Stumbling and Mumbling

Limits of evidence

Twice in the space of a few days the government has over-ruled the recommendations of its expert advisors- on prisoners’ pay and on the classification of cannabis.
Which raises the question: what role should empirical evidence have in policy-making? Here’s a theory - very little.  Evidence-based policy-making (EBPM) is a sham. I say so for four reasons:
1. It’s undemocratic. The evidence might tell us that tough sanctions against cannabis use are counter-productive in cost-benefit terms. But the public seem to want such sanctions. And they are not necessarily irrational to do so. Instrumental rationality isn’t all that matters. So does symbolic rationality. Being “tough on drugs” symbolizes the sort of people we are: clean, self-disciplined, sober. It might be important to demonstrate this, even if it is costly to do so. EBPM is wrong to assume that utilitarianism is the only standard by which to judge policy.
2. Evidence is often unavailable for policies whose main justification is the long-term effect they’ll have. Would a roll-back of the welfare state lead to an end of a culture of dependency? Would greater democracy lead to a more energetic and socially-engaged citizenry? Compelling evidence on these questions is lacking - and would be for years even if such policies were implemented - because it would take decades for these effects to be felt, as it can take generations for social norms to change.
EBPM therefore has a bias towards incremental changes to the status quo. It’s small-c conservative.
3. Evidence is little help in policies designed to tackle low-frequency events.  It’s now widely thought that the UK’s banking regulation policy has been inadequate since 1997. But we went 10 years without realizing this, simply because the test of it - a banking failure - didn’t happen until Northern Rock collapsed. Evidence can only inform banking regulation by telling us how we could have stopped the last failure.
Or take another example - anti-terrorist legislation. There’s no evidence that banging suspects up for 42 days without charge would prevent terrorist attacks. But is this because the policy is useless? Or is it because there have been so few attempted attacks anyway? On the evidence, we can’t tell.
4. EBPM cannot adjudicate between values: liberty vs. security, or equality vs. prosperity, say. At best, it can only tell us the costs of the choice.
Herein, I think, lies the real damage that EBPM can do. In the wrong hands - and policy-making is usually in the wrong hands - it can be used as a way to disguise what is really a value judgement:  supporters of the “20 reasons for 20 weeks” campaign are accused of doing just this.
But the fact is that policy-making must be about choices of values, usually in conditions where evidence is missing or inconclusive.  Politics cannot be a pure science, guided merely by facts, logic and evidence. And insofar as EBPM pretends otherwise, it does violence to the very meaning of politics.

Insider trading and knowledge

Some of you have argued that insider trading is morally wrong because insiders have a duty to report material information to their employers, shareholders. But is this possible? The problem is that material information doesn't come in simple, identifiable, bite-sized pieces. It often consists in hunches, suspicions and gut feel.
For example. Imagine a small firm wins a big contract. Its CEO announces this promptly, and the share price rises. So far so good. But what if less senior managers have a hunch: "we can't deliver this project on budget and on time. We could get hit by penalty clauses and lose money on the contract."  Do these have a duty to make an RNS announcement,  even though their belief lacks a hard, empirical, quantifiable foundation and would undermine their CEO?
A lot of knowledge, as Michael Polanyi pointed out, is tacit - it can't be convincingly articulated.
It's impractical to expect this to be communicated to shareholders by explicit announcements. And a ban on doing so couldn't be enforced at all well.
But it can be communicated indirectly. If these managers trade as insiders by selling their stock, the share price reaction to the contract would be muted, or even negative.
In this way, insider dealing allows us to learn more about the company than any ban on it, accompanied by harsher disclosure requirements, ever could.

Another Gordon gets it wrong

Everyone’s slagging off Scotchmen called Gordon. So I’ll join in. That Gordon Ramsey talks some rubbish, doesn’t he?:

"Fruit and veg should be seasonal," he said. "Chefs should be fined if they haven't got ingredients in season on their menu.
"I don't want to see asparagus on in the middle of December. I don't want to see strawberries from Kenya in the middle of March. I want to see it home grown."…
"There should be stringent laws, licensing laws, to make sure produce is only used in season and season only," he said.

What this omits is that restaurants are already fined for serving asparagus in December. They are fined by that most intelligent regulator, Mr Market.
If you serve asparagus rather than seasonal vegetables such as swede and parsnips in the winter, you are fined twice over, once by higher costs, and again by lower demand as intelligent diners think: “what sort of addle-brained ponce wants to eat asparagus in winter? I‘ll go somewhere that serves proper food.” Asparagus-in-December restaurants are good candidates to appear in Mr Ramsey’s Kitchen Nightmares series.
He is making a common error here - he’s failing to see that markets can make the law unnecessary, by punishing stupidity.
Where he can perform a public service is not by calling for more laws, but by helping to raise the market-based fines on stupid restaurants, by showing how good seasonal food can be - by shifting the demand curves. And here, he does a damned good job. 

Legalize insider trading

The FSA is promising to crack down on insider dealing. No-one in the City feels the need to change his underpants. After all, what chance do public sector workers have of ever recognizing a well-informed decision?
Which raises the question. Why should insider trading be  illegal at all? How can knowing what you’re doing be a criminal offence? Some good judges think it shouldn’t be.
There are (at least) three arguments for legalizing it:
1. Insider trading would improve market efficiency, by ensuring prices reflect all available information.
2. It would reduce market volatility, by reducing the power of noise traders. Today, people who rightly fear a share is under-priced (or over-priced) are reluctant to buy (or sell) for fear that mug punters will drive its price further away from fundamentals. If the numbers of informed traders rise, this problem will diminish. And lower volatility should mean higher prices generally.
3. The only victims of insider trading are ones who choose to be. No-one forces someone to sell a share at £10 if it is worth £15, or to hold a share at £15 if it‘s worth only £10.
So, why should insider trading be a crime? One of the stronger arguments is something like this:

Imagine an oil company’s geologist knows he is about to discover a big oil deposit. Before announcing his finding, he and his friends buy the company’s stock at a low price. The gains from his discovery therefore accrue to him, rather than to shareholders. If shareholders fear this will happen, they’ll under-invest in oil companies, with the result that we’ll get too little investment in resource discovery. Efficiency requires that the property right in oil discoveries lie with shareholders, not employees.

But this argument doesn’t justify a law against insider trading. It merely justifies a clause in our geologist’s contract forbidding such behaviour. And such a ban might not be desirable; allowing a little insider trading might be a good way of incentivizing the geologist to find deposits. This is an issue which shareholders and the company should decide. It‘s not to be decided by general laws against insider trading.
So, why are there such laws? I suspect they owe more to the power of vested interests than to economic logic. If insider dealing were legal, brokers and financial advisors and other charlatans who offer share tips would lose their credibility. A ban on insider trading protects these quacks.   
More: here’s an overview of the issues.

Inequality & performance

Inequality hurts. That's the message of this new paper from Bruno Frey and colleagues. They looked at how US basketball players and German bundesliga footballers' performance is affected by pay inequalities. And they found that players who earn less than their team-mates tend to perform worse, even controlling for ability. Low pay relative to one's peers reduces one's performance, even though rising pay across the board improves it.
This has implications outside of sport. It suggests that a firm that pays a big bonus to a "star" performer - or just gives him a pay rise to try and keep him - might see its overall performance worsen, as its less well paid employees work less well in response. This effect could outweigh the tendency for the well-paid employee to respond positively to the higher incentive.
What's not so clear, though, is the precise mechanism. Do relatively poorly paid players consciously under-perform out of resentment? Or is it instead that pay is a way for employers to convey expectations? Low pay signals that a boss doesn't expect his employee to perform especially well, and people have a way of living up or down to expectations?
Whatever the mechanism, this suggests that conventional thinking might not be the whole truth. It's commonly thought that people are poorly paid because they are unskilled. But could there be an element of reverse causality here - that people are unskilled because they are low paid?

Rationality & preferences

Ben Saunders thinks the PFA player of the year awards - in which Ronaldo got player of the year whilst Cesc (pbuh) got young player of the year - show footballers to be irrational. How, he asks, "can Ronaldo be the best out of all players but not best out of the young ones?"
Quite easily. Players' weren't just expressing a preference for player of the year, but a wider preference. It would have been quite rational for a player to vote for Ronaldo as player of the year but Cesc (pbuh) as young player, even though Ronaldo was eligible in this category. He might have figured:

I have to acknowledge that Ronaldo has been the best player this year. But I don't want the oily little turd to become even more arrogant by giving him two prizes. And I want to recognize too the divinity of Cesc (proof). So I want him to get a prize too.

This, surely, is quite rational.
I make this point because it has a wider application. What looks like irrationality can sometimes (often?) be merely different preferences than we think.
Take a trivial example. Today, I prefer to have chicken than salmon for dinner. But yesterday, I preferred salmon to chicken. Isn't it inconsistent and irrational to prefer one thing one day and another the next? Not at all. My over-arching preference is for a varied diet.
If we re-assess preferences, then, what seems irrational can become rational, and vice versa.

New Labour and the strategy of insecurity

The post-mortems - the mot juste, I think - on New Labour have missed a point. The party is paying the price for the fact that the New Labour project was based upon profound, and now crippling, intellectual insecurity.
Put yourself in the shoes of New Labour’s founders in the 80s and early 90s. You see that traditional social democratic arguments for redistribution don’t work. You see Labour’s traditional support base, the manual working class, declining in numbers (pdf). And you see a managerial class winning what you want - wealth and  power.
What do you do? You abandon traditional Labourism, in favour of an appeal to Mondeo man and Worcester woman. You retain a vestigial belief in income redistribution but  defend it only because it is the partner of economic efficiency, rather than a goal in its own right, and you pursue it through stealth taxes and complicated tax credits for working families. And you adopt a cringing deference towards the managerial class, believing it should be free of burdensome taxes whilst having the ability to deliver top-down reform of the public services.
What we’re now seeing is the collapse of this strategy. The 10p tax fiasco arose from a disregard of the interests of that supposedly shrinking core Labour constituency, the (childless) low paid, and Brown’s belief that meddling with a complex tax system was a substitute for explicit arguing for redistribution. And the pursuit of median voters has led to a collapse in Labour’s support in its heartlands; as Hopi points out, Labour’s losses were especially bad in south Wales.
Worse still, this strategy of insecurity means Brown cannot use at least three potentially popular narratives:
1. Many big-earners aren’t as smart as they think, and are just overpaid, as Mervyn King has said. So maybe we should tax them more. 
2. It’s time to simplify the tax system. Replacing tax credits with a citizen’s basic income could be just as egalitarian, but easier to administer and with lower marginal tax rates on the low paid.
3. The idea that everything can be managed from the centre is an illusion  - we just don’t have that much managerial skill. It’s time to trust workers and markets, not bosses.
The tragedy - well, I think it’s a tragedy - is that the death of the strategy of insecurity has led to a vacuum on the Left, with the Tories alone capable of adopting, perhaps insincerely, these narratives.

Do we need bosses? A test

Do we need managers? Simon Blackburn kicked off a debate about the theory. But Channel Five has come up with something better - an empirical test. It's going to be without a hands-on chief executive for the next 12 months. It's fortune will therefore be (albeit only) one datapoint of evidence.
Here's my hypothesis. The headline in the FT's story is wholly wrong. Channel Five will not be without direction for the next 12 months. It'll head in whatever direction it was heading in before Jane Lighting left. If it was heading for trouble, it'll hit trouble. And if it wasn't, it'll do OK.
The main contribution chief executives make is to change corporate direction through big decisions (such as poaching Carol Vorderman from Channel 4), restructuring or refinancing the company. Otherwise, firms run themselves through force of habit - people don't need leadership to carry on doing what they're doing. Indeed, the lack of a chief executive might be a positive help, as people spend more time doing their jobs rather than sucking up to the boss.
And herein lies the problem with assessing how Channel Five will cope without a boss. If it does run into trouble, this could be evidence that Ms Lighting had set a bad direction, and the firm would have done badly had she remained CEO.
So I fear the debate about the value of managers will remain largely theoretical.

A solution to Brown's tax muddle

It's widely though that the government's efforts to compensate the low paid for the abolition of the 10p tax rate would be either complicated or expensive. But it needn't be so. There's one possible solution that's simple, revenue neutral, a benefit to the median voter, which would lift thousands out of the tax system, unite Labour MPs behind Gordon Brown, and probably cause Polly Toynbee to die of ecstasy.
Step one would be to raise the personal income tax allowance by £1200. This would save all 20p tax-payers £240 a year (20% of £1200) - the amount lost by the biggest losers from the abolition of the 10p rate. This would cost £6.6bn, according to the Treasury's own estimates (pdf).
This £6.6bn could be recouped by a 7p rise in the top tax rate.
On top of its aforementioned benefits, this would cause the Tory party a problem. Brown could ask: "Are you serious about standing up for the poor or are you what you've always been - the party of the rich?"  And he could justify the rise in top taxes more easily now than ever before. Something like this'll please Labour backbenchers:

This government is supporting the financial sector to an unprecedented degree, with a £50bn bail-out. It's only right that those who work in that sector should pay in some way for this state aid.  What's more, the financial crisis that triggered this hand-out has shown that - in many cases - the justification for big salaries was only ever self-serving hogwash. Big earners in the City were not skillful judges of risk, helping to improve economic efficiency by cutting the cost of capital, but just ignorant punters who whine like five-year-olds who have pissed their pants the moment things go slightly against them. Higher taxes on these won't much damage the wider economy.

Of course, it's possible that a 7p rise in top taxes wouldn't raise as much as the Treasury thinks, if some top earners migrate (though not to New York) or downshift. But Brown could mitigate this danger by raising the top rate by less and  raising the capital gains tax rate*.
Whatever, the fact is that Brown has every chance to get out of his own mess in a way that'd delight Labour backbenchers and benefit most voters.
So, what's stopping him? Is it the fear that top tax-payers are so footloose that they would migrate en masse? Or is he just more scared of the right-wing press than of his own MPs?
* Corrected from earlier version in light of comment one.

Costing Grangemouth

I fear the media are exaggerating the costs of the strike at the Grangemouth oil refinery. The Times says:

BP has also shut its Forties pipeline system, which is powered by the plant, 25 miles to the west of Edinburgh. As the pipeline carries about 30 per cent of Britain’s daily oil output from more than 70 oilfields in the North Sea, the industrial action could cost Britain up to £50 million per day in lost revenue.

This is surely wrong. If oil is not piped ashore today it's left in the ground, and can be piped ashore in future. Revenue losses occur only if oil prices fall from today's levels. This is of course highly possible, but by no means certain. Indeed, Hotelling's rule tells us that the least worst assumption to make about future oil prices is that they'll rise in line with current interest rates. On this view, the revenue losses - over time - will be nothing. What we lose today we'll get, with interest, in future.
This helps explain why Ineos can afford to take a hard line. If it doesn't refine crude today, it can do so in future at (probably) higher prices and margins. Its losses are not today's production, but rather the maintenance costs incurred by cooling the refinery; cash flow losses - it has less immediate revenue with which to cover its big interest bill; and the risk of falling prices in the future. But these are probably smaller than the headlines about "lost" output.

Public intellectual - an oxymoron?

Like Gracchi, I’m irked by Foreign Policy’s search for top public intellectuals. If we’re looking merely for the most influential living thinkers, surely Paul Samuelson, Frank Hahn and Kenneth Arrow - the founders of modern neoclassical economics - should be ahead of  Steve Levitt or non-entities like Jacques Attali or Yegor Gaidar. And why on earth would Gary Becker, James Buchanan, John Roemer, Jon Elster, Alasdair MacIntyre or Ronald Dworkin, to name but the obvious few, not make the top 100?
The problem is that Foreign Policy isn’t looking for merely great thinkers - as a glance at its list demonstrates. It wants ones who are “still active in public life.”
But being active in public life and being an intellectual are, if not mutually exclusive, then at least very different things.
To be very prominent in public affairs requires a dogmatism and capacity for soundbites that sits uneasily with the doubts and humble pursuit of “truth” that mark a true intellectual. And many proper intellectuals might reasonably shy away from the crude, ego-driven world of “public life.” As Macintyre said in concluding After Virtue, the task of intellectuals (and others) should be not to shore up the imperium, but to construct new forms of community in which civilized moral life can survive against the barbarism of our rulers.

Last man standing

Greetings from windy Rutland! And many thanks to all of you who wished me luck with the move.
Matthew asks me a tricky question: would I be complimented to be called a Nietzschean last man?
In some senses, the description fits, and not just because I’ve spent more time at Homebase than I should.
I certainly share the last man’s eschewal of great wealth and power:

One no longer becomes poor or rich; both are too burdensome. Who still wants to rule? Who still wants to obey? Both are too burdensome.

And the last man’s interest in “merely” little things, far from being contemptible as Nietzsche claimed, is actually wholly admirable.
So far, I’m proud to be a last man.
However, I fear the Nietzschean dichotomy between the last man and the “overman” misdescribes today’s world.
Nietzsche thought that last men were an undifferentiated mass - “Everyone wants the same; everyone is the same” - whilst the overman strove to be different.
But this is the exact opposite of what we see today. It’s the men who seek power and great wealth who are all the same - with their utilitarian morality and managerialist ideology - but it’s the men who retreat from worldly acclaim who are all different in their tastes, moralities and interests.
And this is where Nietzsche is a lousy sociologist. He thought the overman could both create his own morality and achieve worldly power. But perhaps the two are incompatible. It‘s the men who seek power who are, in fact, slaves to contemporary mediocre morality. It’s the people who have renounced power and ambition who are free to pursue other, higher, moral goals.

* The picture is of Egleton church, taken on my afternoon constitutional.

The last temptation of Chris

This morning, for perhaps the last time, I walked to the top of Primrose Hill. I looked down upon London and asked: do I really want to leave all this?
Yes.
Non-natives don't live in London for the amenities; this doesn't make sense in cost-benefit terms. Instead, they do so to earn money, to "get on". But even those who succeed in this lose something more valuable than money - their freedom. One of the mistakes vulgar libertarians make is to believe that it's only the state that restricts freedom, when in fact we can be enchained by our own past deeds and character.
And many - maybe most - quite rich men are so enchained. Some are trapped by ex-wives or school fees, others by expensive tastes in cars, yachts, wine or drugs. And others are imprisoned by their own ego. Many want a top job not because they need the money, or because it's an enjoyable thing to do - it's generally not - but because the feeling that they have climbed to the top of the ladder gratifies their self-esteem; this is why politics and office politics are often so bitter - they are about character, not money.
In leaving London, I'm leaving all this and seeking - and expressing - freedom.
Of course, I'll still have to work. But in working from home, it'll be proper work, done for its own sake and not as a means to climb any ladder.
This is not a question of improving the "work-life balance". The very phrase captures one of the evils of capitalism - that work and life are opposites. Instead, it's about integrating work into life; in not having to travel into an office, I'm smashing one of the big dividing walls between the two, and moving towards the Marxian ideal of unalienated labour.
Which is another way of saying blogging will be light for the next few days, as I metamorphose from an urbane metropolitan liberal to a petty-minded provincial. My next post will, insha'Allah, be from Oakham.

They don't get it

One of my favourite quotes is that of Kenneth Boulding: "All organizational structures tend to produce false images in the decision-maker." Two recent examples show his point.
First, Jack Straw "has let it be known" (as journos say) that he has doubts about Brown's plans to bang up Muslims for 42 days without charge, but plans to vote for the measure anyway.
In doing this, Straw was probably thinking that this was a way to placate both his constitutents and the PM. But in fact, we just think: "what a slimy duplicitous unprincipled little bastard - Ed Balls is right for once."
Then there's this letter to the Times from one Alastair Campbell praising Terminal 5.
When we read this, do we think: "T5 isn't as bad as thought"?   
No. We think: "This is the Alastair Campbell who worked with Tom Kelly in Downing Street, probably using him to do his dirty work. And Tom Kelly is now head of PR at BAA. So Campbell's just returning a little favour."
But neither Straw nor Campbell seem aware of these reactions. Instead, they persist in the idiotic illusion that we believe what they say. They don't realize they have negative credibility - many statements only become plausible once the likes of Campbell and Straw deny them.
And here's what puzzles me. Why do they continue to do this? Is is because they're too thick to realize what the public think of them? Or is that they know but have become so corrupted by power that they just don't care? Or is that that they do know and do care, but just have no idea how to behave differently?

Housing crash: why worry?

Like Max Mosley, I have a shameful secret - mine is that I like Will Hutton. But by crikey, he writes some pish doesn’t he? Tim’s already had a pop at this, but there’s plenty left. Like this:

The blight [of falling house prices] hits everyone. The most tragic are those whose houses are repossessed, but most of the suffering is hidden. People are trapped and have to put their lives on hold because they cannot move because the housing market is seizing up: the newly retired couple who plan to move out to the country; the woman who wants to move closer to her new job; the family that wants to be nearer a school. Everybody has to abandon or defer their plans.

This is only part of the story. There are also many people for whom lower house prices are a good thing:  the prospective first-time buyer who hopes to buy a place; the young family hoping to get a bigger house as their children grow; the people who traded down at the peak of the market; the older home-owners who no longer have to give their children a fortune as a deposit on a flat; the man whose ex-wife copped for the house. And even home-owners gain from falling prices, in the sense that the opportunity cost of living at home (thus foregoing rent) falls. As Willem Buiter said, houses are not net wealth.
Or take five other perspectives:
1. Many men have borrowed thousands of pounds to buy an asset that’s fallen in price. We call them car-owners. No-one worries about negative equity in the car market. So why worry about negative equity in another consumer good?
2.  Sure, some people have lost money because they over-invested in housing. But why should we care about these any more than about those who over-invested in Laughing Boy in the 3.30 at Wincanton? It’s not the government’s job to bail out bad gamblers.
3. I’ll grant that some people are “trapped” in their existing home. But this is because capitalist presenteeism forces people to live nearish to where they work. But the problem here is the repressive nature of capitalism, not the housing market.
4. Correlation is not causality. The belief that falling house prices are a bad thing arises from memories of the 1990s recession, when falling prices were associated with rising unemployment and repossessions. But this confuses cause and effect. It was rising unemployment that caused house prices to fall. It’s far from clear that a fall in house prices will have such ill-effects if the labour market remains healthy.
5. Wouldn't it be better for us all if people wanting to get rich were forced to ask: "how can I provide a useful service to others?" rather than just buy a house and wait.
Now, you might object here that I’m taking an overly sanguine view because I traded down near the peak of the market. But then, mightn’t Will be taking an overly gloomy view because his missus is a property developer?