A beautifully simple illustration of how housing drives inequality

Dirk Baur over at the University of Western Australia has constructed a fantastically simple model, using the board game Monopoly to look at the interplay of housing and inequality.

For all its simplicity, the results bear a striking resemblance to empirical data.

"We assume a city with four suburbs each populated with five streets. There is one house in each street. The price of the houses (including the land) varies across streets and increases from 1 to 20 monotonically with the cheapest house being in the first street in the first suburb and the most expensive house being in the last street in the fourth suburb. The rental yield is assumed to be 5% and thus varies between 0.05 currency units for the cheapest house and 1 currency unit for the most expensive house."

"There are N players of the game. Each of them sequentially roll a die and buy the house (including the land it is built on) if the initial or remaining budget suffices. If the house has already been purchased by another player rent must be paid to the owner of the house.The default budget for each player is set equal to the amount that would be needed to buy x houses so that all houses can be sold on average."

Baur runs this simulation multiple ways, fiddling with starting capital, wages (the equivalent of passing Go), and rules around what causes the game to end. One thing is constant – the correlation between inequality and housing.

"Interestingly, the correlation between house ownership and budgets across players remains close to one even for positive regular income parameters. This means that the regular income can decrease the inequality in ownership and capital wealth but not change the ranking of the players based on the house ownership."

"…the simulations show that (i) inequality is a frequent phenomenon in the game, (ii) house prices increase both with higher starting capital and higher wages, (iii) wealth inequality falls if wages are sufficiently high relative to house price growth and (iv) inequality is extreme when players do not own any property. We compare the results with house prices and disposable income of eight industrial countries and find striking similarities with the model outcomes despite the model’s simplicity."

But my biggest takeaway is something this model makes implicit but is quite hidden in the real world – the real inequality is between those who are playing and those that haven’t started yet.

"Whatever the dynamics of the inequality among the players of the game are, the inequality measured with those that are not (yet) part of the game, i.e. future players or future generations, almost always increases and can easily reach extreme values."

Democracy as a technological problem

Debates about the future of democracy often revolve around things like money, districting and incumbency. But an interesting paper out of RMIT is framing it as a technological problem.

The paper itself is an exploration of using a Blockchain for "coordinating preferences", or what they call "crypto democracy". But in setting the stage there is this amazing passage:

…technological and institutional changes have both expanded democratic possibilities and helped develop trust that individual votes — i.e. choices – are inputs into the social choice governed by the constitutional system. Technological advancement opens up alternative systems through which democracy might be practiced."

(My emphasis)

It may seem obvious, but it’s worthwhile to dwell on the idea that our institutions were created for a context with entirely different technological boundaries.

And historically, our institutions evolved as the technology did.

"Ancient Athenian democracy was organised predominately by sortition rather than representation. Several hundred offices, including the membership of the governing Council of the 500, were filled each year by random allotment."

"Participation in the lottery was not compulsory, but for those who chose to do so, identification was verified by ownership of a bronze identity plate. These plates were slotted into a tall marble machine, the kleroterion, from which they were withdrawn according to the random roll of a dice. Offices were allocated on the basis of the order the plates were withdrawn."

The introduction of the kleroterion, alongside the identification controls of the bronze plates, provided a material increase in the ‘democraticness’ of Athenian democracy, according to that society’s own conceptions of participation. In that case, technology and technological change expanded the institutional possibilities of democracy and reduced the costs of those institutions."

(My emphasis)

A lottery system, in other words, was not a Platonian ideal, but a beautiful, practical use of the tools at hand.

I’m not sure about the proposal the paper goes on to flesh out. Or whether Blockchain has a role in our future. But its maybe time to start thinking about how the technological boundaries have shifted since our institutions were created.

What new institutions can we dream up?

The giants of economics were humans, too.

Grand Pursuit by Sylvia Nasar is a tough book to describe. I’ve alternately been calling it a series of economic biographies, and a sweeping history of political economy. The blurb refers to it as a "survey" of the characters that shaped economics.

I’m not sure any of these really get at what makes it so wonderful.

Nasar, who previously wrote A Beautiful Mind (which is not only a great movie but a fantastic book), has weaved together both the lives and ideas of the giants of economics. From Malthus and Riccardo, right up to Amartya Sen.

The first third of the book is straight up biography. Of Marx, Marshall, Webb, Fisher and Schumpter. Each chapter it’s own little world.

Nasar beautifully builds a story of progress, of theory and worldview. From a world of harsh limits to entrepreneurial magic, from zero to positive sum, and back, from theories that resembled simple mechanics, to intricate and complex biology.

But it’s the little vignettes of their lives that really make the book pop.

"Marx never did step outside. He never bothered to learn English well. His world was restricted to a small circle of like-minded émigrés. His contacts with English working-class leaders were superficial. He never exposed his ideas to people who could challenge him on equal terms. His interaction with economists… whose ideas he wished to demolish, was nonexistent… Astonishglingly for the best friend of a factory owner and the author of some of the mos impassioned descriptions of mechanization’s horrors, Marx never visited a single English factory – or any factory at all until he went on a guided tour of a porcelain factory near Carlsbad, where he took the waters toward the end of his life."

These little glimpses, the events that shaped their focus and reactions, really ground ideas that often feel abstract. They explain the blind spots and short sightedness that can be maddening in retrospect. These were people, not robots, whose theories and ideas were born out of lived experience and necessity.

"From the age of eight, he commuted daily by omnibus, ferry, and foot through the most noxious manufacturing districts and slums bordering the Thames. Marshall had been looking into the faces of poor people all his life."

Another thing you can’t fail but notice is the sheer fortune. That, until Sen, they were exclusively white. And almost all were either independently wealthy or married into it.

"Beatrice’s identity was shaped by having been born into Britain’s "new ruling class," and her mind by having been "brought up in the midst of the capitalist speculation" and "the restless spirit of big enterprise." As the historian Barbara Cain notes, Beatrice distinguished her class not by wealth but by the fact that it was "a class of persons who habitually gave orders, but who seldom, if ever, executed the orders of other people."

In the second and third parts of the book, the narrative switches. Rather than characters in self-contained chapters, the story hinges on the big events of the 20th century – the world wars, the depression, the rise of international institutions and decolonialism. Characters weave in and out of the narrative, based on their links, intellectual and personal, to events and each other.

"World War 1 destroyed globalisation, disrupted economic growth, severed physical, financial, and trade links, bankrupted governments and businesses, and led weak or populist regimes to rely on desperate measures that were supposed to head off revolutions but just as often hastened them. When the war was over, the victors as well as the vanquished were crippled by colossal debts and subjected to vicious attacks of inflation and deflation."

Against this backdrop some of the magic and mystery of their ideas disappears. Joseph Schumpeter, for instance, is widely lauded nowadays for "creative destruction" and an emphasis on entrepreneurialism. But this seems less like a flight of genius and more a position of necessity when you consider he was the Austrian finance minister in 1919.

The country had been devastated by war, stripped of empire, and was faced with a blockade and dwindling reserves. With few resources at his command, it’s understandable Schumpeter put his faith in an X factor.

"[Schumpeter] believed that a shrunken Austria had the means to recover economically. His deepest conviction was that nations’ resources matter less than what they did with what they had. As long as entrepreneurs were allowed to create new enterprises, the financial system was functioning efficiently, and there were not too many barriers to trade, society could regenerate itself. He rejected the popular assumption that economic viability depended on vast territories, huge populations, and natural resources."

Of course the elephant in the room here is Keynes. But he, too, gets brought back to earth with stories.

"For most of his twenties, Keynes was Britain’s resident expert on obscure currencies. Thinking about currencies got him into the habit of thinking about economies holistically instead of focusing on "trade" or "labor" or "industry" in isolation, and taught him how to draw salient conclusions from a handful of indicators. It also gave him a feeling for which government actions exerted systemic effects, like those of the moon on tides, instead of effects on a particular industry or group.

None of this should take away from their brilliance. But it’s refreshing to get away from economics as received wisdom, or mathematical laws of nature, and into a world of messy identity and politics. Grand Pursuit is undoubtedly one of the best economics books I’ve ever read.

The artifice of it all

One of the mainstays of modern life is GDP. Newspapers harp on about it, investors set their expectations by it, politicians’ careers live and die by it. But until I read GDP: a brief but affectionate history by Diane Coyle, I had never really appreciated how artificial the whole thing is.

Of course, GDP isn’t a natural phenomena. There isn’t a GDP-shaped mountain range somewhere. Moses didn’t bring us tablets etched with the formula. But that’s not really it.

"The concept of ‘national income’ may seem clear enough, but measuring it in practice means choosing what to include and exclude, which is surprisingly fuzzy".

You see, from the start, our measurements were both malleable and rife with ideology. Obvious, you may say. But what we choose to include and exclude ultimately shapes how we view the world. And this is largely invisible. No one can "see" the economy. Very few can or do investigate the statistics. Instead, we go with the heuristics.

You may hold in your head that economics is a human construct but still come under the influence of its selective view of the world.

According to Adam Smith’s definition of productive labour, for example, "only those involved in the making of physical commodities, agriculture and industry would count toward national income."

The very essence of what is "productive" is a construct that has changed over time. And changed massively.

But perhaps Coyle’s most cogent example of this artifice is military spending. Again to Smith:

…money spent on warfare or the interest on government debt was also being used unproductively. The nation’s wealth was its stock of physical assets less the national debt. National income was what derived from the national wealth."

Two things.

First, compare this to the current system, which is essentially a measure of flows of income, expenditure and production, rather than a measure of assets or liabilities. Change.

Secondly, how big would our modern militaries be if their expenditure was still considered a drain on the national accounts? In fact, Simon Kuznets, the father of national accounts, originally tried to count military spending as a negative to the national output.

"Kuznets, however, specifically saw his task as working out how to measure national economic welfare rather than just output."

"With this aim, in fact, Kuznets was out of tune with his times. Welfare was a peacetime luxury… Before long, the president would want a way of measuring the economy that did indicate its total capacity to produce but did not show additional government expenditure on armaments as reducing the nation’s output."

Politics. With the Second World War approaching, governments needed to ramp up military spending. But, as now, the heuristic of growth held sway over the electorate. It’s an easy mental shortcut. So, the government changed the national accounts to include military spending on the "plus" side.

"By the time the wartime economists developed the modern concept of GDP, government was already a far greater presence that it had been. Subtracting Defense spending from the older conception of national income would have wrongly given the impression that the war effort was going to involve a huge sacrifice in private consumer spending."

"…early definitions of "national income" did not include government spending, because governments before the late nineteenth and early twentieth century had such limited functions. Paying for war, or similarly for the justice system, was seen as a necessary evil reducing national income, rather than a positive contribution to the economy."

Of course, we can extend this. There are plenty of things inexplicably included or excluded from our national accounting.

"The main reason for not counting unpaid housework as part of "the economy", while paid housework is counted, is the difficulty of measuring it. Well, difficulty is not the right word. It can be measured by surveys, like the many other economic statistics, but generally official statistical agencies have never bothered – perhaps because it has been carried out mainly by women."

We all need to remember this the next time politicians tout growth. We’ve chosen what goes into growth and what doesn’t. Our figures only show us changes in what we choose to count, what we currently find "important". They say more about our current priorities than anything else.

None of our measures are immutable laws of nature. They are subject to whims and change.

"The imaginary line dividing productive from unproductive activity is called the "production boundary." There is no sharp division in reality, so at the boundary there are arbitrary decisions, and this can be simply a matter of convenience. The border also becomes self-fulfilling, though, as being included in the national accounts definition of GDP is taken as a mark of "productiveness."

I really recommend GDP: a brief but affectionate history by Diane Coyle