Sunday, January 22, 2017

Releasing Value (with Piet)

Piet Viljoen and I met via Twitter through a shared interest in art, investment and South Africa. First contact was extended from digital to written with a little book. 'Learning from George' is a beautifully written envelope sized book by Adrian Hornsby. Short enough to have heard the writer read the whole thing in 15 minutes. That letter was followed by a coffee in Cape Town and a breakfast in Langa, that led to Piet signing up for the 2017 Unogwaja Team. The focus of Unogwaja is about searching for, finding and celebrating the light that fires people up. Seeing value. This is something both Piet and I have a professional interest in, in a different context. I had a chat to him to see if there were dots we could connect.


Trev:
Hayek argued that value is too subjective to determine what the 'right price' is for something. A lot of people get very frustrated that their salaries don't reflect the value they are adding. The horrible truth is that isn't what salaries do. They just reflect how much will keep someone in the job. Hayek's answer was that we should create frameworks that are liberal enough to permit creativity, stable enough to reward creativity and constraining enough to steer creativity to wealth creation rather than wealth capture. Basically, the answer to what something is worth is 'we don't know', but if we focus on trades (i.e. relationships) where both people are happy with the exchange, things will bubble in the right direction. Value is personal. Price is a cold 'somewhere in between'. With businesses, investors know that they have to detach from where the money goes. Some businesses are too hard to value. It feels like the economics that work for investing capital simply don't work for paying people? Capitalism is good at creating wealth, but awful at distributing it.

Piet:
On the contrary, Adam Smith's “invisible hand” distributes economic gains efficiently – on average. Yes, when an enterprise is successful there are inevitable winners and losers. But the gains of the winners far outweigh the losses of the losers. You need to reward the winners – that is how society progresses. No incentive, no progression. In specific instances, the distribution might not happen fairly. But the commonwealth is better off. I think one way of trying to understand this is through the difference between price and value. Price is the markets way of equating demand with supply. The price of an apple at the supermarket is low enough so that everyone who likes apples enough to pay that price can buy an apple. It is also high enough to encourage farmers to produce enough apples to satisfy the demand. But the value of an apple differs among individuals. I don’t particularly favour apples – for me the value of the apple is less than the price. You might love apples, and see the price as a bargain. Undervaluing the apple, so to speak. But, on average, everyone is satisfied. By disentangling price from value we can now begin to look at how the world works without the emotional baggage of what is fair at the individual level, and rather focus on what is fair on average.



Trev:
Smith's writing on the "invisible hand" is beautiful. It matches closely with the point Hayek is trying to make. Smith was arguing against the prevailing Mercantilism of the time which believed in Zero-Sum games and strong nation states. He was arguing for Free Trade. He was arguing for creating frameworks which allowed for trades people to focus on areas where they had strong knowledge of the communities where they worked. Hayek argued we should focus on how people coordinate in intricate and mutually considerate ways. We should focus on relationships. This releases the magic of the invisible hand to shift resources around as you say. The example you give of apples is true... if everyone can vote for apples. If there are people without any money or any form of generating money (not enough jobs), then they can't vote for apples. You may not favour apples because you have had your fill, or can afford something a little fancier. People will naturally change their diet as they can. Without money to vote, the price of apples (or bread) will be too low. On average, everyone isn't satisfied.

Piet:
You are 100% right - if (too many) people have no money the price of apples will be too low. People will vote for apples, but only for free apples. Free apples is a powerful concept. Those who desire power will use that concept to get the most votes.  Once in power, they will make apples free. While people are focused on enjoying their artificially free apples, the powerful will help themselves to the reserves of the system. Of course, because the price of apples is now too low - i.e. the value of apples is far higher than the price, too many will be consumed, and not enough will be produced. Free apples have a habit of ending up to be scarce. Misappropriated by both the poor and the powerful. Eventually, the system breaks down. To prevent this process from happening,  poor people have to be in the minority. 



Smiths invisible hand is dysfunctional in the presence of price manipulation. Price manipulation is welcomed by those with nothing to lose, and encouraged by those who wish for power. The powerful use price manipulation - “free” - to drive a wedge in between those who have and those who don’t have, and in so doing, entrench their power.  It would seem a simple solution would be to aspire to the equality Marx proposed. Where the communities that Hayek envisaged  placed an appropriate value on their relationships. Where the value of a product was equal to the value of the labour that went onto producing it. But human beings are not wired that way. Profit - or surplus value appropriation - is a strong incentive for us all. In practice we don’t want to be equal, however attractive that sounds in theory.

Trev:

A big part of how we value ourselves is in relativity. Someone living at the American Poverty Line is in the wealthiest 14% in the world. The median annual household income worldwide is about $10,000 (R140,000 or £7,500). The minimum wage in the US is $7.25 which is about R100 an hour. Many domestic workers in SA get paid R150-R250 a day. That doesn't leave much scope for voting for apples, and yes... if people are poor, they become far easier to manipulate. This goes back to the power of empowering people at the grassroots. Not giving them 'free apples', but giving them votes. I think the simplest solution is a 'Capitalist path to a Communist Utopia'... not equality of outcome, but equity of opportunity. I am in favour of a Universal Basic Income, that ensures that the market works because it ensures that the framework can't be manipulated. Enough is less than we think. We will still be incentivised by having more than enough. Our relative drivers will ensure that, but if people don't have a roof over their head, security, and the opportunity to participate in building those relationships and trades, we are also wired to rise up and get angry.



Piet:
Your concept of a universal basic income is superficially attractive, as it allows everyone to exercise a vote of some kind. And in so doing seems to enable the “invisible hand” Yet a society with such a structure in place would lack incentives for a large part of the population – the part that would otherwise have been worse off. In effect the price of their input into the economy would be artificially high. This effectively removes the creation of a surplus that would help create more business and more jobs, and yes, even better pay for some of the participants. I would argue that a better way to create “equality of opportunity” would be to use some of the surplus not to pay a universal income, but to spend it on (targeted) free education, free heathcare and possible even free housing. As long as these free items are of high enough quality, they would act as strong enablers for those who want to create further surpluses in the economy. The downside of a universal basic income is that it potentially creates a class of freeloaders, while the risk of free enablers is that some outside of the target group try to benefit from the system. The second risk is covered by the potential upside.

Trev:
I haven't met someone who has been enabled in some way. I see the idea of Privilege as the sum of years of hereditary entitlement. The (targeted) free education, healthcare and housing provided by parents and our inherited network/community. We are comfortable with hereditary wealth but over time much of our wealth is social capital. The lottery of birth means the biggest drivers of your success are where you are born, and who your parents are. That isn't meritocracy. Unravelling that through messing with private property is messy, but a UBI provides the opportunity for a dividend on our common wealth. If it is true that money earned by others is a negative, then we shouldn't provide for our children and should bury all the wealth we create in our tombs. Instead of acting as custodians and handing things over better than we got them. Societal compound interest. Since a UBI covers just the 'Basics' and doesn't stop the standard capitalist incentives from working, people will still be able to participate in the normal way. They will just be driven more by the carrot of higher desires like self actualisation, and less by the stick drivers of hunger, fear and cold. Centralising the decision in state provision of welfare adds an expensive layer of bureaucracy and pushes the decisions away from the mechanics that make the Invisible Hand work. Neither Smith nor Hayek loved 'big plans'.

Piet:
As far as big plans equate to big government, I would fall in the Smith/Hayek camp as well, mainly because big government tends also to be a corrupt government. But it is not certain that instituting targeted enablers would lead to big government. But it would need to be a well thought through process – otherwise bureaucracy will take over. Just as a UBI system would need to thought through properly, as a tax and spend type environment generally leads to more government over time. I don’t think that there is one neat and tidy solution that can tick all boxes. As far as systems go, I believe the one that provides the best incentives will work. I believe Munger said (or possibly paraphrased someone else): if you want to persuade someone, it is better to appeal to incentives than to reason. Targeted enablers are incentives based system, whereas a UBI is a reason based system, which assumes everyone is rational and acts accordingly.

I think the fatal flaw lies in your departure point - that the lottery of birth somehow needs to be corrected.  Poverty isn’t distributed along a normal curve, i.e. there are more people below the average income than there are wealthy above. Politicians know this, so anything that promises to redistribute plays very well at a political level. It also leads to more, not less inequality. The ratio of the wealth of the richest Zimbabwean or Venezuelan to the average is much higher that in the USA or Switzerland. This leads to far too much attention and effort being spent on redistribution than on education and health, which will make more of a difference to the broad population – and equality - over time.

Trev:
The beauty of a free market is the ability to carry information organically. The last 100 years since the first world war was a battle of various ideologies, but one of them was the idea of Scientific Management. That you can reduce things to numbers, and centralise decisions amongst a bunch of experts. The problem is that you can find Nobel prize winning experts on both sides of arguments. The problem is any power you give to the President you love will be power the next President has. We like democracy when we like the government. We like technocracy when we think the mob has lost its mind. Targeted enablers require a target. A target decided on by central decisions from the top. The great information bubbles up from the bottom.

When our side wins

A UBI would be the fire that bubbles understanding up from the front lines. Organisations like GiveDirectly (recommended by GiveWell) have shown how efficient small, regular, dependable, cash injections are at providing that golden incentive. It removes the costs of means testing, while enabling people to look up from hand to mouth survival. To think of the future. The same incentives that keep people looking for better or higher paying jobs remain. In the same way as breaking monopolies improves competition, breaking monopolies on poverty would do the same. An unconditional, universal income is far harder to manipulate by politicians. It can be run independently and simply. Targets enablers on the other hand are the bread and butter of corruption.


Piet:
To grow an economy, you need/want individuals to take risks. The reason most people are risk averse, is that they need to make sure they can pay for their kids schooling, that they can pay for any health issues, and make sure they have a roof over their head. My view is that if you can provide for these things, a huge wave of risk taking and value creation can take place. I agree, that there is a risk that the frictional costs imposed by human interference can be high - in this system, and in any other redistributive system. But in an age where AI is coming into its own, the decisions of who what and where can be implemented by incorruptible machines. Having said all that, your exposition of UBI makes good sense. The main problem I see is getting from here to there. Finally free market systems, with all their attendant faults,  have proved - in practice - to be far superior to socialist or redistributive systems in increasing the median wealth in the system over time.

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