May 5, 2012
Aggregates and Averages, Individuality and InterventionistsBy Stephen Mauzy
John Cowperthwaite, financial secretary of Hong Kong from 1961 to 1971, was the rare bureaucrat: a free-market noninterventionist inured against the hubris of grand economic scheming.
Cowperthwaite ventured into Hong Kong in 1941, joining the colonial administrative service after studying economics at Cambridge. Returning to Hong Kong, in 1945, Cowperthwaite was directed to determine ways the British government could boost Hong Kong's postwar economy.
A man blessed with exceptional instincts, Cowperthwaite determined that the best strategy to keep Hong Kong recovery's moving forward was to enervate the interventionists by disarming their most important weapon. When asked to name the one reform that swelled his pride most, Cowperthwaite replied, "I abolished the collection of statistics."
Cowperthwaite knew that statistics provided the raw input for interventionist mischief. He also knew that an organic, messy, free wealth-producing economy is too confounding and too replete with innumerable combinations of human action to be improved by mere mortals.
Rare is the bureaucrat and other overhead who will acknowledge such an obvious limitation. Cowperthwaite could; most can't. From the outside looking in, markets appear as irrational and uncoordinated as the flight paths of a million butterflies. Surely a guiding hand, backed by the iron fist of government, can instill order, and thus push the economy closer to utilitarian efficiency.
Before pushing, one must first measure; as Lord Kelvin noted, "[i]f you cannot measure it, you cannot improve it." Kelvin provided additional encouragement to the interventionists, adding, "When you can measure what you are speaking about, and express it in numbers, you know something about it." Kelvin was referring to the natural sciences, but numbers are equally handy in buttressing the social scientist.
Throw out a number purported to represent a population, and if that number points to unconscionable inequity or a trumped up free-market defect, the interventionist is already three-fourths on his way to guiding the economy toward his vision. The problem for the rest of us is that any number the interventionists conjure will pertain to no individual.
Averages in particular minimize, if not eliminate, differences; they never magnify or explicate them. There is the obvious: ten people in a room produce an average annual income of $100,000. The average is meaningful only if every one of the ten earns $100,000 annually. One person earns $910,000 and nine earn $10,000, and the $100,000 average is meaningless.
The average is always on the tip of the tongue when talk turns to the wage gap between men and women. The average of all the individual incomes shows that women earn seventy-five cents of every dollar a man earns. The disparity rings of wholesale discrimination. When individuality is injected, the wage gap turns out to be all myth and misplaced indignation. Individuality unveils the rationale behind the discrepancy.
When averages insufficiently promote an agenda, the interventionists turn to the median. The median is useful where distributions are extreme, such as the case with the ten individuals, one of whom earns $910,000 of the $1-million total income.
The median is the go-to number when the interventionist's outrage is ignited by falling household income, the product of widening disparity between the rich and poor. Disparity prevails, to be sure. At one end of the spectrum, we find the Fortune 500 CEO earning tens of millions annually; at the other end we find the history major college graduate pulling down $22,000 per year.
As with the male/female average income disparity, the median household income is meaningless. Households are unstable over time. Rising divorce rates have accelerated household formation over the past 35 years. One household becomes two households. If both people were working, that alone would decrease median household income.
When individuality asserts itself, we find that household incomes are nearly always the product of factors other than inequality. Anyone who believes otherwise should spend time with someone in the lowest household income quintile. He'll find the intelligent youth -- people who will soon enough lift themselves up to higher income quintiles. He'll find the clever poor -- those working under the table and who receive uncounted in-kind welfare. He'll find the intransigent loser whose lousy work habits, belligerence, and high time preference doom him to a hopelessly menial existence.
When individuality is considered, we find that the vast majority rightfully occupy their respective household income quintiles.
Statistics produce a similar loss of individuality in capital. The great macro-economists parse the one big aggregated end number and then decide what levers would best move that number up or down. When individuality is lost and capital is viewed as homogenous, any investment is as good as any other investment. Move the interest rate and money supply to make that number hit the macroeconomists' target. How it hits is inconsequential; hence, the continual parade of one asset bubble after another.
Pursuit of the encompassing end number can get absurd. The Organization for Economic Cooperation and Development (OECD) used data from 2010 Gallup world polls to calculate the happiness and well-being of people in 40 different countries. On a scale of one to ten, citizens ranked their contentment. Not surprisingly, a quasi-socialist Scandinavian country won. Citizens of Denmark rated their "life satisfaction" at 7.8 on average. Apparently, a satisfied life is a life inoculated against vagaries and vicissitudes -- a life lived on a bovine keel. Such a life best fits the goals of the interventionists.
Economists will just as absurdly attempt to quantify marginal utility. Like "life satisfaction," marginal utility is impossible to measure, though that is exactly what a progressive income tax attempts to do. The progressive income tax assumes that everyone occupies the same marginal utility curve; therefore, the progressive income tax assumes that the millionaire values his one-million-and-first dollar less than the intransigent day laborer values his next dollar.
But one could just as persuasively argue that the millionaire experiences little drop in marginal utility on the next dollar earned, or he wouldn't consistently drive himself to success. The day laborer's inconsistent work habits could just as easily reflect his low marginal utility for that next dollar earned. (George Bernard Shaw, in his masterly play Pygmalion, provides an excellent example of money's low marginal utility to the working poor. Money actually held negative marginal utility to Alfred Doolittle, who preferred Henry Higgins' five-pound offer to Higgins' ten-pound offer.)
Bureaucracy requires classification of economic data into relatively few broad bands of manageable numbers. Interventionist bureaucracy abhors individuality, because individuality prevents the bureaucrat from operating in a society of bewildering complexity. A "manageable number" is no longer a statistical device, but a heuristic one used to accurately describe every individual.
Josef Stalin understood the power of aggregates and averages as well as John Cowperthwaite did. "One death is a tragedy; one million is a statistic," the communist tyrant accurately observed. Statistics reduce the population to pawns easily manipulated by the whims of the interventionist, who can pacify his conscience knowing that a statistic can never be a tragedy.
Stephen Mauzy is a financial writer and principal of S.P. Mauzy & Associates. He can be reached at firstname.lastname@example.org.
FOLLOW US ON