Piketty and Pension Fund Socialism

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Any attack on capitalism these days is a direct attack of the retirement savings of ordinary workers. We live in the age of  what Peter Drucker called pension fund socialism in 1976. As Drucker added in 1991:

The rise of pension funds as dominant owners and lenders represents one of the most startling power shifts in economic history.

The first modern pension fund was established in 1950 by General Motors.

Four decades later, pension funds control total assets of $2.5 trillion, divided about equally between common stocks and fixed-income securities. Demographics guarantee that these assets will grow aggressively for at least another ten years.

The majority of equity capital is owned by pension funds and other collective investment vehicles corralling the savings of ordinary people. Much of the rest of physical capital is owned by workers through home ownership.

In the age of human capital, 70-90% of all capital in the economy is human capital. The notion of unskilled workers labouring away with the capital supplied by the bosses is 19th century throwback.

The rentier rich has been long replaced by the working rich. They make their fortunes in their own life times – sometimes as business entrepreneurs, sometimes through rent-seeking.

It is also the age of specific human capital, with a proliferation of technologies and products. The rising specialisation of firms and their production inputs has forced firms to try harder to find those inputs that suit their needs best. Management has the task of finding the right inputs. The role and reward to managers has therefore risen.

When the rise in returns on investments in human capital is beneficial and desirable, and policies designed to deal with inequality must take account of its cause. Growth in education levels has been a significant source of rising wages, productivity, and living standards over the past century.

The initial impact of higher returns to human capital is wider inequality in earnings, but that impact becomes more muted and may be reversed over time as young people invest more in their human capital.

The rentier class has been replaced by the working rich. The evidence on the top 1% is most consistent with theories of superstars, skill biased technological change, greater scale and their interaction of these factors.

Individuals who are really good at making money can now apply their skills to larger amounts of capital and reach far larger audiences  and markets for their products and services. That favours CEOs, athletes, celebrities, corporate lawyers, successful entrepreneurs and other working rich Who have a skill  or talent that can be supplied at little cost on a much larger scale. Some have a special dark place in their hearts for people who earned their money through honest hard work.

What is Uber threatening?

medallions

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Friedman on middle-class welfare

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I loath bipartisanship

Firstly, the other side is wrong in their approach and often in their objectives. The voters finally put them on the opposition benches for the next 3, 6 or 9 years and that is where they belong: powerless and irrelevant and whose job it is to snipe.

Secondly, written constitutional arrangements dictate the proper extent of power sharing: two-houses of parliament elected differently, proportional and other methods of election, the length of terms, federalism, and parliamentary versus presidential executives.

Thirdly, knowledge grows through critical discussion, not by consensus and agreement

Fourthly, in a democracy, we resolve our differences by trying to persuade each other and voting at elections. The winners then form the government.

The role of equality in subsequently increasing the size of government

Sam Peltzman

Sam Peltzman argues that:

governments grow where groups which share a common interest in that growth and can perceive and articulate that interest become more numerous.

Growth in the size of governmental is driven by the evolving demands of voters. Peltzman maintains that:

the levelling of income differences across a large part of the population . . . has in fact been a major source of the growth of government in the developed world over the last fifty years [because this levelling created] a broadening of the political base that stood to gain from redistribution generally and thus provided a fertile source of political support for expansion of specific programs. At the same time, these groups became more able to perceive and articulate that interest . . this simultaneous growth of “ability” served to catalyse politically the spreading economic interest in redistribution

Growing income equality, which was a result of the Industrial Revolution and modern economic growth, caused the size of government to then grow. The reduction in inequality preceded the rise of the welfare state in the mid-20th century.

The merits of federalism

  • A divided government is a weak government.
  • One great feature of the federal system is that we can try different policies in different states and see what works and what doesn’t.
  • The laws of each state can more closely reflect local public opinion.
  • The will of the people is constantly tested and re-measured in a federal system: elections at one level or another every year contested on local and national issues.
  • People vote more often for different policy packages, rather than occasionally for a few up and down choices.
  • The will of the people is constantly tested and re-measured in a federal system: elections at one level or another every year contested on local and national issues.

After 15 years of Maggie Thatcher, good and hard, British Labor reconsidered devolution because a federal state slows the impassioned majority down.

Who do members of parliament represent?

Delegate - selected for perfect obedience

The theoretical literature on political representation focused on whether representatives should act as delegates or as trustees. James Madison articulated a delegate conception of representation. Representatives who are delegates simply follow the expressed preferences of their constituents.

The classical liberals of the 18th century were highly sceptical about the capability and willingness of politics and politicians to further the interests of the ordinary citizen, and thought the political direction of resource allocation retards rather than facilitates economic progress.

Governments were considered to be institutions to be protected from but made necessary by the elementary fact that all persons are not angels. Constitutions were a means to constrain collective authority. The problem of constitutional design was ensuring that government powers would be effectively limited.

  • Sovereignty was split among several levels of collective authority; federalism was designed to allow for a deconcentration or decentralization of coercive state power.
  • At each level of authority, separate branches of government were deliberately placed in continued tension, one with another.
  • The dominant legislative branch was further restricted by the constitutional establishment of two houses bodies, each of which was elected on a separate principle of representation.

These constitutions were designed and put in place by the classical liberals to check or constrain the power of the state over individuals. The motivating force was never one of making government work better or even of insuring that all interests were more fully represented.

Members of parliament as trustees are representatives who follow their own understanding of the best action to pursue in another view. As Edmund Burke wrote:

Parliament is not a congress of ambassadors from different and hostile interests; which interests each must maintain, as an agent and advocate, against other agents and advocates; but parliament is a deliberative assembly of one nation, with one interest, that of the whole; where, not local purposes, not local prejudices ought to guide, but the general good, resulting from the general reason of the whole.

You choose a member indeed; but when you have chosen him, he is not a member of Bristol, but he is a member of parliament. …

Our representative owes you, not his industry only, but his judgment; and he betrays instead of serving you if he sacrifices it to your opinion.

Burke does not seem to be a fan of federalism and vote trading to protect minorities. Madison liked conflict and tension as a constraint of power and the size of government.

Schumpeter disputed that democracy was a process by which the electorate identified the common good, and that politicians carried this out:

• The people’s ignorance and superficiality meant that they were manipulated by politicians who set the agenda.

• Democracy is the mechanism for competition between leaders.

• Although periodic votes legitimise governments and keep them accountable, the policy program is very much seen as their own and not that of the people, and the participatory role for individuals is usually severely limited.

Modern democracy is government subject to electoral checks. John Stuart Mill had sympathy for this view that parliaments are best suited to be places of public debate on the various opinions held by the population and to act as watchdogs of the professionals who create and administer laws and policy:

Their part is to indicate wants, to be an organ for popular demands, and a place of adverse discussion for all opinions relating to public matters, both great and small; and, along with this, to check by criticism, and eventually by withdrawing their support, those high public officers who really conduct the public business, or who appoint those by whom it is conducted

Representative democracy has the advantage of allowing the community to rely in its decision-making on the contributions of individuals with special qualifications of intelligence or character. Representative democracy makes a more effective use of resources within the citizenry to advance the common good.

P.T. Bauer on what Third World governments do

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Politics without romance

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Growing polarisation of American politics

Items in the Ideological Consistency Scale

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How Did the Prediction Markets Do?

Below is a map showing the results of the 2012 US presidental elections and the map of prediction market forecasts on October 1st.

Florida had not been called to Obama when the map was made.

via  Thinking on the Margin: How Did the Prediction Markets Do?.

the beauty of proportional voting is that even if they don’t vote for you, you’ll probably still get in.

HT: Kiwiblog

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Neoclassical economists think the economy is freestanding and ignore institutions!

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1991 was awarded to Ronald H. Coase:

for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy

The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2009 to

Elinor Ostrom “for her analysis of economic governance, especially the commons” and Oliver E. Williamson “for his analysis of economic governance, especially the boundaries of the firm”

The Royal Swedish Academy of Sciences has decided to award the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for 1993 jointly to Robert W. Fogel and Douglass C. North

for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change.

The Royal Swedish Academy of Sciences has decided to award the1986 Alfred Nobel Memorial Prize in Economic Sciences to Professor James McGill Buchanan for

his development of the contractual and constitutional bases for the theory of economic and political decision-making.

Democratic socialism is pointless

Democratic socialism is pointless because electoral power is fleeting: sooner or later, the left wing parties representing the socialist alternative lose power, and capitalism is resorted.

How can democratic socialism work without entertaining the certain prospects of the right-wing parties winning office in 6,9, 12 years time and undoing everything?

Under pension fund socialism, with the majority of the share market owned by superannuation funds, any call for wide-spread nationalisations is political suicide. The same for re-nationalisation later when the left-parties get another turn in office.

The rotation of power is common in democracies, and the worst rise to the top. So it is wise to design constitutional safeguards to minimise the damage done when those crazies to the right or left of you get their chance in office, as they will.

Socialists must choose between supporting democracy and supporting socialism. The only way to stop the return for capitalism would be to undermine elections and the rule of law and ignore constitutional rights.

Unfettered power loses its shine when it must be shared with your political opponents at least once a decade.

Too many policies and ideas of the Left assumed that they are the face of the future, rather than just another political party that will hold power as often as not.

As James Buchanan pointed out in 1954, the great strength of democracies is majorities are temporary so the exploitation by the majority of the minority is never permanent. If electoral majorities are other than temporary, the minority would have no choice but to fight.

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