Opinion

Edward Hadas

Morality and monetary policy

Edward Hadas
Mar 6, 2013 13:22 UTC

Monetary policy these days is complicated, ineffective, and quite possibly immoral. The complexity is inevitable; there is no simple way to ensure that the supply of money and credit is appropriate in a large modern economy. The ineffectiveness is evident: central bankers let that supply grow too fast before the 2008 financial crisis, and have unable to return monetary conditions to normal since then.

The moral lapses may be subtle, but I believe the lack of attention to the common good in the management of interest rates and the monetary system causes three serious problems.

 1) Dangerous freedom

Imagine a world in which anyone can use anything as a currency. This perfect monetary freedom would be a disaster. With strangers, I would only be willing to deal in gold, or some other scarce substance that could be carefully measured, because I would have no way of evaluating verbal or written promises to deal fairly. I might be able to trust members of my social group in economic transactions, but only because our monetary freedom was balanced by strong social constraints; they would be punished if they tried to cheat me.

The example is extreme, but it brings out the dangers that come with all monetary freedom. Money is always a token of value, but the value of the token is hard to determine. Invincible ignorance is one issue. No individual can hope to know how much a dollar, or an ounce of gold, should be able to buy at any time, and even monetary authorities struggle to keep track of the supply of both money and the things that money can buy.

But greed is even more dangerous than ignorance, and the freedom to create money – as banks do by lending out deposits, or as anyone can do by issuing promissory notes – is an invitation to greed. The borrower or the issuer is constantly tempted to acquire more spending power than justice would allow.

Salvation through work

Edward Hadas
Feb 27, 2013 14:58 UTC

“It has been computed by some political arithmetician that if every man and woman would work for four hours each day on something useful, that labour would produce sufficient to procure all the necessaries and comforts of life … and the rest of the 24 hours might be leisure and happiness.”

When Benjamin Franklin wrote that in 1790, the American thinker was a few centuries ahead of his time. But the modern economy is so productive that everyone would have far more “comforts” than were available in Franklin’s day, even if the standard working week were shrunk from 40 to 20 hours. The four-hour day, though, isn’t on the horizon. Benjamin Kline Hunnicutt, a professor of Leisure Studies at the University of Iowa, explains why not in a fascinating new book, “Free Time, The Forgotten American Dream”.

For more than a century, labour activists continually demanded – and were granted – shorter working hours. By the 1930s, futurologists were sure that the trend would continue. Workers wanted more leisure time, and, thanks to ever more efficient machines, they could have it, while still enjoying steady improvements in the material standard of living.

The knots of development

Edward Hadas
Feb 6, 2013 15:35 UTC

Why are so many poor countries stuck with huge economic problems? Why, for example, are there so many unemployed young people in Egypt – 41 percent of 19-24 year-olds? The poor state of British housing can help answer these questions. 

By developing world standards, the British housing system works quite well. In Egypt, it takes 77 bureaucratic procedures in 31 offices, and between six and 14 years, to get legal approval for construction of a new house, according to the 2012 doctoral dissertation of Abdel Hamid El Kafrawy of the University of Glasgow. The result: housing is in chronically short supply and 65 percent of the population live in unregistered and untaxed buildings. 

For a rich country, though, the UK does remarkably badly. Construction has been inadequate, at half the modest target rate set by the government in 2007. The relatively few new houses and apartments which are built are mostly relatively small – new American houses have almost three times as much floor space and new French houses have 45 percent more, according to a 2009 study by the British Commission for Architecture and the Built Environment. And rental and mortgage payments for these under-sized living quarters take a higher share of income in the UK than almost other developed country. 

Taxes and human nature

Edward Hadas
Jan 30, 2013 14:54 UTC

The tax system could well be the most idiotic, hypocritical and unnecessarily complicated part of modern industrial economies. The system needs to be rebuilt.

In developed economies, as governments have expanded, taxes have increasingly been used as a tool of economic and social policy. The rich are taxed more than the poor for the sake of a vision of social justice: from each according his ability. Depending on the jurisdiction, some good cause or another is favoured: house ownership, marriage, children, charitable contributions, savings. For companies, an almost endless series of exemptions, deductions and definitions are supposed to encourage investment, employment or some other desirable end.

Each tax wrinkle produces its own complex set of rules. Taxpayers’ continuous efforts to minimise payments lead to yet more rules. Each tax jurisdiction has its own system, a diversity which both increases the intricacies of international business and creates opportunities for individuals and companies to place income where it is less highly taxed.

The demographic effect

Edward Hadas
Jan 23, 2013 15:26 UTC

The populations of many countries are declining in a time of peace and prosperity. That unprecedented and basic change in society must indicate something, but what? The experience of Japan, where the trend is most advanced, provides some hints.

Until about 1950, Japan followed the once universal pattern of population increasing along with incomes. Then the birth rate began to decline. By around 1970, the birth dearth began; from then on there have been too few babies to keep the population constant. For the past two decades, roughly 140 children have been born to every 100 women. At that rate, each generation is about a third smaller than the last, although lengthening life expectancies kept the total Japanese population from falling until 2011.

One effect of this demographic transition is undeniable. It has sharply reduced the size of the dynamic core of the economy: the people who are starting their adult life. They bring ambition, flexibility and a strong desire for new housing and amenities. In Japan, this group, the people between 20 and 25 years old, is a quarter smaller now than in 2000, and is set to decline by another 15 percent over the next two decades. Demographic factors are not the only reason Japan’s GDP growth has been slow – 0.6 percent annual rate over the last decade – but they have played a major role.

The then and now of pensions

Edward Hadas
Jan 16, 2013 14:50 UTC

What is the right size for pensions? That question can be approached in two ways: “then” and “now”. Pensions, and other economic arrangements to support elderly people, may be considered repayments for what they did back then, when they were young. Alternatively, these payments may be considered as a share of output right now. In rich countries, the two approaches are in conflict. The “then” logic, which is based on promises made long ago, supports higher pension payments than the “now” logic, which is mindful of rapidly ageing populations. Politicians struggle to find acceptable compromises between the two approaches.

Until 60 or 70 years ago, politicians did not have to worry much because governments played a minimal role in supporting the few people who lived long enough to be unable to earn their keep. The elderly mostly relied on their own families for support. Moralists provided a “then” justification for this obligation: children had a duty to the parents who gave life, the young owed the old more than could ever be repaid for the provision of nurture and wisdom.

Philosophers and religious teachers often claimed that the duty of children to parents was as natural as that of parents to their children. However, many people must have remained unpersuaded. Otherwise, the injunction would not have been repeated so often in such solemn tones.

What Islamic finance can offer

Edward Hadas
Jan 9, 2013 13:53 UTC

The Islamic approach to finance was once the most advanced in the world. The period of pre-eminence ended six or seven centuries ago, but the religion’s fundamental insights into the field could help form a financial system suitable for the 21st century.

From the beginning, Muslim teaching took a religious view of commercial relations and responsibilities. There are a few injunctions in the Koran and far more in the teachings traditionally attributed to Mohammad. I am not an expert, but the basic ideas seem clear enough: merchants should be fair, risks should be moderate and understood, and God condemns all rapacious financial practices.

During the first centuries of Islam, Muslims became great traders, providing an economic bridge between Asia and Europe. Europeans adopted and then further developed the Islamic techniques of providing credit and of sharing responsibilities, risks and rewards. Christian thinkers continued the Islamic debate over what was fair and just, and church authorities copied the Islamic teachers’ practices, ruling on the legitimacy of transactions, and exhorting merchants and investors to restrain their greed.

Greed, justice and deception

Edward Hadas
Dec 19, 2012 12:15 UTC

Greed contributes to all the economic and financial woes of prosperous societies. The United States and other rich countries produce much more than is needed to support all of their people in comfort, so if desires were all truly modest, there would be few problems. Greed encourages people to decide that their own share is too small. Greed influences the popular desire for GDP growth (more, faster), financial gains (higher house prices as a human right) and total economic security (guaranteed pension, come what may). Voters’ greed encourages governments to spend more and tax less.

During the boom years, politicians and economists consistently underestimated greed’s disruptive power. While few endorsed the extremist view that greed is actually good, even fewer acted as if it were dangerous. The rhetoric changed during the crisis. It has become fashionable to add “greedy” to the description of any unpopular group – bankers, highly paid executives, rich people in general, welfare cheats.

In theory, the entry of greed into the public discourse ought to be helpful. If those subject to immoderate desire could be identified with certainty, then society might take up arms against them. While we might never win the battle, we could at least hope to shame and restrain the malefactors.

Economics for Christmas

Edward Hadas
Dec 5, 2012 12:51 UTC

The Christmas season is a particularly good time to think about the fundamental weaknesses of conventional economic theory. Frenzied shopping for gifts cannot easily be reconciled with the standard model’s dour “economic man”, a creature who “who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial”, in the classic definition of John Stuart Mill. The joyful Christmas season is also a good period to offer praise for a line of economic thinking which draws on a much more flattering view of human nature.

Historically, this approach has been closely associated with the Catholic Church, but “Catholic Economics” is a misleading title, since the thinking is not denominational – for example, Justin Welby, the incoming leader of the Church of England, is a fan. It is not really religious; many atheists would reject the conventional assumption that people always and everywhere calculate their selfish advantage. In honour of the season, I will use “Christmas economics” to describe this anti-Scrooge analysis, which is based on what might be called the Christmas economic person. Unlike the simple and narrowly rational economic man, this is a complicated creature, largely motivated by the desire to be and to do good, but also prone to greed and foolishness. That combination is illogical, but it is realistic; people always show a frustrating mix of virtue and vice.

A comparison shows the advantages of Christmas economics over the standard approach. Consider the difference between the conventional idea of a market and “giving in order to acquire”, a phrase used by Pope Benedict XVI in his Caritas in Veritate. Note that the economists’ market is not a physical place to shop, like a supermarket. It is a conceptual place where purely self-interested economic men trade with one another until they are all as satisfied as they possibly can be, a state known as equilibrium.

Candidates as consumer products

Edward Hadas
Nov 21, 2012 15:06 UTC

Barack Obama did not win the election because more Americans thought he would be a better president than Mitt Romney. More Americans voted for the incumbent than for the challenger, but it is Obama’s superior campaign organisation, and not his personal appeal, that deserves most of the credit. In particular, his product managers were better than Romney’s at using the technique of “data mining”.

The technique, pioneered by supermarkets, is conceptually simple: measure everything and tweak as necessary. In practice, it is a delicate affair. Suppose a popular soft drink has 4 percent higher sales when it is stocked next to a salty snack than when healthier raisins are its shelf-neighbour. Should shelf locations be swapped? There are many variables: the effect on sales of salty snacks and raisins, the profit margins of the different products, and customers’ sensitivity to any price changes. Most of the effects are tiny, but the study of millions of data, including a large number of computer simulations, can increase a retailer’s revenue and profit by a few percent.

In elections, data mining can bring votes to candidates and can increase the supply of contributions which pay for vote-gaining advertising. The work is detailed. Time magazine reports that the Obama campaign carefully tested how much more likely undecided voters in each close state were to yield to the blandishments of local rather than to out-of-state volunteers. The superiority in detailed computer work – “We ran the election 66,000 times every night”, as one expert explained to Time – probably gave Obama a few more percentage points of votes than Romney. It was the margin of victory.

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