Catallaxy Files

Henry Ergas wrote a piece for The Australian this week in which he talked about Thatcher’s achievements in the UK and the need for politicians to change ideas about how the world works if they are to achieve reform.

The headline, not Ergas’s work I am sure, was “Thatcher showed Keating the Way” which was not what Ergas wrote in the article at all.

It was though, enough to spur Keating to write to defend his achievements and to say that he was not at all influenced by Thatcher (or anyone else it seems) but worked it all out himself. Keating may be right about Thatcher but I am sure there are a number of former Treasury officials who would say they helped educate him.

Many (including me) would say that Keating achieved more good things as Treasurer than anyone else in that office since the War. It is a pity in a way that he fears his reputation is so insecure that he needs to react to a misleading headline. In any event in twenty or perhaps ten years he will be little more than a footnote.

But why are politicians, as a class, so determined to maintain and indeed often promote their reputations? Most former prime ministers write memoirs that are usually unread and unreadable. I once thought that Menzies’s Afternoon Light might have interesting insights into an important period of Australia’s history but gave up after a hundred or so pages. (If you are interested there are plenty of copies in the  second hand bookshops for around $5.)

Howard is apparently working on his, for an advance of $1 million. I will not be a buyer.

As the cabinet papers covering 1972-75 were released under the thirty year rule, Whitlam made sure that his gloss on the events was given prominence, in case something in the papers might be misinterpreted. Fraser is now doing the same for his period of government.

Who cares? Historians will interpret and reinterpret recent Australian history out of all recognition many times, in the light of prevailing theories and fashions. Most politicians will be forgotten except by old men explaining boring history to their grandchildren.

I cannot think of another profession where people try so hard to create and promote their own legacy. Not businesspeople. Who knows the managing director of BHP who decided it needed to move into resources and away from steel making? This was one of the most important steps in recent business and economic history and no one remembers who did it.

Few academics are remembered. Perhaps some for scandals – Orr and Anderson – but almost no others. Generals, Archbishops, Surgeons: who?

So what is it about politicians that they want so much to be remembered and that they want so badly to control what they are remembered for?

Joe Sternberg of the Wall Street Journal Asia asks the question.

Google is just the highest-profile and latest case of a company asking whether China is really worth all that trouble. But it’s not alone. Many companies have floundered in China, and others have just stayed out.
…
Government officials sitting in Beijing may not care about any of this in the short run. The Chinese economy is booming along very nicely despite, and in some cases because of, rampant copying of foreign companies’ business models or intellectual property. One could argue the fact that Google’s China business struggled so badly shows that China doesn’t need Google.

But is that really true over the long run? Put another way, can China develop into a mature economy if the Googles and Cybersitters of the world can’t rise or fall there solely on their commercial merits? At China’s current level of development we may be a generation away from a definitive answer, though economic history suggests Beijing is on the wrong track. Meanwhile, foreign investors will continue questioning exactly how much they’re willing to put up with for a shot at 1.3 billion customers.

Helen Coonan has an op-ed in the AFR (no link, sorry) today talking about female under representation on Australian corporate boards. She quotes some stark statistics. Women chair 2 percent of ASX200 companies, hold 8.3 percent of directorships and 10.7 percent of executive positions. By contrast women constitute 33 percent of appointments to government boards and constitute 37 percent of public service senior executives. On face value that looks like a big difference – it is a big difference, but are those stats comparable? As I’ll argue below, the answer is ‘no’.

She then goes to argue that the costs of this sort of labour market discrimination are very high – a Goldman Sachs JB Were analysis suggests it could be as high as 11 percent of GDP. Furthermore, institutional investors are beginning to evaluate factors such as gender diversity when making investment decisions. So a lack of female talent on corporate boards may result in a higher cost of capital for large corporations. That is even before the Rudd government intervenes with heavy handed regulations. Okay, so it looks like there may be some grounds to argue that ‘something must be done’.

Coonan makes the point

The economic benefits and boost to productivity of increasing female participation in the workforce are well understood.

That is probably true. The more people who are able to and want to participate in the workforce the better off we all are. This is the same argument for open borders or just even larger migration intakes.

But I have a number of problems with Coonan’s position. She makes the argument that

corporate Australia has settled for recruiting 90 per cent of its leadership positions from just 50 per cent of the available talent.

This is a very common argument – we can call it the ‘quota argument’. The gender mix is about 50:50 therefore all positions should have a similar gender split. Herein lies the first problem; female participation in the economy is lower than male participation. Already we must expect more males than females at all levels. How much more? That is the 11 per cent of GDP question.

The ‘quota argument’ recognises that we need to have a theory of how many women we should expect to observe at any one level. It then uses the most simple and naïve theory going – that’s not automatically wrong, but in this instance we should do better. So the first thing lacking is a theory of how many women there should be.

The next thing to consider is an explanation as to why there are so few women in very senior roles. Here I want to make two points; first relates to the gender division of labour and second to the voluntary nature of the labour market. The first point is that women have children – for women this is a huge physical and emotional investment that is disruptive of economic activity. The next point is that participation in the labour market is voluntary. The amount of investment in human capital to succeed at the highest levels of corporate Australia is likely to be very high, and probably many women choose not to make that investment – especially so when they have already made a huge investment in fertility decisions. This argument suggests that at some margin the fertility decision crowds out some high level human capital decisions.

So do I have any evidence to support this outrageous idea? Yes, almost. I don’t know of a paper looking at corporates, but I do know of a paper that looks at women in science (gated version) (emphasis added).

Many studies have shown that women are under-represented in tenured ranks in the sciences. We evaluate whether gender differences in the likelihood of obtaining a tenure track job, promotion to tenure, and promotion to full professor explain these facts using the 1973-2001 Survey of Doctorate Recipients. We find that women are less likely to take tenure track positions in science, but the gender gap is entirely explained by fertility decisions. We find that in science overall, there is no gender difference in promotion to tenure or full professor after controlling for demographic, family, employer and productivity covariates and that in many cases, there is no gender difference in promotion to tenure or full professor even without controlling for covariates. However, family characteristics have different impacts on women’s and men’s promotion probabilities. Single women do better at each stage than single men, although this might be due to selection. Children make it less likely that women in science will advance up the academic job ladder beyond their early post-doctorate years, while both marriage and children increase men’s likelihood of advancing.

This result is consistent with the crowding out type argument that I suggested. The really important point, I believe, is that women choose the life they wish to pursue, and most women choose to have children. Schemes and efforts to promote women at the very highest levels are a form of social engineering that disregards the choices many women make for themselves. This isn’t saying that women can’t have children and succeed at the highest levels, because some do. But we should recognise that many don’t because they don’t want to make the huge double investment that such a choice would entail. Quite rightly many women take to view that there is more to life than just economic/corporate success.

This brings me to Harold Demsetz’s three fallacies of social engineering. The first fallacy is that people could be different; the second is that there are free lunches, and the third is that the grass is greener on the other side. The argument Coonan makes (and she isn’t alone) contains two of the three fallacies. They want women to make different choices than the one’s they actually make, and they believe these choices are free. It is harder for women to climb the corporate ladder (especially at the very high levels) than it is for men. This is largely due to the gender division of labour. Policies that aim to make it easier for women to participate should operate through that channel. To be fair the Australian government (since Howard) has been trying to do so, but with much criticism and I suspect not much success. (In one respect this makes a comparison with Europe of little interest, fertility has declined substantially and women there face a different trade-off).

The last point I want to make (in what is a very long post) relates to comparisons between the public and private sectors. First the public sector does not have a profit motive; subsequently the costs of affirmative action are lower in the public sector than in the private sector. I’m not suggesting that all appointments in the public sector constitute affirmative action, but I am suggesting that the appointment criteria in the public sector are likely to be somewhat different to those in the private sector. People making appointments in the public sector can indulge their preferences for gender diversity far more than can private sector decision makers. (See Gary Becker’s work on discrimination for this argument). The next point relates to the number of appointments made by decision makers in the public and private sectors. A private sector organisation may search for a person to fill one position. They will invariably identify several highly qualified individuals of whom they select one. The government, by contrast, has many high level positions to be filled and also undertakes a search and invariably will identify several; highly qualified individuals of whom they can select several to fill those positions. A single decision maker with many positions to fill and a preference for greater gender diversity can more easily achieve that diversity than a single decision maker with fewer positions.

Of course, none of this suggests that there is never gender discrimination but it does suggest that simply undertaking head counts is not enough to show discrimination. The other point that needs emphasis is that government (or the opposition for that matter) should work to ensure that people can live the lives they choose and not the lives that elitists think they should choose.