Social and cultural distance is endogenous

In this paper presented last week in Bristol, it is shown that agents in charge of promoting developing programs can overcome social distance if they receive incentives to do so. That is, poor citizens who distrust government agents because they may be from different social groups (such as castes in India, or different language or religious groups) may overcome this lack of confidence if there is some action that reduces the cultural distance. This is very important, because there is a whole branch of research in development economics that takes cultural heterogeneity as exogenous, and then makes explicit or implicit policy recommendations based on these exogenous distances. For example, some take language differences as a proxy for cultural distance between homogeneous groups. Although the mother tongue of someone is of course exogenous to the individual, the impact of this initial language trait on cultural distance is largely endogenous. That is, there is no necessity in language initial distances implying cultural distances. People can learn other languages, the language of the neighbours for example, or they can all learn some lingua franca that helps reduce cultural distance. Or translators can be used and do business based on the fact that language diversity has never been an impediment to trade and collective action. Of course, there will always be entrepreneurs of hate that benefit form exacerbating cultural conflicts and divisions. These cleavages are instrumental in preventing majorities from aggregating in social or economic dimensions such as income and wealth. The nationalistic right has always known this very well, and the internationalist left has since Jean Jaurès struggled to fight them successfully.

Separability arguments

Great conference yesterday and today at the CMPO in Bristol, about  (broadly) "The Impact of Institutions and Regulation on Public Services." I presented a preliminary paper on "Behavioural Economics and Institutional Architecture". But the best has been, in my view, the keynote lecture by Maitreesh Ghatak from the London School of Economics. Ghatak has given an overview about the economic role of intrinsically motivated agents and organizations. He has done that in the context of the history of economic thought since Adam Smith. Smith is famous for his invisible hand statement, which is associated to the idea that economists and policy makers should let individuals pursue their individualistic material interest in most cases. Smith also acknowledged that real individuals have other motivations, but for most of the history of economic ideas since then, agents motivated by things other than material self-interest have been basically neglected. But this has been changing in the recent past. The idea that economists should focus on the pursuit of material self-interest is a consequence of a number of separation arguments that were made. Markets should allocate private goods and, separately, governments should allocate public goods and deal with redistribution. Firms should maximize profits independently (separately) from the consumption preferences of their shareholders, managers and workers. And extrinsic monetary incentives could be safely separated from intrinsic incentives that come from social norms, because they just reinforce them. But that is changing: more and more, it is recognized that governments are crucial to create and support markets, and that private organizations can also provide public goods. In some organizations, the preferences of owners cannot be separated from the objective of the firm (like in football clubs), and sometimes extrinsic incentives conflict with intrinsic ones. The relaxation of these separability arguments calls for much more interaction between public economics and organizational economics (a point I emphasize when I propose merging graduate programs in my university, but that no-one else seems to understand). In the tradition of Coase, the problems are similar. Contractibility problems in organizations and lack of property rights are related phenomena. And then the division between business economics and general economics, as many similar divisions, is artificial.

Nate Silver about the World Cup and Piketty

The star statistician Nate Silver predicts that Brazil will win the World Cup. He does not say that this is a certainty, but that the odds of Brazil winning, after applying a forecasting model of his invention, are higher than the odds that professional bettors are using in the market. The forecasting model will be updated as the World Cup progresses. We'll be able to test whether Nate Silver is as good forecasting soccer as he has been forecasting elections. He also has a recent post on the controversy between Piketty and the Financial Times. Although he does not go into the details of the controversy, he has interesting thoughts on the relationship between data and economic research. He argues that economic data is inherently difficult to compile, and that you do not need to wait until you have perfect data to report about some sort of research conclusions. He also says that peer review should not finish with publication, but should be a sort of indefinite process. He reveals that he is not a leftist, which perhaps prevents him from reaching the conclusion that you don't need a perfect dataset or a perfect theory to make bold and necessary policy proposals, like those made by Piketty.

The World Cup, the last refuge of the patriot (and the economist)

In less than a week we will be immersed in a new soccer world cup. Great excitement is coming. According to Branko Milanovic, the world cup is one of the big winners from globalization. Because now the best players in all countries play in the best leagues (but they return to play for their countries in the world cup), all national teams benefit from increased player mobility: the best players from any country compete at the highest level all year long and learn from the best directly. The result is more uncertainty in competitions between national teams, as opposed to much more concentration of talent in team competitions. If you look at the most recent editions of the world cup, it is true that from the round of sixteen to the final, most games finish with a very narrow score, in many cases ending with extra time or with a penalty shoot-out. The last final was decided at the extra time in 2010 and in the 2006 edition Italy won in a penalty shoot-out. That is why it is very difficult to predict who will be the winner. Brazil has the home field advantage, and Spain has enormous talent. True, they are older now, but there are more players now that play in non-Spanish leagues; that is, Spanish players are more open than ever to the forces of globalization: economists should like this. And there are many other teams that can be a surprise winner. Besides sports, at the world cup we will see flags and painted faces, people feeling identified with national symbols that have increasingly little meaning outside the football pitch. Someone said that patriotism is the last refuge of the scoundrel, and the world cup is one of the last refuges of the patriot’s gregariousness. It is also one of the last refuges of the economists, who find their theories of increasingly little application out of the pitch, but who spend an increasing amount of time and resources (myself included) thinking about the beatiful game. Look at today’s front page in The Economist or at the recent report by Goldman Sachs. Our excuse is that many important issues, such as corruption, rationality, team incentives and many others, have a very transparent laboratory in the soccer industry (in and out of the pitch).

Progressive economists strongly defend Piketty from criticism

A few days ago the Financial Times devoted most of its front page to criticizing a few empirical aspects of chapter 10 of Piketty’s book, “Capital in the XXI century”. This in itself is a sign of the importance of the book. Although the criticisms were in perspective minor and did not question the core of Piketty’s argument, they were sold as questioning the general message of increasing inequalities. Piketty himself has provided a timely and convincing response, and Paul Krugman among others have supported the French author’s claims here and here. A good thing from this empirical debate is that Piketty is absolutely transparent and allows everybody to share his data.

Others have more interestingly pointed out some weaknesses at Piketty’s theoretical arguments. For example, Debraj Ray has argued if I understand well that the inequalty r>g (the rate of capital gains being larger than the rate of economic growth) does not necessarily imply increasing wealth inequality. Milanovic has replied to Raj that it certainly does in a world (the world we’re in) where capitalists are the rich. In the same article Raj makes interesting points about economic growth and structural change creating non-linearities in the evolution of inequality, which Milanovic accepts, and which give a richer perspective on the issue.

Nobody seriously disputes that global wealth inequality is very high and is in an increasing trajectory. This phenomenon coexists with globalization and democracy, and it is the combination of the three (high wealth inequality, globalization and democracy) that must be dealt with. The empirical and theoretical criticisms of Piketty that we have seen so far do nothing to contradict the argument that these levels of inequality in a globalized world are incompatible with a well functioning democracy. And do nothing to contradict the argument that policy prescripctions must go beyond the nation-state, in the form of international  (initially European, ideally global) progressive capital taxation. These policies will only prevail if accompanied by institutional changes in a federalist direction. Although the defence of progressive economists such as Krugman or Milanovic has been very convincing, they do not put enough emphasis on the transnational, post-sovereignist dimension of the policy response to inequalities. The debate should go on.

More Canadian lessons

In the last few days, professor Jean Leclair, a legal scholar from the University of Montreal has been in Barcelona to talk about federalism. Jean Leclair belongs to the scientific committee of "The Federal Idea," a think tank in Quebec (Canada) that is worth imitating. This Canadian province has been through a controversy between secessionism and federalism for a long time, from which federalism has emerged as the winner (overall majority in the last provincial election), but which has left many scars in society, which have not been completely healed. That is why it is very important to learn Canadian lessons. Canada is one of the most successful decentralized and diverse democracies in the world, but still today secessionists in Quebec keep saying that it is a failed state. That is one of the reasons why "The Federal Idea" was created in 2009, because in spite of the failure of secessionists to create a new nation state, after two referenda (in 1980 and 1995) and decades of controversy, the idea of federalism was still unpopular in many sectors of society in Quebec. The intellectuals and academics behind this think tank reached the conclusions that federalism is worth mobilizing for, that it will not necessarily survive by inertia in front of powerful feelings and emotions (which are easy to manipulate by so many opportunists).

Jean Leclair explained that federalism should be defended as a moral issue, as a defence of the principle that what matters is the individual and its rights, and how these rights are preserved in social life in a diverse world. Identities are not homogeneous, even each of us has a diversity of identities, and it is immoral to make us choose among these identities.

The main problem of federalism is that nobody wants to die for compromise, whereas there are always people willing to sacrifice their lives for a homeland or a nation. But compromise is necessary and desirable, in order to organize societies that are characterized by diversity (that is, all of them).

Making the EU and the euro irreversible

The victory of the UKIP in Britain and the FN in France is scary. These are extreme right xenophobic parties, no matter how they disguise it. They won the election in their countries to choose the representatives to the European Parliament, though not by an overall majority. In terms of policy, what matters is the global composition of this Parliament. To this extent, these two parties are not in a position to even condition the current EU policies. They cannot even influence in the short run the EU policies of their countries, because they have not a majority in their parliaments and they are not in government. The UKIP has as political objective to enter the British Parliament in the general election next year, not to dominate it. The French FN will hardly win a Presidential election with two rounds, although they might win an election to the national Assembly at some point. But the biggest danger is that these parties exert a strong pressure on the mainstream parties, in the UK to abandon the EU and in France to abandon the euro and to force protectionist policies that undermine the common market (which is a good thing, and we should say it). The reaction to this threat by the majority of Europeans who want a federal, united and democratic Union must be to cooperate with the civilized forces in these two countries to make the EU (with the UK) and the euro (with France) both politically and economically irreversible. This means to complement the common market with social policies and coordinated growth strategies that make it acceptable. Europe has the opportunity to leave behind centuries of political fragmentation and violence. Actually we are already doing it, with large economic and social dividends, despite the mistakes in managing the crisis. It is these mistakes that must be addressed, and make progress to a better, more popularly appealing Union. The Roman Empire lasted for 1000 years, we are just starting to build a new political organization.