Guest Post: “Why Everyone Younger Than You is Spoiled” Part II

Following on last week’s excellent guest post, Jeff Lundy (Sociology PhD Candidate at UCSD and visiting scholar at Michigan) completes his discussion of the accounting errors that may partially explain why older people think the kids these days are so profligate.

Why Everyone Younger Than You is Spoiled: the Foibles of Amateur Accounting Part II
By Jeff Lundy

Welcome to Part II of my post on why everyone younger than you is spoiled. Last week, I covered two “accounting errors” that older generations make when taking stock of younger people’s lives. In particular, I argued that older generations don’t adequately account for inflation or substitution, and that this leads them to overestimate how “well off” young people live. This week I’ll cover two more of these amateur accounting mistakes that tend to “overinflate” our image of current living standards, relative to the past.

Diffusion

Like substitution, diffusion is a phenomenon most people know about, but haven’t really thought through. In terms of consumer goods, diffusion refers to the process by which innovative goods start out as expensive, and then gradually become cheaper, as they concurrently also become more widespread in the population.

For instance, circa 1925:

40% of Americans had a telephone in their home,

50% had an automobile,

65% had an electric light.

By 1980:

90% of American households had a telephone,

85% had a car,

100% (essentially) had an electric light.

EMH Mark 1*

I’m back in the thick of the Business Press, this time at the end of the 1970s. And I found this gem, in an article about investment opportunities and the stock market:

Some investors, however, are questioning the very concept of “undervaluation,” which has allowed Wall Street to sell equities even as share prices plummeted. Says one: “If the market is efficient — and it is — it sets the correct value on all investments, including stocks. If some are high, and some are low, that’s what they’re worth. It’s impossible for stocks — or anything else — to be undervalued.” (Business Week 12/31/1979, “New Investments for the New Decade”)

On one hand, let’s hope John Quiggin is right and the economic doctrine of Efficient Markets underlying this statement is refuted. It certainly seems a bit silly right now, in the light of the last two years of turmoil and crash.

On the other hand, on some basic level, I think the statement is tautological. Something is worth what you have to pay for it. If you can buy or sell it on the market, then the market price is what it’s worth. Value == market price. I know that’s not quite what folks mean when they say the market sets the correct value on a financial asset – it has to do with the expected value of future returns and all that. But on some basic level, I think we think value in terms of the market, which gives a statement like the one quoted a lot of credibility and validity.

* And yes, this is a semi-obscure Voyager reference. Welcome to my world.

RetroBlogging: Berle and Means (1932) Quote on Motivations

Berle and Means (1932) The Modern Corporation and Private Property is one of those books everyone cites and few people read. So, in parallel to a literature review I’m working on, I decided to read it. I also justified it on the grounds that Gardiner Means was the lead author on a 1939 FDR administration report (“The Structure of the American Economy”) that shows up in my own research. Anyway, it’s a fascinating book about the consequences of the changing nature of ownership of large firms – what does it mean to own something you can’t control and vice versa?

The book has a few threads – first, laying out the evidence that most large firms were no longer controlled* by their owners (the famous “separation of ownership and control”), and second, tracing the history of the corporation in law. The last section of the book lays out three possibilities going forward, one based on the tradition of property law (“the logic of property”, which suggests managers should be disciplined and all profits should accrue to the shareholders), another based on a reading of economic theory (“the logic of profits”, which suggests managers should receive the profits to incentivize their efficient management and shareholders should get only a reasonable return), and a third way that asserts that the fundamental concepts underlying the first two no longer appy.

Berle and Means argue that economics needs to re-assess the concepts handed from Adam Smith through to the contemporary economic theories. For Smith, an enterprise was something small and manageable – a small group of workers and a collection of machinery owned by a single person or small group. The AT&Ts and US Steels of the world don’t make a lot sense in that model, and Berle and Means suggest we start by throwing out an understanding of the corporation as a purely economic tool for small groups to collaborate. Instead, we must think of the corporation as a political entity – an organization that dominates economic life, and a prominent institution for the redistribution of resources on the order of the state. In that context (with probably more lead-up than is needed), Berle and Means suggest that pure profits don’t motivate the large firm CEO the way they do the small shopkeeper:

“Just what motives are effective today, in so far as control is concerned, must be a matter of conjecture. But it is probable that more could be learned regarding them by studying the motives of an Alexander the Great, seeking new worlds to conquer, than by considering the motives of a petty tradesman of the days of Adam Smith.” (p. 308)

A lot has changed since Berle and Means wrote their book, and while their analysis that holds up remarkably well compared to the experiences of the 1940s-1970s (I would argue), the world starts to change in the late 1970s and early 1980s. For one thing, Berle and Means premise their book on the non-existence of a market for corporate control – a market which emerges in earnest in the early 1980s. For another, a new dominant theory of the firm has arisen (agency theory) around a new logic (what I would call “the logic of contracts”) which starts from the premise that the firm-as-institution is a myth – there is nothing but a nexus of contracts. Thus theorizing has had significant consequences of workers, executives, shareholders, etc. For the best review of this turn, see Jerry Davis’ Managed by the Markets. Anyway, today I’m going to be thinking about what this new model of the firm does to Berle and Means’ insistence that we think of firms as political, and managers as motivated in particular, power-oriented ways.

* As Mizruchi (2004) notes in an excellent review of the book and its impact on Sociology, control for Berle and Means is operationalized as the power to appoint the board of directors who are assumed to manage the firm. Later work in the corporate governance tradition assumes the board are not managers, but rather the voice of owners or the pawns of CEOs who actually run things, and this assumption leads to a misreading of Berle and Means.

Guest Post: “Why Everyone Younger Than You is Spoiled”

Today on A (Budding) Sociologist, we have a first (and one that vaguely contradicts the title of this blog): a guest post! Jeff Lundy is a PhD candidate at the University of California, San Diego, a visiting scholar at the University of Michigan, and a blogger at The Panhandler’s Guide. His dissertation focuses on the consumption patterns of Americans in the past few years, drawing on the absurdly detailed Consumer Expenditures Survey to analyze theories about overspending and luxury consumption. His post today, the first of two, is about a topic of frustration: why old people think the kids these days spend too much.

Why Everyone Younger Than You is Spoiled: the Foibles of Amateur Accounting
By Jeff Lundy

Sociologist Katherine Newman is working on a fascinating study of a new phenomenon called “delayed adulthood.” According to Newman, parents are bemoaning the extended amount of time their kids are taking to “grow up” in First World countries (e.g. U.S., Japan, Norway, Spain, etc.). Along with this phenomenon of “delayed adulthood,” Newman similarly finds media articles dotting the globe that discuss how parents regard their children as increasingly “spoiled.”

I can’t wait to read Newman’s book on this phenomenon when it comes out. However, from a personal standpoint, I think younger generations are already well aware that older generations (particularly boomers) think we’re a bunch of slackers. In fact, I’ve gotten so tired of hearing this from my elders that I’ve spent some time contemplating why older generations think us younger generations are so spoiled.

While there are many things that must feed into this complex phenomenon, I think that a major culprit here is our elders’ amateur financial accounting. In fact, I’ve isolated four main issues with the economic accounting of older generations that I believe leads them to think of us youth as spoiled (and which us youngins’ should remember for when we get older). To spare your attention span, I’m spreading the four issues over two posts. So if you want the exciting conclusion to this week’s post, you’ll have to come back next week.

Inflation

Postmodern Economists, Empiricist Sociologists? The Problem of Unobservables

A few days ago, I ran into one of my favorite economics PhD students at my favorite Coffee Shoppe. When I first started meeting the economics PhD students here at Michigan (through the first-year econometrics sequence), I was surprised by how… normal they all seemed. They were interested in economics, but they were not “market fundamentalists” or die-hard Hayekian libertarians. For example, they by-and-large seemed to agree that development economics had failed the poorer parts of the world over the last few decades, in part due to its own hubris. We didn’t agree on everything, but we had a lot of common ground. I began to wonder if the arrogant, imperialist economist was a myth, at least among Michigan students (who tend to focus on labor and development, and less so on micro-theory, for example).

Then I met this particular grad student – call her L. The first time I had a conversation with her came during a discussion of precisely the role of economics in development. Before class one day, she was arguing with another student that it was important for economists not to know too much about the countries they were working in – that it would be at best worthless and at worst outright harmful. The job of the economist was to bring the Theory and let local experts worry about the quirky details of the specific place. I wish I’d had a tape recorder!

When I ran into L this past week, though, our conversation was not about development but rather the role of unobservables in theoretical and empirical work. She was reading about factor analysis, and asked me what I thought about it, and I replied something cheeky about economics being a shockingly postmodern discipline* in that they were quite comfortable analyzing the world in terms of, and coming up with measures of, unobservable quantities (the classic example is apparently “effort” in labor studies). Sociology is not free of this habit – and I’m not particularly opposed to it – but I think it’s interesting how crucial unobservable concepts are to economic theory and yet how ruthlessly positivist the rhetoric surrounding economic knowledge can be. Leave “culture” to the lesser mortals, we economists deal with cold, hard rational money and resources. I’m exaggerating, of course, but I think there might be a significant grain of truth there.

A classic example of this kind of problem is Harison White’s (1981) Where Do Markets Come From?. White rejects existing economic explanations for the origins of stable markets as being impossible because they require actors acting on knowledge they cannot have, e.g.“Firms can observe only volumes and payments, not qualities or their valuations…” (p. 520) White then generates different circumstances under which firms’ mutual observations of each other, and knowledge of their own internal cost structures, leads to different possible stable markets. It’s a very dense model I don’t claim to fully understand, but one of the central distinguishing claims White makes is that he can explain markets without reference to actors acting on unobservables.

A similar story popped up in the literature I’m currently knee-deep in concerning the rise of agency theory and “shareholder value” as a logic/conception of control/model of the firm/etc: the problem of profit. In an important sense, there are two very different kinds of profit discussed in the academic and business literature, economic profit and accounting profit. Accounting profit shows up in balance sheets and refers to the money left over after paying expenses. It’s observable – and manipulable, but different from what economists are talking about. Here’s Froud et al. (2000):

“[E]conomic profit is an unobservable concept of mainly theoretical interest to economists, whereas accounting profit is an observable magnitude of interest not only to companies themselves but to those who make economic decisions to contract with the firm and to those who comment on corporate performance.” (777)

In an excellent paper in a similar vein, Espeland and Hirsch (1990) give numerous examples of the kinds of manipulations possible of accounting profits that, they argue, made possible the conglomerates of the 1960s. Especially popular tricks allowed firms to count the earnings of acquired firms retroactively, thus increasing the apparent profitability of the firm post-merger (I don’t want to butcher the details, go look at the paper if you are curious). I’m not so interested in overt frauds – a la Enron – as the general problem of needing to make choices to end up with a balance sheet that lists a certain amount of profit. Even well-intentioned accountants not trying to defraud anyone, following generally accepted practices, make choices that in turn define the observed (accounting) profits. And on the basis of those observed figures, business decisions are made (by investors, executives, etc.).

So, where does this all get us? I’m not entirely sure, but I’m enjoying thinking through these issues – how do you study decision-making? Is it reasonable to say that (economic) sociology has focused more on the kinds of tools available to the people making decisions while economics has focused narrowly on more abstract, and unobservable, constructs?

Alright, back to writing.

* If I recall, Lyotard talks about game theory is a great example of a postmodern science concerned with narratives and possible worlds.

The Interdependence of Irrelevant Alternatives

I don’t understand psychology. I’ve never studied it formally, and have read only a few popular books written by psychologists (e.g. Daniel Gilbert’s excellent Stumbling on Happiness). Not understanding psychology is one of the reasons I like being a sociologist – our explanations act on a different level, a level I feel more comfortable with (although at times it’s awkward to avoid a bit of psychologizing). When I’m trying to understand microeconomics and its critiques, however, I have to engage a bit more with that kind of work – rationality, what that means, deviations from it, the whole behavioral turn in economics. One of my favorite “deviations” is the violation of the axiom of “independence of irrelevant alternatives” (IIA). IIA says that if you prefer A to B when you don’t have option C, then you will still prefer A to B when you do have option C. So, if you have a choice between salad and soup and you choose soup, and then the waiter says, “But wait, you could also have fries!” you won’t then decide to have the salad. There’s some experimental work that shows people do precisely this (although not particularly often, if I recall correctly) but I’d never really encountered it in my own life…

Until tonight. As a bit of back story, in undergrad I spent a lot of time wishing I had more to do on Saturday nights. My first year, I didn’t meet a lot of people except through my older siblings, and for some reason I was never involved in their Saturday activities (perhaps because I didn’t really drink then, or go to bars). So I’d always end up in my dorm, failing to get work done, and mindlessly clicking away at some video game. I’m sure most of us have nights like that – where you don’t have anything to do, but wish you did, and can’t get anything done because of it. Things have improved in the last few years, and tonight (a Tuesday!) many of my friends gathered at our usual pub – affectionately nicknamed the Winchester. I realized early on that I just wasn’t feeling it (getting over a cold, didn’t sleep much, etc.), and decided to head home early to read a good book. What’s fascinating (to me anyway) is that the existence of the option to go out makes me feel completely differently about staying home. Even though, tonight, I prefer home to going out, the possibility of being out and actively electing the opposite means that I will likely get much more done and be happier doing it (much as I would have probably elected to stay home rather than going to a frat party or a skeezy bar freshman year). It’s not a perfect example, as there are only two choices involved and the second choice is changing the value of the first not the choice elected, but I think it fits the general idea.

Speaking of which, I should go read. And sleep. And get over this expletive deleted cold.

Name This Fallacy

There’s an op-ed in the Times today about fixing the nation’s higher-education system. It’s significantly less whacky than another recent op-ed on a similar problem, perhaps because it’s more focused on producing qualified applicants and encouraging better rankings than with fixing the professoriate. So far so good.. but here’s where I get nervous:

The benefits of an extra year of schooling are beyond question: high school graduates can earn more than dropouts, have better health, more stable lives and a longer life expectancy. College graduates do even better.

Just because high school graduates do better than dropouts, and college grads do even better, that doesn’t mean that if everyone had more education everyone would earn more. For example, jobs that used to require no degree or only bachelor’s degrees (librarians, say, or certain administrative jobs) now require specialized master’s degrees. There are serious issues with credential creep, especially with the sorts of credentials that aren’t associated directly with acquiring skills. So the implications derived from comparing individuals don’t scale. A high school graduate earns more in part because a high school dropout earns less. Maybe there are some gains to overall productivity, but it seems like it’d be very difficult to tease these out. And this logic (people with more X have higher Y so we really need to make sure everyone gets more X) seems sound because the causality is relatively clear on an individual level – more education does lead to higher wages. And yet, the macro-level policy implication doesn’t necessarily hold up (and certainly not in a straightforward way). Am I missing something? If not, what’s a good name for this problem?

Rewrite!

I think I’m beginning to understand the academic rhythm of summer and why professors value those uninterrupted weeks so much. Without at least a few days in a row with nothing else on your mind, it’s really hard to get in the right mindset. And it helps to have a few weeks to review the literature beforehand so you can actually sit down and just start writing. Or re-writing. For the first time in my academic life, I need to seriously overhaul two ‘promising’ papers entirely – reframing the contributions into totally different (and much better defined) literatures and narrowing their focus from the vague, seminar-paper style they are currently in. I’ve never done this kind of revision before, as I’ve never tried to get something into shape to present at a serious conference (ASA) or publish before. I have a feeling it’s going to be a weakness of mine as an academic. I hate re-reading my own work, let alone tweaking it. Fortunately, I have a lot of good feedback to work from, but it’s broad feedback – engage with this literature, not this one, focus on this story, not that one. That’s all helpful, but still doesn’t tell me where to start. I’m tempted to hit the books… but I feel like that’s the standard trap, to just keep reading. All this made worse by the fact that instead of reserving this summer for my own work, I’m (very happily) working part time on a couple different projects for my advisors. Even just 2 or 3 hours spent thinking through someone else’s problem makes it hard to focus on my own.

So, anyone have any strategic advice for rewriting? In particular, advice for going from “draft” to “submission” rather than dealing with revise and resubmits, say.