, if it could work.

But could it? Is it, to use Wright's terms, viable? Maybe, if you believe in entirely altruistic human beings, but I don't. I don't believe in the opposite either (in the solely self-interested individuals of some economic theory). But surely there's enough self-interest in our psyches to necessitate some formalised coercion to prevent injustice? Maybe we could call this instrument of coercion something other than the state but that's what it would be.

One counter argument I've heard is that an anarchist world would also be a localist one. In it we would all live in units small enough that our impulse to care for our neighbours would be sufficient to hold society together. And maybe it would. But units that small, unless they traded heavily, would also be deprived of all the economic benefits scale and specialisation can bring. We might, in other words, be wealthy ethically, but materially we would be dirt poor. Maybe, then these communities could trade together? But who would regulate such trade? who would make sure it was fair? The state?

Finally, we have the issue of achievability. Even if such a world could work, could we ever create it from the one we have at present? This isn't an issue just for anarchism of course, but any major reforms, including plenty I am in favour of. And Wright's thoughts on achievability, and its relationship to viability are definitely worth reading.

Now in saying all this I am most definitely not attacking anarchists. All the anarchists I've met (admittedly a small sub group) have been kind, smart, committed people. I'm also aware in writing this that I'm no expert on anarchism so it may well be the case that I'm missing something. And I know my objections above aren't new, so maybe there are some good counter arguments. If this is the case I'd be really interested in reading about them.

Finally, I do think that there are some important insights in some anarchist thought, too. Particularly about the de-hierarchialisation of power. Insights which could provide all sorts of ideas for deepening democracy, if not actually replacing capitalism. Those thoughts, though, are for another post.

Asymmetric Information

Sigh. Life would be easier as an agent in an economic model.

After my valve replacement surgery, assuming everything goes to plan, I'll be taking blood thinners for the rest of my life. Being on blood thinners doesn't mean that if I knick myself shaving I'll bleed to death. But it will increase the hassle of this activity. And, to be honest, it's a hassle enough as it is. So I'm thinking of buying an electric razor.

Easy enough.

Or not.

For a start I have no exact idea how much I'm willing to spend (or, to be more specific the worth of the extra utility I'll gain for it). But I'm guessing I'm aiming for something mid-range.

The main thing though, is that I want to buy something at least semi-decent. But, every different shaver I've seen makes that promise. The trouble is I have much less idea how true these promises are than the people who make them. I have, in other words, an asymmetric information issue.

I've tried to correct this by:

1. Consumer magazine: nothing on shavers.
2. Choice magazine: nothing on shavers since 2004 and even that was pretty crappy.
3. Which magazine. Something on shavers in 2007, which claimed that even quite cheap ones can do a good job. The problem is that I need a subscription to Which to find out any more. Which I'm willing to get except that the F'ing magazine only offers online payment options to people in the UK or Ireland.

So I still don't know what to get. If anyone has any suggestions I'd love to hear them...

[Update: sigh...no comments. Which might mean this blog has no readers. But I doubt it. I suspect something quite different.

Typical Laanta Reader]

Discounting

Were there any peeping Toms in Island Bay last Wednesday they would have been in for a shock. At 7.21pm, towards the eastern edge of the suburb, a man could have been spotted leaping from the bath, and running naked into the lounge shouting 'I've found it!'. Which was a bit of an undue claim, as it happens, as I hadn't found anything. I'd just finally got my head around the concept of discounting as it relates to climate change. All this was thanks to a very handy paper from Geoffrey Heal of Columbia University [pdf]. Heal's paper also explains how William Nordhaus is able to get such counter-intuitive results from his economic models as to whether or not we should do anything about climate change. Nordhaus, while admitting that climate change is real and serious, argues that the economics of the matter suggest that we do little. Nordhaus's models have been used by people like Bjorn Lomberg to suggest that we should turn a blind eye to the issue and by others to 'prove' that the Stern Review on climate change is wrong.

My recommendation is that you read Heal's paper yourself to get an understanding of all this. What follows is just my own attempt to crystalise my learning by trying to explain it. I may get it wrong.

Discounting is a tool that economists use to help us weigh costs and benefits across time.

There are several important components to any discounting equation.

The first of these is the pure rate of time preference, which is a function that reflects, in Heal's words, "the rate at which we discount the welfare of future people just because they are in
the future".

A rate of zero will mean that we discount their welfare not at all. Rates greater than zero will suggest that we place less value on their lives. Stern chose a pure rate of time preference slightly higher than zero to take into account the fact that there is a slight chance that there may be no future generations (if, for example, the Earth is hit by an asteroid). If you choose rates much higher than Stern's you are essentially saying that the lives of people living in the future are less valuable than those living at present. Discriminating across time in other words. Like all forms of discrimination, discrimination across time is hard to defend in any ethical sense. Yet a surprising number of people who call for little action on climate change on economic grounds are doing so because they make use of models with high pure rates of time preference. Their argument is, in effect, that, we shouldn't take action now because your grandchildren don't matter as much as you do. Seriously.

The next important component is simply the degree to which you think consumption will increase between now and the day of reckoning. This seems simple enough, yet as Heal points out most economic models of climate change are based on a simple consumption function that uses a single consumption good. In reality we consume many goods, and there are important ones of which our consumption may decrease, despite increasing overall consumption. Goods (services) related to natural capital may, in particular, decrease as a result of climate change. And these are some of the goods most important to our wellbeing. The models, in other words, are a bit fuzzy on the stuff that matters. They're also fuzzy on distributional issues (i.e. who does the consuming - rich or poor).

The third important component to our equation is the impact of consumption on utility (wellbeing). Perhaps one of the most sensible assumptions that one can make in economics is diminishing marginal utility. That is, the more we have, the less the next unit of consumption will contribute to our wellbeing. So when discounting a number is included into the equation to reflect the fact that future changes in consumption will be less important than current ones because we'll be richer then (and diminishing marginal utility would suggest that a change in consumption of value x will have an impact of y on wellbeing now but less than y in the future when x is greater). One thing to note is that Partha Dasgupta takes Stern to task for under assuming diminishing marginal utility. I'm not sure Dasgupta is right to do this but that's a post for another day. Another point to note is that there are also distributional issues at play. Most regimes for addressing climate change are structured so that wealthier nations bear the brunt of the costs. On the other hand if we do nothing it may be the poorest who are hit hardest - so therefore diminishing marginal utility could be inserted into a model in a manner opposite to the way it is used at present. Meaning that it would increase the case for action rather than decrease it.

Now, where was I? Oh, that's right, so what's the matter with Nordhaus's model. In a nutshell he calculates the pure rate of time preference from the observed rate of return on capital. Heal details all the problems with this but the most glaring one to me is simply that Nordhaus is confusing 'is' with 'ought'. Which is just so wrong in this instance it isn't funny. There are also all sorts of other problems including the way risk is managed and the assumptions needed to even consider deriving discounting from the rate of return to capital but you're better reading them from Heal's mouth than mine. I gotta run now...dinner needs to be cooked...but in the meantime remember this one thing:

Nordhaus's work like so much in economics brings with it the veneer of certainty that comes with numbers and maths. But underneath the surface is a much less clear world - one of philosophy. At the very least this ought undermine the tone of certainty with which people appeal to Nordhaus when they argue against action on climate change. But I also think it's worse than that. I think Nordhaus gets the philosophy horribly wrong. As far as dicsounting goes, we ought to discount Nordhaus.

[Update: added a bit more under diminishing marginal utility.]

Freedom of Speach and its Discontents

Both Ethical Martini and Poneke think Frog was wrong to recommend to its readers that they not watch, or consider a Broadcasting Standards complaint, over the Great Global Warming Swindle 'Documentary', which was screened recently on prime TV.

Ethical Martini, which is an interesting and worthwhile blog, would have preferred that Frog Blog encouraged its readers to argue the issues. I'm not so sure. Debate is great, but what debate is there actually to be had in the case of this documentary? What would really been achieved given that the long, long list of errors and falsehoods in Swindle have been pointed out many times without to-date causing its producer to resile from his position; nor stop media outlets from showing something they must now know to be dishonest, albeit good for the ratings.

Poneke's objection is less hard to glean but a generous reading of his or her post would suggest that Poneke's primary problem is Frog's attempt to stifle free speech through the threat of a BSA appeal.

As a defender of free speech I have been mulling over an abstracted version of this argument over the last few days and here's what I think:

First let's start with human rights. As some sort of rule utilitarian I support human rights, not for deontological reasons, but rather because I think they lead to a better world, which contains less suffering. They provide a basis for a sensible social contract where the individual is afforded protections from the collective; and history provides us with ample evidence to show that their violation leads to tragedy and horror.

Free speech is a particularly important human right - if it is prohibited, we can't even speak out to defend other rights. Free speech is essential to democracy too; indeed it is inherent to democracy.

Freedom of speech is also not so simple an issue as some of its defenders would make it seem.

The primary reason for this is that, as I have written previously, rights can be rivalrous. In other words, me making use of my rights can lead to you being deprived of yours. I can use my right of free speech to call for you to be silenced, for example.

In the 1994 Genocide in Rwanda radio stations were a key tool in mobilising the genocidaires in their attempted extermination of the Tutsi. Do we really want to defend free speech even when this speech is calling for genocide? Probably not. And, indeed, most nations don't - they have laws on their books that prohibit incitement to murder.

This is a clear infringement of people's right to free speech, but it seems justified.

And there are other ways that most democracies limit free speech to protect people. Lying, as we all learn one way or other, can be harmful. Not so harmful that we'd want to outlaw it, of course, at least in most instances. Yet in some cases it can be particularly harmful - say if a major newspaper were to accuse someone of being a foreign spy with no evidence. For this reason we have liable laws. Similarly, if a car dealer sells me a car which he claims to be 'as good as gold' while knowing it has dangerous faults, this could cause me physical and personal harm. So we have laws about that too.

When you think about it there are many ways in which democratic and apparently free societies restrict free speech for what appear to be quite justifiable reasons.

None of this is to say that some of these restrictions aren't problematic: liable laws, for example, (or threats of) are used all the time to silence what may well be reasonable criticisms. This is a real issue but few people would use it to argue the case that we should eliminate libel laws altogether - instead we just need to get the balance right.

Laws curtailing freedom of speech can also be dangerous through their unintended consequences - regulation, which may well-intentioned, could subsequently be used to silence genuine political dissent. Hate speech laws, and the recent debate around them in the UK, are a good example of this argument being played out. For this reason, and the danger of the ever-present slippery slope to authoritarianism, we need to be very wary about introducing new laws which may impede free speech.

So it's not simple. But this doesn't change the fact that we already restrict free speech in quite a few ways, most of which seem justifiable.

The relevance here to the Broadcasting Standards Authority, and our broadcasting laws, is that they too are a way of stifling certain types of speech. Frog provides us with the relevant section of New Zealand law:

Broadcasters should refrain from broadcasting material which is misleading or unnecessarily alarms viewers.

Setting aside the unnecessarily alarms bit (which I'm not at all sure is justified) this law reasonable enough. Less so now, perhaps, in the age of the internet, but for much of New Zealand's history, broadcasters occupied a particularly privileged position in New Zealand discourse. Often the enjoyed a near monopoly in information provision or, at the very least, were likely to be the only source of information for most people on most issues. Which puts them in a position of considerable power. Power which when abused can cause considerable harm.

Imagine, for example, if a New Zealand broadcaster produced a series of documentaries which claimed to show, without justification, that vaccinations caused cancer. And that this led to a significant number of New Zealanders not vaccinating their children. Herd immunity is perilously easy to loose and even if not everyone watched or believed the documentaries we could see a situation where epidemics broke out again and people died. To me it seems perfectly reasonable to stop this from occurring.

Just to be clear though: I don't think that anti-vaccination campaigners should be silenced. They should be free to speak their minds and to try and prove their claims scientifically (good luck to them, but that's another topic). But until these claims can be backed by fact they shouldn't be broadcast as such. The risk of harm is too great.

It's true that broadcasting laws can be abused and that slippery slope arguments against them are plausible enough but, once again, I think that these aren't arguments against their existence. Instead they show why we need to take time to get them right.

I'm open to being dissuaded from this stance - just as free speech itself is problematic so are almost all restrictions on it - but one thing that really doesn't wash is to start implying that someone is trying to silence free speech by using a law which has been long established without first making a coherent case, outside of one's views on the specific context, against the law.

--

As an aside, Prime could probably defend any BSA complaint by arguing that that they held a panel debate after the documentary showing, but I'm not sure. Firstly, is this really balanced? You've already given one side of the 'debate', surely balance would suggest giving the other side equivalent space, not sound bites in and amongst an argument. Also, in terms of public broadcasting and the complexities of science, is the hurley burley of a debate really the best way to let these be presented? Why not have let David Wratt (the only climatologist on the panel) simply outline the errors in an uninterrupted segment afterwards?

[Update: in comments Ethical Martini points out that he didn't claim Frog was wrong to recommend BSA complaints. In my original post, I didn't suggest this, I noted that I thought that this point was at the centre of Poneke's problem with Frog's post (although, to be fair to Poneke, I can't even say this with 100% certainty - it's hard to figure out what his/her actual problem with Frog's post is). I thought my original post was clear in its distinction here, but perhaps not - so I'm adding this update just to make doubly sure.]

Dueling with the Visible Hand (GST is regressive!)

Over at TVHE (guess which blogs I've been reading lately) Matt argues that:

The main criticism I often hear about this is that GST is regressive. Now I used to spout that line as well, after all poor people have a lower marginal propensity to save then wealthy people, as a result they spend more of their income, and so more is taxed.

However, then I was told to think about it a different way. Over our lifecycle we should spend all our money, so that we are on the boundary of our budget constraint. As everyone spends all their income over their lifetime, GST must be a flat tax.

I read TVHE not only because Matt and his co-bloggers are smart but also because they have a near monopoly on interesting counter-arguments to my own beliefs. I enjoy what I read even when I disagree with it, because I'm always learning something.

Having said all this, I have to confess that I think Matt's got it plain wrong here. Surely the mere existence of inheritance taxes provides fairly sound proof of the fact that people don't spend all their income over time. And I'd imagine, although I'm open to being dissuaded by evidence to the contrary, that the wealthy tend to die with more than the poor do. What theory suggests about people's consumption patterns and what they actually do are two different things altogether.

Yet, even if the wealthy really did not save more than the poor, GST would still be a regressive tax. Why? In three words: diminishing marginal utility. Which, in this context, is a fancy way of saying that money matters more to those who have less of it. If you give a person who earns a dollar a day a pay rise of a dollar a day it will improve their wellbeing significantly more than if you give the same pay rise to me. The idea of diminishing marginal utility is so strongly intuitive that it ought to be axiomatic, I think. Moreover, most of the recent happiness research confirms its existence. It is, in other words, a pretty safe bet.

And, as good (albeit troubled) utilitarians, we ought to think about tax in terms of its impact on people's wellbeing (utility) rather than on money. Money, after all, is but a means to an ends.

And, in the same sense that a pay rise matters more to someone in poverty than it does to someone who is well off, a rise in costs will also harm someone who is poor more than it well their wealthy compatriot.

For example:

Imagine an economy where no one saves and with only three goods: rice, cheese and caviar.

Rice alone is sufficient to fulfill our needs, but cheese tastes better and caviar better still*. So, where they can, people will replace rice with cheese and cheese with caviar. Upgrading from rice to cheese or cheese to caviar will make people happier (and so better off) but the most important thing to their wellbeing is that they consume calories sufficient to stave off hunger and ill-health.

Now imagine two people - Karl and Milton.

Karl earns $5 a week, Milton earns $15. Both need to eat 1kg of rice, cheese or caviar, or some combination of the three to avoid hunger. Rice costs $5 a kg, cheese $10 and caviar $15/kg.

So Karl is full if unfulfilled eating a kilo of rice a week. Meanwhile, Milton's styling on pure caviar.

But one day the Nolanists sweep to power in a landslide election victory, and they decide to impose a GST of 20%**.

Rice now costs $6 a week and Karl's health suffers as does his happiness, eaten away by gnawing hunger. Milton on the other hand shifts some of his caviar consumption to cheese. He's worse off, but not by nearly as much as Karl.

And this is why GST is regressive: it disproportionately impacts on the wellbeing of the least well off, even if the proportion of income effect is neutral.

_________________________________________________________
*Obviously, I'm stretching the truth here: in the real world caviar is repulsive.
**I'm ignoring the corresponding income tax cut here because I'm too lazy to do the maths, and because it doesn't actually change the picture if distributed evenly and if revenue neutral.

Dueling with the Visible Hand (utilitarianism edition)

Over at TVHE Matt has replied to my reply to his reply to my post on the trouble with utilitarianism.

I'll keep my reply brief for two reasons:

1. I am a utilitarian myself and the last thing I want to do is construct an argument so good it convinces me; then I'd have to go find a new political philosophy, which would be a real chore :)

2. I don't want to scare off my tiny readership - and I'm worried that arguments about arcane political philosophy may well do this...

Ok - here we go:

Starting with the good news: both Matt and I agree that utilitarianism is no different from other political philosophies insomuch as that it ultimately makes claims that can't be anchored perfectly to something deeper (appeals to value-judgements, I guess). Matt, however, thinks that utilitarianism provides more transparency in dealing with value judgments. I'm not so sure: I think we could appeal to Rawlsian liberalism, or the libertarianism of Robert Nozick with equal transparency.

I also agree with Matt that people will feel better about chicken pies they buy than they will about those they steal. As I said in my second post, incorporating our preferences for justice into people's utility functions is perfectly sensible.

Where we seem to differ is that Matt believes we can combine consequentialist and non-consequentialist beliefs into one overarching philosophical model. I understand the appeal; most of us do this in our day to day philosophising (we support some things because they improve people's lives, others because they seem fair). But, at least to my non-philosopher mind - in terms of constructing sound and rigorous frameworks for weighing policy and economic choices, the two ways of arguing what is right are completely incompatible.

This, I think, is our fundamental disagreement. And going back to my original post, the fact that justice can't be brought into the picture (except as rules in rule utilitarianism or as something that make us happier) leaves me uncomfortable in this unjust world of ours.

Blogs, Learning and the Minimum Wage

It always intrigues me to read print media pundits writing off blogs as shrill, derivative and poorly informed. It's true that a lot of blogs use articles from the print media as the basis for their posts (and so are, in a sense, derivative). But to me this seems to be a good thing; removing barriers to entry in the ongoing conversation that ought to be democracy and ensuring that large media outlets don't inevitably have the final word on that which matters.

As for being shrill and ill informed, this is very true - of some blogs (and New Zealand, alas, has more than its fair share of these). But, in the same way that the Sun is not the Financial Times, some does not mean all, and there are plenty of bogs out there which are incredibly well informed and also well mannered.

Crooked Timber is a case in point. To give but one example, this recent post on labour markets and the minimum wage by a guest blogger there is simply excellent. The author knows her stuff, as do most of the commenters. Which means that you'll read the post and learn more about the topic than you would in a year's worth of newspaper articles here; or a first year economics text book for that matter.

Utilitarianism Again

Of the many lists of things to do currently piling up in my life, one of the longer ones is 'Reply to posts on the Visible Hand in Economics'. While I disagree with quite a lot of what I read there, the content is always well written and well argued. And interesting.

But, alas, I speak economics only a little better than Portuguese, which - combined with the substantive nature of much that is blogged there - means that my responses need time; a scarce commodity at present.

Anyhow, a little while ago Matt responded to my post on the problems with utilitarianism*.

It's an interesting post and in the comments below he makes the very worthwhile point that people may actually feel better knowing that they live in a juster world and as such - to some degree - justice can be incorporated in people's utility functions.

In the post itself he makes two points which I don't think are quite right, though**.

1. The first of these is that utilitarianism somehow differs from other political philosophies in that it doesn't involve value judgments (claims that can't be perfectly anchored to deeper claims) about right and wrong. The trouble is that utilitarianism does do this: arguing that we should do what leads to the greatest good is a value judgment just like saying that we should concern ourselves with fairness as it might be reasonably construed behind a veil of ignorance. One of the strengths of utilitarianism is that the value judgment involved seems more intuitively defensible than, say, claims on absolute property rights, but value judgment it remains.

2. Matt suggests that we can mix concerns for justice (equity) with concerns for outcomes (efficiency) in our grand designs. I'm no expert but I just can't think of this - mixing consequentialist and non-consequentialist political philosophy - leading to anything but a philosophical mess. In saying this I'm not making a dig at Matt: in my day to day thinking I do exactly the same; in his ubiquitous first year econ. text book N Gregory Mankiw does it; and, heck, it's throughout our daily political discourse. But I just can't see how the mixture could ever be coherent and consistent.

Maybe I'm wrong and maybe there is a way to soundly mix deontology and consequentialism though. If there is, I'd love to hear it.


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* I'm still a utilitarian, remember - just a troubled one.
**And I'm neither an economist nor a philosopher so it may be me that is wrong here of course.

Yet another bookmark

Alan S. Blinder explains Keynesian economics.

Worth Reading

On health costs and aging.

Monopsony in Labour Markets

Just a bookmark two good posts on monopsony and labour markets. (Hat tip: Crooked Timber).

What's the Matter with Utilitarianism

To me utilitarianism is the least worst political philosophy, but it's not without problems. The one that I find most troubling being that Utilitarianism leaves no place for justice at a philosophical level. That's not to say that, for rule utilitarians at least, there's not space for something resembling justice in practice (in the long run we all benefit from having a just social contract). But justice is there simply because it helps make us all better off; not because it is right to put wrongs to right.

Consider the following hypothetical example:

Race A colonised the land of Race B. Much injustice was done. Eventually Race A formed a majority of the population. Years later the country starts to address its past. An act utilitarian would be guided in this process by the belief that we should undertake those acts that lead to the greatest wellbeing (so quite possibly no redress). A rule utilitarian might decide that compensation is part of a just social contract and even if the majority don't benefit from this in the short run, because in the long run we are all better off with such a social contract in place. But, while this might look like justice - it is not justice for justice's sake. And this seems troubling.

Drug Research

Dean Baker makes the case for the government being the primary funder of medical research:

The place to start is through public financing of clinical drug trials. This is by far the most corrupt part of the drug development process, since clinical test results are most immediately associated with the approval and marketing of drugs. If the tests can be taken out the control of drug companies who have a direct material stake in their outcome, it will remove the major source of corruption in the prescription drug industry.

The government can appropriate a sum of money approximately equal to what the industry now spends on clinical trials (around $20bn a year). It can then arrange long-term contracts (10-12 years) with independent testing firms, who would then decide which drugs to test. Renewal and expansion of the contracts would depend on the effectiveness of the contractor in finding and testing new drugs and preventing unsafe drugs from coming to market.

The government should impose strict rules on the contractors to prevent the sort of abuses that we currently see in the industry. First, there should be no overlap of financial interests between the firms doing the testing and the drug companies. All communications between the two, for example petitions to test a particular drug, should be in the form of public documents posted on the internet. Any other contact should be treated the same way as if a lawyer contacts a sitting juror in a pending case - it's called "jury tampering" and you spend years in jail for doing it.

Also, all the data from the tests must be publicly posted on the internet. This will allow any researcher anywhere in the world to independently analyze the data. This should substantially reduce the likelihood of mistakes or misrepresentations of results.
It would also enormously facilitate comparative effectiveness assessments of different drugs. This will allow for much better and more timely research.

A more honest system with fewer incentives to cheat.

An important additional argument, I think, is that such a system could also be a big improvement on the current state of play where rewards to investment in research on new medication are provided primarily through patents. By allowing companies that develop drugs monopoly pricing for a period of time, patents are supposed to provide incentives to research and allow drug companies to recuperate the costs of such research. Yet, patents contribute to grossly inflated prices for new drugs (such as Herceptin) and also to critically needed medication being denied to the world's poor.

If we were to nationalise the research process this would remove the needs for patents. And the problems that come with them.

What Have Unions Ever Done For Us?!?

Via DailyKos, this is great. It's Australian but most of it's true (terminology differences aside) for us here in NZ

Relative and Absolute Poverty

When Jim Bolger famously claimed that there was no poverty in New Zealand he was echoing a common conservative talking point in which it is argued that, because we don't see deprivation matching that in the Third World, we aren't home to people who are truly poor.

As a version of the claim has been made again recently (this time as part of John Minto Hate Week and with the United States as the target country) I think it's worth having a quick look at poverty measures and the debate about its absolute and relative definitions.

While I'm not a statistician I've delved into this subject fairly thoroughly (indeed, I've given lectures on poverty measurement in the past); yet even I still find succinct explanations hard to give. This is, in part, because measuring poverty requires you to define poverty and - like so many elements of development - while we can all recognise poverty when we see it, rigorous, resilient definitions prove surprisingly elusive. Definitional consensus is, as this Google search shows, unlikely in the near future.

In order to keep things clear I am going to start by discussing poverty definitions first and then move on to the poverty lines that follow from them. (Click here to read the rest of this post...)

I will finish by discussing alternatives to monetary poverty measures.

Absolute Poverty
The standard definition of absolute poverty revolves around a set of basic needs. One is said to be absolutely poor if they do not have the means to meet this basic set of needs. In it's most minimal conceptualisation this set of basic needs is often equated with the basic nutritional requirements for survival, or more 'generously' adequate health. More 'generously' still shelter and other elementary necessities are often added into the equation.

An interesting exercise to try for yourself is to assume that our purpose as concerned citizens is to quantify suffering stemming from material deprivation (presumably because we want to reduce it). Starting with this assumption and considering only those aspects of wellbeing that can conceivable be altered by material means (so excluding things such as whether one's government respects human rights or not) try and list the basic needs that ought to be quantified in defining absolute poverty.

Here's my own list based on minimal requirements: nutritional needs; warmth and shelter; basic medical care; money to catch the bus to see one's relatives and have some sort of social existence; some small amount of savings so I am not worrying where my next meal will come from; an element of security.

Yours is probably different. Indeed, amongst all the absolute measures of poverty out there, there is no one formula. And this is part of the trouble with defining poverty in an absolute sense. The term absolute poverty sounds scientific and certain, yet this belies the fact that it is ultimately underpinned by value judgements which are anything but.

Relative Poverty
English researcher Peter Townsend provides us with the textbook definition of the alternative to absolute poverty - relative poverty:

Individuals, families and groups in the population can be said to be in poverty when they lack the resources to obtain the types of diet, participate in the activities and have the living conditions and amenities which are customary, or are at least widely encouraged or approved, in the societies to which they belong. Their resources are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns and activities. (Source: This PDF of the first chapter of Ruth Lister's book Poverty)

Townsend is often credited with bringing to prominence the idea of relative poverty; yet, as is so often the case, Adam Smith got there years before:

By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.

There is a strong case to be made for a relative rather than an absolute definition of poverty. As I noted above, despite the appearance of objectivity, absolute definitions of poverty are themselves the products of value judgements - relativities, if you will.

It might plausibly be possible to use the developing science of happiness to come up with set of basic needs based on factors scientifically shown to lead to reduced suffering. But, if we were to do this, and if current research is to be believed, the first thing we would probably stumble across is the next argument in favour of a relative definition of poverty. Simply put this is that human beings are inherently social creatures and our own wellbeing is inextricably linked to our ability to participate in society around us and act within societal norms. If we don't have the means for at least minimal participation then we will suffer through loneliness, ostracism and loss of opportunities. Moreover, the necessities required for normal social participation change as society changes. To illustrate this, consider the following: once upon a time, only the wealthy had telephones. Society accordingly, reflected this fact, and one could participate in it with relative ease without one. Now, only the poorest do not have phones and once again, society reflects this - if you don't have ready access to a phone a surprising number of things become remarkably difficult (contacting friends and family, making appointments, making inquiries, seeking work...). Things that not only would be easy if you had a phone, but also if you lived back in the days when no one else had one.

Given that humans as social creatures suffer when excluded from society around them and given that our purpose stated above was to quantify material deprivation which leads to suffering it seems reasonable then that our concept of poverty should include the want for resources to allow us to normally be part of society around us.

Even those totally unconcerned with the wellbeing of others may still find it prudent to be concerned with relative poverty. Social exclusion, after all, contributes significantly to crime. Minimising it, it would seem, is even in the interests of the wealthy.

There are other arguments - including those based around fairness and justice - which might also lead us to relative definitions of poverty lines but, to me, the points above are sufficient to make me a supporter of a relative definition of poverty. This isn't to say that there aren't problems with relative poverty measures though. And it's measures that I now turn to.

Poverty Lines
Actually measuring poverty accurately is a tricky business, but - fortunately for us - defining poverty lines is easy enough.

All you need to do is work out the dollar value of your poverty line and then declare anyone who earns less than this poor.

Ok, so actually it's not that easy. You also have to choose whether you are going to use an income poverty line (if you earn less than it you are poor) or a consumption one (if the dollar value of the goods you consume is less than the line you are poor). This difference is particularly important in subsistence economies where people may earn little but still have an adequate lifestyle through the goods they gather from the land.

Then you have to decide whether your line is to be person or household based. And, if you're using households you'll have to worry about something dreadful called household equivalence ratios.

Finally, you'll also have to take into account the fact that in different places different goods will have different costs. The large variation in housing costs between regions in New Zealand is the reason why our government's low income lines are calculated based on income after with housing costs removed. The World Bank's gyrations over purchasing power parity reflect their attempt to control for the differing costs of goods in different countries.

Phew! And these are only the most basic issues.

Absolute Poverty Lines

Once you've accounted for everything listed above, constructing an absolute poverty line is relatively easy. Define your necessities, price them and, viola, you have a poverty line. Between locations this poverty line should only be adjusted to reflect differing costs of necessities (and possibly to reflect differences in needs such as those that exist between rural and urban dwellers) . Over time, the poverty line should only be inflation adjusted (possibly on the CPI/possibly on the prices of the necessities in question).

Relative Poverty Lines

Relative poverty lines are constructed, as their name suggests, by choosing a level of income (or consumption) relative to a society's average income (or consumption). Most typically the type of average chosen is the median. A figure one commonly sees is 60% of median income. The value of the line is rarely arbitrary; often the percentage chosen will be based on other research about the costs of minimal social participation (this is what Stephens and Waldergrave did in their research on poverty in New Zealand). Over time, this poverty line is then moved as the median moves.

The Problem(s) with Relative Poverty Lines

Relative definitions of poverty are better than absolute ones, in my opinion. But relative poverty lines are not without their faults.

First up, they are more easily dismissed by those who, for ideological reasons, don't want to believe the poor exist.

They are also meaningless for comparisons between countries with significantly different median incomes (comparing a poor by somewhat equal country such as Vietnam with a wealthy but unequal society such as the US, for example, could produce farcical results)**.

Similarly, they don't give credit for long run increases in GDP (and median incomes). If Germany's median income was to double over 20 years but its distribution of wealth was to stay the same you would see no decrease in poverty measured via a relative poverty line. I'm in favour of measuring poverty in relation to societal norms but it does also seem that some credit needs to be given to overall improvements in the standard of living.

And, paradoxically, if during a recession, median incomes fall but distribution is unchanged a relative poverty line will record no rise in poverty. This can't be right.

So what are we to conclude then - should we discard relative poverty lines. No, they still have their uses. One, ideal, solution is to use both sorts of lines. Carefully analysing the two so that they compliment each other's weaknesses. Maybe you'll get lucky and find poverty dropping under both measures. Or - if this isn't possible - use the tool most relevant to the task you are involved in. Or use whatever measure you have, but beware of, and upfront with, it's limitations.

Beyond Monetary Poverty Measures

"Money," Cindi Lauper once wrote, "changes everything". Unfortunately, alas, money measures, on the other hand, don't quantify everything. And there's a good case to be made about the limitations of quantifying poverty using monetary measures at all. It's too detailed to go into here and now, but I do want to point out that much recent research has gone into ways of measuring poverty in terms of outcomes rather than incomes.

Some examples of this are the UNDP's Human Poverty Index and New Zealand's Economic Living Standards Index. Amartya Sen's work on conceptualising poverty as capability deprivation is a related theoretical framework. In the long run, I think improvements in poverty measurement will come through these initiatives (not that they are without their problems).

And Finally
Lets be done with some poverty measurement silliness.

1. The New Zealand government's low income lines are not relative poverty lines. They are absolute ones. The appear to be relative because they are shown in the Social report as percentages of median income in 1998. However, for subsequent years, they have only been adjusted for inflation, they haven't been adjusted to reflect changes in median incomes. As such they should be properly considered an absolute poverty line. Particularly as the 60% figure is close to other research on what a family needs to earn in NZ to avoid experiencing deprivation.

2. Relative poverty lines aren't just measures of inequality, and poverty could be eliminated under these measures. Relative poverty lines are similar to inequality but they aren't (unlike true inequality measures) impacted on by changes in distribution of incomes over the median level. This means that you could (simply by raising the wages of those earning under 60% of the median wage) eliminate relative poverty while still having society wide inequality (differences between the median and the top and among those above the median).

3. If Bill Gates moved to a country with a relative poverty line, poverty levels would not discernibly increase. Or at least they wouldn't if the poverty line was based - as almost all are - on a percentage of the the median income. All he would do would be to shift the line by one person.

Some Links

ODI
Poverty Terms Defined
Lister's Book (Chapter 1, poverty definitions)
Krugman on Relative Poverty
New Yorker Article (not yet read but looks good)

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*I cut a whole heap out from this section of the post to try and keep things simple. If you want more you may be interested in the following: Alan Botton's Status Anxiety; better analysis can be found in Richard Layard's Happiness [these speech notes may be ok] and Richard Wilkinson's the Impact of Inequality [review here].)
**Note, however, that John Minto never did this despite what David Farrar and Owen McShane would have you believe.

The Top Marginal Tax Rate

Lane Kenworthy has an interesting discussion on the merits of raising the top marginal tax rate in the US. His conclusions: doing so will increase government revenue and is unlikely to slow economic growth.

Hat Tip: Mark Thorma

What the Huck! (Owen McShane Edition)

Recently, writing about the farcical level of inaccuracy in a Garth George 'column' Gareth Renowden pondered whether the Herald's fact-checker was on leave. Self professed scientist Owen McShane adds weight to this speculation with a Huckabeean display of innumeracy in his most recent column.

The target of which was --- wait for it --- John Minto and his heretical views on property rights. For what it's worth, my own views on the role of property rights in economic development may, quite plausibly, be closer to McShane's than Minto's. But if you are going to opine in New Zealand's paper of record on property rights and poverty it helps if you have a clue.

And Owen McShane quite clearly doesn't. (I'm being nice here, it's also possible that he does and that he is simply being dishonest)

The catalyst for McShane is Minto's claim that:

The US has the highest levels of poverty in the Western world (more than 30 million) despite one of the highest per capita incomes in the world. Why would this be?

...and so McShane races to the US's defence:

Minto tells us that such Americans can only create poverty because "the US has the highest levels of poverty in the Western World (more than 30 million)" and asks, "Why would this be?"

Well, the answer is simple. The United States Official Poverty Rate (the OPR) is based on calculations that are available from 1959 onwards. For the total population of the US, this rate declined by nearly half over this period, from 22.4 per cent in 1959 to 12.7 per cent in 2004. It seems Americans do know something about reducing poverty.

Also, millions of Americans can be declared to be in poverty because the UN poverty index is based on the percentage of the population with disposable incomes of less than 50 per cent of the median.

Astute readers will notice a subtle segue here. McShane starts by talking about US official poverty stats before moving on to those compiled by the UN, which he then goes on to criticise because they are based on a relative poverty line (50% of median income). Now there's actually an interesting debate to be had about the respective merits of absolute and relative poverty lines, but McShance sure isn't interested, and I don't have the time to go over it in detail so it will have to wait for another post. The important point here though is that Minto's number of over 30 million isn't based on any UN estimate - it's based on the US's own official poverty stats [large PDF file]. And the United State's poverty line is not a relative line in any sense. It is absolute, based on inflation adjusted basket of basic needs.

McShane, who one bets has never experienced anything like poverty at any point in his life then adds that:

American families not only have hot and cold clean running water, flush toilets and electricity but typically have one or more cars, at least one television, several telephones and even own their own homes.

So, what he essentially saying here is that - in the richest country on Earth (and one which gets rather cold in winter I hear) - you may well not be poor, even if you don't have hot water, a flush toilet, and electricity. And, if he considers a car a luxury, he should try getting round without one in your typical public transport deprived US city.

Next up is a true clanger:

The UN test means that when the median American household income reaches US$1 million a year, a family living on US$499,000 a year will still be deemed to be living "in poverty". Using the New Zealand index, they could be earning $600,000 a year and still be "in poverty".

Which is just factually false. New Zealand (to our shame) doesn't have official poverty lines. Rather 'low income' lines are used, based on 50% and 60% of the median income in 1998 (adjusted for inflation). This may seem like a relative poverty line, but it is not. God only knows why MSD use percentages to reflect what is actually an absolute figure (based on a dollar value in 1998 thereafter adjusted for inflation) but the fact of the matter is that, assuming the methodology stays the same, if - 20 years from now - median income has increased to $US1M a year, NZ's the low income lines will not have gone up accordingly - they will have been adjusted for inflation, that is all. (Reference: here). Also, these 50% and 60% figures aren't entirely arbitrary; research by Charles Waldergrave and others came up with a needs based poverty line for New Zealanders that was roughly the same as the 60% figure.

This out of the way things just gets worse:

I am not at all sure why Minto assumes that Americans are experts on creating poverty rather than wealth. Some poverty indices have truly bizarre outcomes - especially those which focus on where families sit relative to average income. Minto bewails the fact that the very rich in the US have very high incomes.

One way to reduce poverty might be to persuade them to up stakes and take their wealth to other less fortunate nations.

However, if Bill Gates decided to migrate to a poor country like New Zealand, his settlement here could increase the number of New Zealand families officially living in poverty because his vast income would considerably increase the average household income. And hence throw hundreds, if not thousands, more families, and even their children, into poverty.

Which would only be true if New Zealand, or any country for that matter, used a poverty line based on mean rather than median incomes. (Otherwise Bill Gates's big move would only shift the poverty line ever so slightly). For what it's worth, I have heard about poverty lines based on mean incomes but I've never seen them used in practice and none of the poverty lines that McShane mentions in his column are based on means. So why does he start talking about them now? Either because he doesn't know the difference between means and medians or, more likely, because he is being utterly slippery to try and obfuscate the fact that the United States does, indeed, have a serious poverty issue.

Why he felt the need to write this tosh I don't know, but it's hardly to the Herald's credit that it chose to publish it.