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Economy

When reputation misleads

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Rebecca Long Bailey inadvertently posed a good question yesterday, when she tweeted:

Rishi Sunak the new Chancellor is a former Goldman Sachs banker who has backed anti trade union regulations; tax cuts for big business; opposing tax avoidance clampdown; cutting tax for wealthiest. The mask is slipping already, this isn’t a different kind of Tory government.

This raises the same question that is being begged by the Labour leadership contest: to what extent does a person’s past behaviour and beliefs predict their future behaviour?

We have countless examples of it not doing so. All of you will have worked with somebody who arrived at your firm with a glittering CV but who turned out to be a dunderhead, and conversely with somebody of no great reputation who turned out to be excellent. Indeed, this is pretty much the history of top-flight football managers.

Similarly, in politics, people have defied their reputations. Martin McGuinness had a history of terrorism, but he became essential to the peace process. The racist Lyndon Johnson did more for civil rights than JFK who had a liberal reputation. Theresa May arrived at Number 10 carrying hopes she would fight “burning injustices”, just as Gordon Brown did to hopes he would be a Viking warrior, whilst Thatcher was initially an under-estimated housewife. Francois Mitterrand became president amid socialist hopes, but was soon forced to make the austerity turn. And few people in 1997 predicted that Blair would become a reckless military adventurer.

And this is not to mention the many “future Prime Ministers” who shrank into obscurity – who today remembers John Moore? – or the ministers hoping to make reforms only to “go native” under pressure from the Sir Humphrys.

So, why might a man’s past be an unreliable guide to his future?

Sometimes, it’s because he can use his reputation to do things that others can’t. McGuinness’s links to the IRA allowed him to persuade men to put down their arms, just as Richard Nixon’s reputation as a cold warrior gave him the political capital to seek détente with Russia and China.

A second reason lies in William Goldman’s eternal truth: nobody knows anything. What we know of somebody – especially if only by CV or reputation – is only a partial guide to the reality and their future. As investors in Woodford’s equity income fund know, even a good long track record is an imperfect indicator of the future.

Thirdly, and perhaps most importantly, we all face constraints and incentives that break the link between character and future conduct. As Marx said:

Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past. 

But this is not an insight confined to Marxists. Quite the opposite. Warren Buffett made the same point when he said:

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains.

And Charles Prince, former CEO of Citi, said the same thing when he famously said: “as long as the music is playing, you’ve got to get up and dance.” If incentives are strong enough, one’s past choices don’t predict one’s future ones.

Herein lies the reason why Ms Long Bailey might be wrong. Even if Mr Sunak is a head-banging inegalitarian, incentives and social structures constrain how far he can implement his desires. Acting upon his past beliefs is no way to retain the support of people who have only “lent” their votes to the Tories.

Now, I don’t say this with great certainty: I prefer to leave futurology to people who are paid enough to compensate them for making fools of themselves. I do so, however to flag up a danger for Labour – that they might be mischaracterising the Tories by painting them as simple-minded Thatcherites.

Indeed, Ms Long Bailey might be making a very anti-Marxist error – a version of the fundamental attribution error, of attributing too much to character and underplaying the importance of social structure.



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Economy

The NO BID Evaporation of Wealth

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COMMENT #1: Marty,

Good morning. I knew you were going to get blamed for having too much “influence”. And then after emailing you about it, I see the comment in the Fake News blog this morning, just too funny!

Can’t these people just try to learn why they were wrong? I always try to learn from my experiences and I’m nobody. I’ve learned more after college through trading experiences and attending your conferences than I ever did in college. They just fed me a bunch of BS that I had to repeat for a good grade, which is why I almost dropped out. I probably had two good professors total in Economics and Finance, they both had real-world experience, go figure!

There will always be haters.

Best,
EM

COMMENT #2: Great article today

One question I can’t answer is when capital flees(whether it’s from virus or Bernie). It’s not flowing back towards Europe or Asia. So is It (mostly)all flowing into US Bond market? Which we know is the worst spot to be as investors flee the public sector.

Two instead of Bernie being the reason for the very large drop in the Dow (and I think he’s a large problem for equity markets). Could It be the Coronavirus will substantially reduce economies all over the world and therefore equity valuations and earnings as well = equity sell-off and into cash?

Regards,

DJCL

ANSWER: For now, the US debt market is the best in the world and really the only viable one. The comments about capital fleeing just illustrate the fake news. If capital was fleeing the USA, then you would expect to see the currencies move with such a capital flow. That has not been the case. They just make up excuses for they must always apply some reason to every market move.

When I was called into the 1987 Brady Commission, they too began with the proposition that some mythical person sold the market and they were going to hang them. I explained that every investigation began with that same directive and nobody has ever been found. I asked if they even understood how markets functioned. They said simplistically that you borrow stock from one person and sell it to another. I asked, “Then how does a short ever outnumber the longs?” I had to explain that a crash takes place when people try to sell and there is NO BID. They never understood that. Value evaporates, it does not flee dollar for dollar.

These people will look at Buffet or Bill Gates and have no idea that their “wealth” is based upon share value — not cash.  Bernie stands up and says he will go after the 1% and fails to understand that if he confiscated all their wealth, assuming it was cash, he would not even balance the budget for one year. It would make no difference. But people like Bernie love to point the finger at the rich rather than government because they cannot admit this is the worst management debacle in recorded history.



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Economy

Is it time for Hannah Mather Crocker?

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Sometimes women’s contributions to the political and economic life of past centuries are overlooked, not because they were minor, but simply because they were seen as stories of daily ‘domestic’ life and therefore inherently less significant than accounts of war, conquest, and statecraft. Since the 1960s, there has been a movement within the discipline of history to correct these omissions. Historians like Gerda Lerner, Anna Firor Scott, Deborah Gray White, and so many more began the work of filling in forgotten and otherwise neglected aspects of history, often in the newly emerging subfields of women’s history and black history.

However, despite all the excellent work that has been done over the past sixty years, there are still gaps in our knowledge. The evidence that I’d like to offer on that point today is the life and work of Hannah Mather Crocker. Despite being a leading political theorist in the post-Revolutionary era and the first woman to write a book-length discourse on women’s rights, Observations on the Real Rights of Women (1818), Crocker was overlooked for most of the 20th century. A 2006 APSR article—one of only a handful of academic publications to deal seriously with Crocker’s work—suggests that Crocker may have been set aside in part because Elizabeth Cady Stanton, Susan B. Anthony, and Matilda Gage were critical of her arguments in their first-moving and highly influential 1886 History of Woman Suffrage.[1] This goes to show the importance of going beyond standard ‘textbook’ accounts of intellectual history. Every contribution is a filter, and what was filtered out when answering yesterday’s questions may be exactly what we want to understand today.

In defense of Stanton and friends, Crocker’s ambitions do seem pretty modest compared to those of the later 19th century feminists. She prefaces Observations on the Real Rights of Women as a “little work” that was “not written with a design of promoting any altercation or dispute respecting inferiority or superiority, of the sexes” (p. 2; all page numbers below refer to this same book). She also often seems to uphold traditional gender roles, conceding to her contemporary readers that the actions of “females trespassing on masculine ground” are both “morally incorrect, and physically improper.” (p. 3). Yet! She writes to us from 1818 in defense of an idea that remains in dispute 200 years later: that despite any and all biological differences, woman are every bit as capable of intelligence and discernment as their male counterparts and deserve the same rights to make their own decisions. Despite the biological reality of being a woman, with all its “duties peculiar”—the most singular of these being childbirth and childcare–“the wise Author of nature has endowed the female mind with equal powers and faculties, and given them the same right of judging and acting for themselves, as he gave to the male sex” (p. 2)

Perhaps the most consistent argument throughout is this argument about how much is lost when women do not or are not able to cultivate their intellectual capabilities. Like other early thinkers on questions of women’s rights, including Mary Wollstonecraft and John Stuart Mill, this emphasis leads focuses on barriers to women’s education as particularly harmful: “it has been fairly proved, even to demonstration, that the female powers and faculties are equal with the men; but their mode of education often checks their progress in learning” (p. 26). Part of the harm Crocker sees in limiting women’s education is that any ignorance will be transmitted to the little “olive branches around her table.” This prioritization of women’s role as mothers is a tough one to grapple with. In emphasizing maternal responsibility, Crocker is well in line with her times. Yet this idea that women’s most appropriate role is as the caretaker will later on come to be twisted for use in political arguments about whether or not women should be allowed particular rights or admitted into particular spaces. This may be another reason why her contributions have been discounted by later generations of feminists.

Overall, Crocker’s treatise on women’s rights may be much more important than it’s been given credit for. She makes strong arguments about women’s intellectual and moral equality. Further, she is offering these arguments during a period of time in American history that was arguably the most restrictive in terms of what women were considered capable of managing. My next post will share some ideas from Crocker that deal directly with women’s productive and managerial roles, particularly in civil society and household government.

 

 

[1] Botting, Eileen Hunt, and Sarah L. Houser. 2006. “‘Drawing the Line of Equality’: Hannah Mather Crocker on Women’s Rights.” The American Political Science Review 100 (2): 265–78.

 

 


Jayme Lemke is a Senior Research Fellow and Associate Director of Academic and Student Programs at the Mercatus Center at George Mason University and a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics.

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Economy

The Entrepreneurial Advantages of Building Human Capital While Young

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While you were young, did you gain knowledge and learn skills that gave you the human capital necessary to become an entrepreneur or a small business owner? Human capital consists of the knowledge and habits developed as a youngster that form skillsets that later in life can be used in the business world. These skills are developed either through the family unit, culture, or regional location and determine the success or failure of entrepreneurial pursuits and performance. In the young, the development of skills and knowledge are applicable to future ventures in entrepreneurship or small business ownership.

Everything you learned from family dinner conversations and your culture served to build your human capital. Across the globe, the people of various regions cultivate certain skills that enable individuals to consider entrepreneurship as a viable choice of work. Some of you never had the social or family setting that gave you entrepreneurial insights. Some people get this while they are young, and some do not. Acquiring human capital at a certain age bolsters the chance of entering entrepreneurship or small business ownership. If human capital or business insights are not embedded culturally or acquired at a certain point, some individuals will never consider entrepreneurship or be successful at it.

We cannot all become successful entrepreneurs, especially if only a few of us come from a cultural background that rewards an ethic of hard work and related values versus a cultural background in which achieving entrepreneurial success is never even thought of.1 What is valued in the family unit and what is rewarded or praised contributes to our future entrepreneurial skills. Ludwig von Mises noted, “the inequality of men, which is due to differences both in their inborn qualities and in the vicissitudes of their lives, manifests itself.”2 The region of the world in which one lives and the context of the acquired human capital skills are equally vital to having an entrepreneurial skillset.

We hear from many entrepreneurs, and those who are not entrepreneurs per se, that much of their education occurred around the family dinner table, or that they lived in a place where small business activity was plentiful.3 Human capital that is based on family, culture, and regional differences has consequential effects for many considering entrepreneurship.

Cultural factors are critical in developing entrepreneurship. Often these cultural factors are overshadowed by the technical aspects of operating a business—the seen versus the unseen. Parents and the elderly pass on their values to their children, values such as taking risks, being independent, challenging uncertainty, etc. Children who are rewarded or not rewarded will either be encouraged or discouraged to pursue entrepreneurial activities in the marketplace. If a child is never taught to be independent, how is he or she able to systemically think of and identify potential profit opportunities and bring opportunities to fruition?

Habits form over time, and many are culturally based. In some cultures, some children spend up to twelve hours a day playing videogames and entertaining themselves on social media. In other cultures, children are expected to work long hours helping mom and dad with their business or studying to earn the best grade. These youths may work at an uncle’s garage learning all about vehicles or attend college to gain business knowledge. In either situation, these youths are learning about private property, e-commerce, revenues, profit and loss, bookkeeping, and so on—gaining skillsets and knowledge in order to run a business of their own in the future.

Generally, whatever is cultivated in the family unit and culture will manifest and have consequences in the marketplace. Children who acquire a work ethic and values related to entrepreneurial success will have an advantage over their peers who have not had the same experience. The children who have not learned these things will have a much later start or never acquire the skills and the know-how needed to pursue entrepreneurship or small business ownership.

Not everyone has an equal opportunity to become an entrepreneur, as some must acquire a collection of basic skills, knowledge, and habits that may take decades to develop. Taking risks, working longer hours, and making critical decisions require a certain upbringing. Entrepreneurs are not created overnight but over time. However, ten years of working with mom, dad, or an uncle as a youth, gaining practical knowledge, surely provides advantages later in life.

We cannot disregard the location and region in which we lived during the time of our early human capital acquisition. Being located in one region of the earth versus another can surely impact our ability to develop a predisposition or entrepreneurial insights needed for entrepreneurial behavior. Perhaps we live in an area where several industries exist. Being surrounded by these industries allows us to either work for or start a business in a vein that is familiar to us.

As with any location or local market, our human capital can be stymied in a region or location where a product or service is not valued or not supported although it might be highly valued in another market (i.e., if one has to take their product knowledge to another region where the consumers have higher subjective valuations of their productive goods or services).

Unfortunately, the opportunity to attain the same human capital at the same time and place that leads to entrepreneurship is not equally available to everyone. Without the requisite human capital, one can only dream of becoming a successful entrepreneur or business owner. Families and family cultures vary among peoples across the globe, and so does the dissemination of knowledge at the family dinner table. We all come from backgrounds that either reward or punish certain behaviors that later transform into predispositions and values that underpin our ability to, at a minimum, think like and be an entrepreneur. Ludwig von Mises said that entrepreneurs “owe their position exclusively to the fact that they are a better fit for the performance of the functions incumbent upon them than other people are.”4 An interpretation of Mises on this point is that the skills and knowledge develop over time that enable entrepreneurs to uniquely perform the production of products and services for the consumer.

  • 1. See Thomas Sowell’s The Quest for Cosmic Justice. In the section titled “Freedom versus Equality,” he discusses equal performance and social barriers.
  • 2. See Ludwig von Mises’ Planning for Freedom.
  • 3. See Ryan McMaken’s article “Three Economics Lessons I Learned from My Dad.” For example, three lessons that he learned were: lower the cost of doing business, politicians drive up the cost, and the world is always changing.
  • 4. See Ludwig von Mises’s Human Action on the Entrepreneurial Function.



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