Stumbling and Mumbling

Markets and freedom

One of the great political changes of my adult lifetime has been the right’s abandonment of free market economics, as illustrated by the government imposing trade frictions within the UK and putting up the tax burden to what the OBR says will be “its highest level since Roy Jenkins was Chancellor in the late 1960s.” Two books I’ve read recently pose a question: might this shift be due in part to an awareness that markets are no longer the foundation of freedom we once thought they were?

To see my point, let’s start with the classical liberals that so influenced Thatcher. They thought free markets were essential for a free society. As Friedman wrote:

Historical evidence speaks with a single voice on the relation between political freedom and a free market. I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity. (Capitalism and Freedom (pdf), p9)

Or, as Hayek said in The Road to Serfdom, “a directed economy must be run on more or less dictatorial lines.”

And a market economy is itself liberating. As Friedman put it:

So long as effective freedom of exchange is maintained, the central feature of the market organization of economic activity is that it prevents one person from interfering with another in respect of most of his activities. The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected from coercion by the consumer because of other consumers to whom he can sell. The employee is protected from coercion by the employer because of other employers for whom he can work, and so on*. (Capitalism and Freedom, p14)

Two recent books, however, challenge this perspective. Here’s Martin Hagglund:

To lead a free life it is not sufficient that we are exempt from direct coercion and allowed to make choices. To lead a free life we must be able to recognise ourselves in what we do, to see our practical activities as expressions of our own commitments. This requires that we are able to engage not only in choices but also in fundamental decisions…This is why capitalism is an inherently alienating social institution. To lead our lives for the sake of profit is self-contradictory and alienating, since the purpose of profit treats our lives as means rather than as ends in themselves (This Life, p299-300).

There are (at least) two distinct problems here. One is that free markets are a cover, behind which lie exploitation and oppression. The labour market, Marx wrote, is “a very Eden of the innate rights of man” wherein “both buyer and seller of a commodity, say of labour-power, are constrained only by their own free will.”  Once the transaction has occurred, though, things change:

He, who before was the money-owner, now strides in front as capitalist; the possessor of labour-power follows as his labourer. The one with an air of importance, smirking, intent on business; the other, timid and holding back, like one who is bringing his own hide to market and has nothing to expect but — a hiding.

Secondly, markets themselves are a form of what William Clare Roberts calls “impersonal domination”:

Because they are dependent for their lives upon the market, as slaves are dependent on their masters, producers of wares for sale must keep a ‘weather eye’ out for changing market conditions, which are, at bottom, nothing but the will and caprices of their customers and competitors. (Marx’s Inferno, p57)

This dependence afflicts capitalists as well as workers. As Marx famously wrote:

Free competition brings out the inherent laws of capitalist production, in the shape of external coercive laws having power over every individual capitalist.

You might think all this is a mere philosophical debate. Far from it. Four big developments since the 80s vindicate Marx, Hagglund and Roberts against Friedman and Hayek.

One was the financial crisis. This showed that mortgage derivatives –products intended to reduce risk – actually increased systemic risk (pdf) and made the financial system as a whole less manageable. Such products were, in the title of Richard Bookstaber’s book, a demon of our own design.

That phrase echoes perfectly Marx’s idea of alienation, of how man-made structures come to exercise impersonal domination over us:

The object which labour produces – labour’s product – confronts it as something alien, as a power independent of the producer…It means that the life which he has conferred on the object confronts him as something hostile and alien.

Secondly, casualization in academia, greater stress among teachers and doctors, the rise of bullshit jobs, falling relative pay in journalism and deadly working hours in investment banking are all facets of a single phenomenon – the degradation of erstwhile good jobs. People in jobs that were once “middle class” experience less freedom at work. Yes, the dark satanic mills have shut and terrible working conditions diminished, but more people now experience labour markets as a front for domination and alienation. And they vote accordingly.

Thirdly, there’s the housing market. In the 80s we young people regarded this as a source of liberation. After just a few years work, we could buy our own place and so free ourselves from the uncertainty caused by dependence upon the rental market. Today’s young people have much less chance. For them, this important market confronts them as an alien force, thwarting their hopes and subjecting them to domination by landlords.

Fourthly, there are globalization and deindustrialization. Many in the US and UK experienced these as causes of and decline, as processes of uncontrolled domination rather than liberation. The vote for Brexit was in large part an expression of frustration by the “left behind.”

That slogan “take back control” tapped in brilliantly to those feelings. To a Hayekian or Friedmanite, the slogan should seem weird: haven’t 40 years of marketization given people more control of their lives? From the perspective that markets aren’t liberating, however, its appeal is clear.

Of course, the slogan took a reasonable feeling and diverted it towards a pointless end. The challenge for our time is to give it more useful expression. How can we increase economic democracy and people’s real control over their economic lives without damaging too much the genuine good that markets do as technologies of allocation? Hardly anybody in politics, however, is interested in this.

* Note that Friedman’s argument only applies to imperfect markets. In the textbook case of perfect competition all sellers and all employers are the same.

Productivity in late capitalism

In the debate about how to increase productivity, everybody seems to be making an assumption that I find questionable - that feasible policy changes can make a significant difference.

We need some historical context here. My chart shows that big, sustained productivity growth is in fact very rare; growth of over 2.5 per cent a year was only seen over lengthy periods between 1945 and 1990. Our idea that rapid growth is normal and stagnation not  might owe more to the influence of our formative years than it does to the wider historical evidence.

To see why strong growth should be so unusual, imagine an industry could treble its productivity over ten years. If it accounted for two per cent of the economy, it would add less than 0.3 percentage points to total annual productivity growth. This tells us that a few dynamic sectors are not enough to achieve good aggregate growth. Productivity growth was minuscule in the early decades of the industrial revolution because fast-growing sectors were only a small part of the economy.

Which is the problem we face now, in modified form. The economy is dominated by services, in many of which efficiency gains are terribly difficult to achieve: teachers, waiters, care workers and hairdressers have few ways of significantly improving productivity: this is Baumol’s cost disease. As Dietrich Vollrath writes:

Most service industries have relatively low productivity growth, and most goods-producing industries have relatively high productivity growth. As we shifted our spending from goods to services then, this pulled down overall productivity growth. (Fully Grown, p5)

Perhaps, then, strong productivity growth was the aberration and stagnation is the norm. Certainly, this is what classical economists thought. All of them foresaw a “stationary state” in which growth ceased because the forces of diminishing returns outweighed technical progress. As John Stuart Mill wrote:

It must always have been seen, more or less distinctly, by political economists, that the increase of wealth is not boundless: that at the end of what they term the progressive state lies the stationary state, that all progress in wealth is but a postponement of this, and that each step in advance is an approach to it. 

Marx’s view that a falling rate of profit would ultimately lead to capitalist stagnation was essentially an elaboration of his predecessors’ thinking: Marx’s admirers and detractors both under-appreciate the kernel of truth in Paul Samuelson’s gibe that he was a “minor post-Ricardian.”

It’s not just Baumol’s disease and diminishing returns that limit productivity improvements, however. There’s also a collective action problem. Companies will only invest to raise profits if they believe (rationally or not) that there’s a profit for themselves in it. This obviously limits investments that have spillovers: as William Nordhaus showed, firms capture only a “miniscule fraction” of the total returns to innovation. It can also curb investment if firms fear that future change will render today’s technologies obsolete: why spend £1m on a robot today if it will be competing against a £500,000 one in a few years’ time? And then there’s the likelihood that a series of crises – the tech crash, financial crisis and pandemic – have depressed animal spirits.

All this means that even if productivity-enhancing technologies are available, companies have good reason not to use them.

There’s another obstacle to productivity growth. As thinkers such as Mancur Olson and Joseph Schumpeter pointed out, economic growth produces powerful groups with vested interests in blocking further progress. Joel Mokyr calls this Cardwell’s law:

Technological progress encounters resistance from various groups that believe they stand to lose from innovation. These pressure groups will try to manipulate the political system to suppress successful innovation….Under fairly general conditions, it can be shown that the single economy will move inexorably to an absorbing barrier of technological stagnation.

So, for example, big companies push for harsh intellectual property laws to preserve their monopoly profits, at the expense of expanding knowledge: there’s a reason why that link to Mokyr’s paper takes you to Scihub. Bosses prefer to use new technologies for surveillance and guard labour (pdf) rather than for expansionary or liberationary purposes. And bankers want high-powered incentives that boost their incomes even if these come at the risk of financial crises that contribute to years of stagnation.

Such conservatism is especially restrictive in our rentier-dominated economy. Rentiers oppose some changes that might raise productivity, such as shifting taxes from incomes to land. They also want low interest rates rather than the high aggregate demand that might drive productivity gains. In the post-war years General Motors needed a large well-paid working class; the latter-day Goldman Sachs does not. All of which blocks productivity improvements because it is this minority of people who have disproportionate political power.

There’s a reason why Johnson’s attempt to raise productivity by restricting immigration is so daft: more intelligent ways of doing so are countermanded by our political system.

All of which suggests that Marx might have been right:

At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters.

Capitalism was once a progressive force, but – especially perhaps in the UK – it no longer is. And this is due not to external shocks but to endogenous developments.

The point of this is of course not to say that if we had a revolution we could all live happily ever after. It is instead to pose a challenge to anybody discussing the UK’s productivity problem. It’s not sufficient to ask what measures might raise productivity: there are countless good candidates. We must also ask: are those policies possible within the constraints of the UK’s political system? Technocrats must take class politics more seriously.

The house price puzzle

Everybody knows that the housing market has become financialized, as Josh Ryan-Collins among others has documented. But what kind of financial asset is housing? The answer is far from straightforward.

In one sense, house prices are like share prices. Both are claims upon future incomes – profits in the case of equities and wages in the case of houses (it’s fair to assume rents are a stable fraction of wages). Both tend to fall in recessions. And both have over the years delivered a risk premium – though how great depends upon which time period you use, how you account for liquidity risk and so on.

But there’s a massive difference between house prices and share prices.

Since the mid-90s house price valuations have soared. In 1998 the average house prices was 3.1x the income of first-time buyers according to the Nationwide. Today it is 6.7x. Equity valuations however (at least in the UK) have not much changed in this time. The ratio of the All-share index to dividends or earnings is much the same as it was in 1997-98. In this sense, house prices have behaved far more like bonds than equities: they have risen as interest rates have fallen whereas share prices have not.

There’s an obvious explanation for this. Lower real interest rates raise the net present value of future rents (or of rents saved if you are an owner-occupier) so they raise house prices. As Bank of England economists say: “the rise in real house prices since 2000 can be explained almost entirely by lower interest rates.” My chart shows that there’s a huge correlation between the house price-earnings ratio and the ten-year index-linked yield. House prices, then, have behaved like bond prices. And if it walks like a duck and quacks like a duck…

In theory of course, a lower discount rate should have also raised share prices. I suspect it hasn’t because the same stagnation and risk aversion that’s pushed bond yields down has depressed expectations for dividend growth and increased the risk premium investors demand on equities.

But why haven’t these same factors also depressed house prices? Surely increased risk and the prospect of lower rental growth should be bad for them?

The answer might be that, in fact, housing is a safe asset just like a bond.

One way in which this is true is that protects us from future rises in rents: the demand for owner-occupation is a demand for rent control. Also, as Cristian Badarinza and Tarun Ramadorai have shown, foreign investors have regarded the London housing market as a safe haven (pdf) from economic and political risk – just as they regard western bonds.

What’s more, for many of us our house is not wealth so we shouldn’t care if its price falls. And an asset whose price fall doesn’t bother us is similar to one whose price doesn’t fall in the first place.

Put it this way. I grow a lot of kale in my garden, so I never need buy any from the shops. The price of kale therefore doesn’t bother me. If it falls I’m worse off as a kale-grower but better off as a kale-consumer to exactly the same extent. The net impact is zero. As an owner-occupier I’m in the same position. I’m providing housing services to myself. A rising cost of those services benefits me as a supplier and makes me worse off as a consumer with no net effect. As Mervyn King said (pdf) back in 1998:

A rise in house prices leads not only to an increase in wealth but also to an increase in the cost of housing services. Or, to put it another way, if the price of your home goes up, you will not be able to spend more on other things if you wish to carry on living in your home.

This shows that housing like a bond in another sense. A rise in bond prices is ambiguous for bond-holders. Yes, it makes them better off in the sense that their assets are worth more. But it makes them worse off in that they will have to pay more in future to obtain a given income: “higher bond prices” is another way of saying “lower annuity rates”. For many, the net impact is zero.

Obviously, this is not true for everybody. If you are a landlord or someone planning on trading down – that is, on consuming less housing services in future – rising house prices do make you better off.

Such people, though, are a minority. Atif Mian and Amir Sufi estimate that the boom in housing transactions in the US during the bubble of the mid-00s was driven by the 1% of people who bought and sold many houses quickly. The vast majority didn’t behave as speculators – but as Ulrike Malmendier and Adam Szeidl show (pdf) bubbles are generated by minority behaviour.

But for everybody who is long of housing, somebody else is short such as younger people wanting to buy a home. Net, as Willem Buiter pointed out, housing is not net wealth (pdf).

If all this is right, it has an encouraging implication. It suggests that measures to definancialize the housing market such as credit controls, curbs on speculation or land value taxes are – from an economic point of view – a free hit. They would reduce the economic harms done by high house prices such as increased instability (pdf); lower productivity (due in part to encouraging longer commutes); and greater labour market frictions – not to mention the cultural and psychological damage they do. And they’d do so at very little cost: if house prices aren’t net wealth, cuts in them don’t matter.

This is not to say the job is politically easy: the tiny minority for whom house prices are wealth would resist such measures, and it is they who control politics. The point is, though, that what we have here is an obvious cost-benefit win.

But is it right? There’s a different explanation for the contrast between bond and equity behaviour in the face of falling interest rates.

It’s possible that housing speculators have priced in the good news of lower bond yields (a lower discount rate) but not the bad, that they betoken stagnation.

There’s a sort of precedent for this. Back in 1979 Franco Modigliani and Richard Cohn argued that shares had fallen in the 70s because they were only half reacting (pdf) to higher inflation: they were taking on the bad news of higher interest rates and hence discount rates but not the good, that inflation would raise future earnings. Maybe the housing market is also doing some half-pricing in – taking on the good news of lower interest rates whilst ignoring what those lower rates symptomize.

If this is the case (and I don’t know if it is) then prices should eventually fall of the own accord. In which case we don’t need policy to definancialize housing: the market will do it anyway.

Skill as a social construct

Imagine we lived in a society scared of germs, which prized cleanliness not only as a way of ensuring good health but also of improving productivity as people avoided the sniffles and minor ailments. In such a society good cleaners, who could get a place really spotless, would be highly valued and paid.

This isn’t a wholly fanciful example. In industries that need ultra-clean rooms, such as semi-conductor manufacturing, cleaners are indeed well-paid and valorised. It tells us that the value we attach to jobs is a product of culture. A germophobic culture would regard good cleaning as a skill and pay accordingly for it.

You might think such a culture would be irrational. Maybe, maybe not. But the valuations our current society attaches to some jobs is also irrational. City University’s David Blake has shown that “the vast majority of fund managers” are “genuinely unskilled.” If we regard skill as a matter of technique, this is correct: they don’t beat tracker funds. But skill isn’t just about technique. It’s about what gets valued. Those fund managers are paid handsome salaries because they are valued even though they lack technical ability.

Similarly, Nick Bloom and John Van Reenen have shown (pdf) that there is “a long tail of extremely badly managed firms” and Paul Ormerod and Bridget Rosewell have shown (pdf) that “firms have very limited capacities to acquire knowledge about the likely impact of their strategies.” In many cases, therefore, managerial “skill” is technically lacking. But their pay suggests otherwise.

Skill, then, is a social construct – the result not just of technical ability but of what society values, what it sees (which might not be there), and what it doesn’t see. This is a longstanding theory (pdf) in sociology, but a perspective missing from economics. Economists talk about demand curves and value -added. But doing this they are entering the play during the second act, missing the one that describes the cultural formation of value and demand curves and hence of skill.

For example, in the 1960s the women who sewed car-seat covers for Ford were seen by managers as unskilled and paid accordingly. But in fact – and as the women proved – such work was difficult. It was seen as unskilled not because it was technically easy, but because it was women’s work. It’s not obvious that such gender-based perception of skill has wholly vanished: it might explain why care work is under-valued.

Ian Hampson and Anne Junor give us another example, that of an education support worker helping a disabled child (pdf):

She had acquired the haptic skills of having a constant ‘feel’ for the way the child’s muscle system was coping with spells of standing. She contributed to the stable and happy climate of the centre by unobtrusively managing medication, ambulance calls and feeding without interrupting the f low of class activities. She needed negotiation skills at the level of problem-solving and solution-sharing, to shape other children’s responses and to guide parents. She managed awkward ‘upward’ feedback, convincing a higher-status classroom teacher to forego exciting new teaching methods that were actually causing the child to regress. These skills appear mundane, but were subtle sources of social development.

She is, not, though, paid and valorised as a skilled worker.

Philip Moss and Chris Tilly point to another example. Young black men, they say, are perceived as lacking soft skills – the sort that don’t carry formal credentials – and so are under-represented in jobs requiring these. Just as “skill” is gendered, so it is also race-based.

Harry Braverman points (pdf) to yet another example. In the early 20^th century, he says, an ability to ride a horse and carriage was seen as unskilled whilst the ability to drive a car was a skilled job. Today, it is the opposite way round.

We might add to all this David Graeber’s theory of bullshit jobs. Flunkies and box-tickers do jobs which they themselves regard as lacking social value. But they are often paid as skilled jobs because they have private value to their immediate bosses who want to build their empires*.

And of course, there is the matter of unpaid care work. Frances Coppola tweeted today:

Underlying the casual assumption that families can care for relatives themselves is a toxic belief that people - especially older women - who give up work to take on the care of relatives aren't productive anyway.

They aren’t productive because of a social construct – that in capitalism the only labour that has value, and so is productive, is that done for profit. The wages for housework campaign challenges this – and in doing so shows us that other valorizations are possible.

There are several elements of the social construction of skill:

 - Marginal product. This approach is entirely consistent with the idea that wages equal marginal product**. It’s just that our ideas of what is a high marginal product are a matter of taste and ideology. In a fabulous paper (pdf) the late Werner Troesken showed that snake oil sellers were highly productive for decades even though their products were mostly useless, making them much like fund managers today. And footballers (and top sportsmen generally) are much more highly valued now than they were in the 60s or 70s. What’s changed isn’t their technical skill – Fred is not a better footballer than Bobby Charlton was – but our sense of value.

 - Payment for the bare minimum. In some jobs, we pay the bare minimum for the bare quality of work. In others, we pay extra for “talent”. Which it is can be a matter of power and preferences, not just technical ability. For example, although most care-workers are paid the bare minimum, skilled ones can get more by escaping the maw of council sub-contractors and going private. And where “talent” is rewarded it is often not actual ability that matters but the fact of having proven that one is just good enough – which is why many professions are dominated by mediocrities, as Marko Tervio has shown.

 - Management recognition. We’ve all rang up call centres and found that some staff are immensely helpful and efficient and others less so. Such helpfulness, however, doesn’t always bring with it appropriate pay. As Hampson and Junor say, some skills are unrecognised because they “lack managerial authorization.”

 - Avoiding externalities. Oil workers are well-paid and valued – if, that is, you ignore the pollution they generate. Similarly, many bankers seemed skilled before 2008 because we under-rated the risk pollution they were generating. And (some) journalists, columnists and rentagobs have private value, because the intellectual pollution they cause isn’t priced.

My point here is that value and productivity are not exogenous technical data. They are instead the product of societal judgments which valorize some activities and de-valorize or under-valorize others.

Which suggests that both left and right are missing a trick. We can raise the wages of the low-paid not by creating shortages or by hiking up the minimum but by a shift in what we valorize and don’t. It’s easy to imagine – unless you’ve been captured by capitalist realism – a society that is reasonably egalitarian simply because it values cleaners and care workers more and bosses, financiers and bullshit jobs less.

Of course, this isn’t to say we can simply think ourselves richer: I’m talking about relative values here. And of course cultural change takes time. But we should start the process. Which requires us to recognise that skill and productivity are social constructs. And what we build, we can change.

* Graeber’s theory is more economically orthodox than his admirers would want to admit. It’s an example of the point Michael Jensen made in 1989 – that listed companies with dispersed shareholders have inadequate oversight of managers who can therefore pursue their private interests at the expense of shareholders. These interests might include building an empire of bullshit jobs.

** It’s also consistent with Marx’s theory. There’s a reason why he equated value with *socially* necessary labour-time.

In search of the centre ground

In the FT, Robert Shrimsley writes:

Starmer is leading his party back to the centre ground and has positioned it where it needs to be and patently was not under Jeremy Corbyn….The problem in contesting the centre ground is that you do actually have to fight for it and the Tories will not lightly surrender.

This poses the question: what is this centre ground, and how can it be said that the Tories occupy it?

It’s a puzzle.

We could define the centre ground as being what the median voter believes. But the majority of voters want a £15ph minimum wage, higher taxes on the rich, and nationalization of railways and utilities. From this perspective, Starmer is leading his party away from the centre ground which Corbyn and McDonnell claimed – a ground which the Tories don’t occupy.

Clearly, Shrimsley doesn’t have this conception of the centre ground in mind.

But there’s another. It arises from the theory of valence politics.

This says that voters don’t judge parties by the entirety of their manifestos, which only cranks and obsessives read. Instead, they judge parties, and especially leaders, by their performance on what they care about most.

On this view it can be said that Corbyn abandoned the centre ground, despite having many policies popular with the median voter. Median voters saw him as unpatriotic and as unable or unwilling to get Brexit done, defects which outweighed his attractive economic policies. Johnson could thus seize the centre ground in 2019.

But there’s more to valence politics than this. As Peter Kellner has said, valence voters

judge parties and politicians not on their manifestos but on their character. Are they competent? Honest? Strong in a crisis? Likely to keep their promises?

Johnson does not occupy the centre ground on these criteria. But then, nor does Starmer. As Kellner wrote recently: “the average ‘valence’ scores of the two parties are dreadful.”

On this conception, then, nobody in England commands the centre ground.

And, perhaps, nor could they. Median voter theory assumes that voters are distributed along one dimension – traditionally left and right – and so there is some kind of centre: the theory is closely analogous to Hotelling’s Law.  But this might be changing. If voters are divided along other dimensions, such as culture or age, the centre ground becomes much harder to define – which is perhaps why the Lib Dems and ChangeUK lost so heavily at the last election. In 2019, Labour won among under-39 year-olds but lost heavily among older voters. It won the younger median voter but lost the older one. What does the centre ground mean here?

How, then, can Shrimsley be writing anything other than utter guff?

Simple. There’s a third conception of the centre ground.

Which is just the status quo, and minor tweaks thereto.

In the 60s and 70s, for example, the centre ground believed that utilities should be publicly owned. By the late 90s, it believed they should be privately held. And before 2016 the centre ground supported UK membership of EU single market. Now, it opposes them. It is in this sense that “Starmer is leading his party back to the centre ground” – by abandoning support for freedom of movement.

Centrism, then, is parasitic and deferential to the existing order.

These different conceptions of the centre ground explain the intellectual trajectory of centrists during my adulthood.  In 1983 the SDP manifesto wanted a fiscal stimulus to cut unemployment and raise welfare benefits, increased foreign aid and “a major extension of profit sharing and worker share-ownership.” Centrists today are just gimps for billionaires.

This transformation happened because the SDP were using a median voter conception of the centre ground; they tried to split the difference between left and right as they existed at the time. Today, though, centrists see no need to stake out a defined position between left and right. “Moderation” means accepting the status quo.

When columnists like Shrimsley speak of the centre ground, therefore, what they mean is merely “something that doesn’t scare me”.

From this perspective, Starmer is indeed returning to the centre ground, by not challenging the existing capitalist order. However, it is one thing to actively argue for the status quo and another to merely passively accept it without intellectual effort, as Starmer is doing. Worse still, defending capitalism when it is delivering rising living standards and better jobs (as centrists could plausibly claim in the 90s) is very different from defending it when it has delivered a generation of crisis, rentierism, and stagnation. The centre ground is now just a fetid swamp.

The minimum wage dilemma

Should the national living wage rise to £15 an hour? For me, it’s a dilemma because there are two competing and powerful perspectives.

The economic perspective is sceptical. Econ 101 says a higher price means lower demand, so a higher minimum will lead to job losses or – just as importantly but often overlooked – cuts in hours.

Granted, Econ 101 might be wrong. Where employers have monopsony power, a higher minimum wage can lead to employment actually increasing.

Which leads us to the thorny question of empirical evidence. Here, we have a problem. It’s possible that previous rises in the minimum wage have had little effect upon labour demand simply because they have been small – enough to generate favourable effects by reducing monopsony but not so big as to have the effects predicted by Econ 101*. It’s like taking paracetamol; one or two will make you feel better, but it does not follow that a whole bottle will make you even better.

What we need, then, is evidence from big rises in minimum wages. Much of this comes from Seattle, which gradually raised its minimum from under $10 an hour in 2015 to $15 this year.

Sadly, this evidence is mixed. Some has found (pdf) no adverse (pdf) employment effect (pdf), whilst other research has found that hours (pdf) worked fell and prices rose. And other research suggests that big rises rises in minimum wages do cut jobs (pdf) even though small ones don’t.

Net, the economic perspective, I suspect, says that a £15 minimum wage would be a risky experiment.

But it is not the only perspective. There’s another one. It says that pay is not just a matter of technical skill and effort – much minimum wage work requires lots of both – but of power. “Skill” is a social construct. People are low paid because they lack power and because society grossly undervalues some types of work – not least the sort traditionally done by women and minority workers. And because we tend to equate people’s worth with the worth of their labour-power, this means that some people are devalued. A higher minimum wage is an attack upon these inequalities.

Herein lies my problem. If we take only the economic perspective we are guilty of capitalist realism, of failing to imagine an alternative to inequalities. But if we take only the latter perspective, we are guilty of at best wishful thinking and at worst recklessly endangering the livelihoods of the worst off.

So, can we combine both perspectives?

Perhaps.

Part of the answer is to regard a higher minimum wage not as a standalone, isolated technocratic fix but as one of a suite of policies to improve life for the worst off.

The most important of these is to run the economy hot, to achieve genuine full employment. One reason why some of those Seattle studies have not found adverse effects of jobs is that the economy was booming as the minimum wage rose. As Dan Davies has said, whatever your preferred social policy objective is, full employment is a good way to achieve it. But we should add into the mix in-work income support (say through a basic income) to mitigate any loss of hours and stronger trades unions. Personally, I regard minimum wages as a second-best, a means of achieving what would in a better world be done not through state diktat but collective bargaining.

There’s something else. What we also need is a revalorization of work, that recognizes the worth and merit of those who clean up after us. We don’t try to employ bosses or TV presenters on the cheap, so why should we think we can get social care or meals out on the cheap?

Of course, all this poses deep questions. How – if at all - can we effect such a big cultural change? Are higher wages in the interests of capital (because they might raise aggregate demand) or not – that is, is wage-led growth feasible? And how might we counter the potential inflationary impact of full employment and higher wages, for example by spreading profit-sharing?

Frankly, I don’t know the answer to these questions. But I do know two things. One is that they should be asked and answered by cleverer people than me. The other is that we should at least acknowledge the dilemma created by that clash of perspectives.

* Even this might not be wholly true, though. A recent paper (pdf) found that “employment growth from 2015 to 2018 was in the region of 2 or 3 percentage points lower in firms affected by the introduction of the National Living Wage.”

What Starmer misses: the C-word

One word is notably absent in Sir Keir Starmer’s recent essay – capitalism.

Our most successful politicians have had something to say about this – whether it be Thatcher’s belief that capitalism needed low inflation and weak unions if it were to thrive, or Blair’s belief that governments and people needed to adapt to capitalist forces of globalization. Starmer, however, has no such analysis.

For example, he notes that, “entering the 2020s, Britain faced stagnant wages, vast inequality and the slowest growth in living standards since the second world war.” But he attributes this solely to “Tory failure”. Which is dubious. It omits the fact that slower growth in output and productivity – and the symptom thereof, lower real interest rates – are global phenomena. Larry Summers didn’t (re-) coin the phrase “secular stagnation” to describe bad policy in a single country.

Of course, we can debate the causes of this: falling profit rates, an ageing population, lack of monetizable innovations; depressed animal spirits as a legacy of the financial crisis; and so on. But Starmer seems unaware there’s even a debate. Which leads to this:

Business is a force for good in society, providing jobs, prosperity and wealth. But business has been let down by a Tory government.

But is it less of a force for good than it used to be? Stagnation, job polarization and deprofessionalization all mean that capitalism has become less good at providing jobs and prosperity for many people. To some extent, it is the Tory government that has been let down by business, not just vice versa.

Failing to ask this question leads to this:

A Labour government would provide a level playing field, a skilled workforce and a modern infrastructure, from transport to public services.

This is the politics of Prince: partying like it’s 1999. But capitalism has changed since then. We now need more than just good infrastructure and rules of the game to stimulate growth. Starmer shows no awareness of this possibility.

Which brings us to another omission. Starmer decries the nationalism and other “identity-based politics in the Western world that has done immense damage to the progressive cause.” But he fails to ask: why has such politics gained traction only in recent years? In the 90s and early 00s the Tories’ obsession with Europe led them into electoral oblivion. So why has it become so effective recently?

The answer – as regular readers will be bored of hearing – lies in Ben Friedman’s The Moral Consequences of Economic Growth. He shows that economic stagnation fuels illiberal nationalism, and sometimes worse. Populism is one more consequence of capitalist failure. If you don’t appreciate this, your critique of it is mere narcissistic moralizing: “why can’t people be reasonable like ME?” The cure for populism is economic growth. But if stagnation is due to capitalist failure as well as to Tory failure, this needs some kind of critique of capitalism – which Starmer lacks.

Here we run into another problem. Capitalism sets constraints upon what governments can do. These constraints operate in countless ways: lobbying; ownership of the media; offering ex-ministers well-paid jobs to incentivize them to behave whilst in government; controlling business confidence; emergently creating an ideology (pdf) which supports the existing order; and so on. These mechanisms mean that, as Pablo Torija Jimenez has shown, governments serve the interests of the 1%.

Good policies require much more than the goodwill and intellect of politicians. They require a material base, a particular set of class interests and balance of class power. We had this in the post-war era: a strong union movement and capitalist class that required a mass consumer market made full employment politically feasible. One challenge for social democratic politics is how to recreate such interests. In the absence of an analysis of capitalism, you cannot do this. Without it, though, your politics is just moralizing.

In lacking a critique of capitalism Starmer is actually more backward than capitalists themselves. One thing we’ve seen this year is the acquisition of companies such as Morrisons, Aggreko and Meggitt by private equity firms. This is happening in part because, as Michael Jensen famously pointed out, dispersed equity ownership is inappropriate for many firms – which is why we’ve seen a long-term decline in the numbers listed on stock markets.

But if capitalists themselves can ask the question of who should own assets, why shouldn’t politicians? It is quite possible that some forms of increased worker ownership will increase productivity, and so should be part of that suite of policies necessary to raise wages. This is not a terribly radical claim: it was part of the 1983 SDP manifesto. But it seems beyond Starmer. I fear his refusal to nationalize the big six energy companies is the product not of serious thought about the nature of ownership but rather an unthinking acceptance of the constraints set by capital.

Of course, I might be wrong here. Maybe capitalism is more dynamic than I believe and maybe it is less antagonistic to technocratic social democratic reforms. If you think I am wrong, though, you need to produce evidence and reasons. Which Starmer’s essay does not. It is one thing to be captured by capitalist interests. It is quite another not to even see the bars of your cage.

The death of free market ideology

Free market economics is dead as a political idea.

The government’s subsidy to CF Industries to ensure that it supplies a product that is (checks notes) soaring in price is just one of several examples of this. It has also introduced trade barriers within the UK, an almost unprecedent move for any developed nation in modern times. Even before the rise in National Insurance, it was planning on raising the share of taxes in GDP to what the OBR says would be “its highest level since Roy Jenkins was Chancellor in the late 1960s.” And you can interpret all the talk of “levelling up” (and it is all talk) as a renunciation of the free market idea that companies will relocate to areas where land and labour are relatively cheap.

All of this fits with Johnson’s “fuck business” remark; his renunciation of the European single market; and wilful increase in political uncertainty. What we have here is a flat rejection of Thatcherism. 

Of course, markets are still a massive part of capitalism (and I suspect they should be a big part of post-capitalism too). But they have few defenders in government,

Which poses the question: why have we seen so great an intellectual counter-revolution?

It’s a tricky question because of an astonishing fact which demonstrates the emergent genius of the Tory party – that it has made this move without a protracted debate. Whereas the Labour party tears itself apart over much smaller differences, the Tories just get on with it without feeling any need for ideological consistency or introspection. As Sir Keir Starmer says, they have “a remarkable ability to shed their skin.”

Although the Tories aren’t telling us why they’ve made so great a change, I’d suggest several possibilities.

One is the simple empirical fact, that free markets haven’t worked as billed. I don’t just mean that the pseudo-market in retail gas and electricity has failed. I’m thinking also of the financial crisis and the long stagnation in productivity. All show in different ways that markets don’t deliver stability and growth as much as hoped. Of course, free marketers have defences against these points – but the point is that they need defences, and are now on the back foot.

We can turn this around. In what sector is there a clear case for introducing more market forces? It’s not obvious. (No, healthcare isn’t one).

There’s a second reason, which we can derive from Jesse Norman’s admirable book, Adam Smith: what he thought and why it matters. Markets, he says, are not isolated technologies. Instead, they “are sustained not merely by incentives of gain and loss, but by laws, institutions, norms and identities.”

If we have the right such norms and institutions, the self-interest of market actors will indeed promote the public interest. If not, though, we get rent-seeking, corruption and cronyism, as Jesse says:

Capitalism can encourage people to behave in socially productive or unproductive ways: to devote their energies to building homes or finding new tax loopholes; to developing life-saving drugs or running offshore sweatshops. It can stimulate fruitful investment, or the search for unwitting clients to be ripped off.

Latter-day free markets have, however, given us too much of the unproductive activities: fraud; mis-selling; cronyism and rentierism (pdf). Thatcher hoped a market society would give us men like her father; in fact it gave us ones like her son. Actually-existing free markets have not been embedded in the norms and institutions that would make them work in the public good. Which has, maybe unfairly, discredited the case for them.

Relatedly, one lesson of recent years is that capitalism requires a more extensive state than Thatcherites thought - not just to provide infrastructure and regulation but to provide automatic stabilizers and support for those “left behind” by globalization – a group which was never in the free marketeers’ original script.

Perhaps, though, there is something else. Tory support for market forces was strong when they were operating to enrich capitalists and hold down wages, but it has waned now that they are starting to raise wages, if only in a few sectors. Business owners whining about staff shortages are showing a fine sense of entitlement but not so keen a grasp of market economics. The attitude of many on the right to the free market reminds me of Corporal Jones: “they don’t like it up ‘em”.

Perhaps free market ideology was, for many, never a principle but only just one more weapon in the class war, a means of protecting what Tories really care about, which is the defence of private sector hierarchies.

Capitalism and the state

Greg Smith and Dehenna Davison write:

For many in left behind parts of the country, the reality is that the private sector is stifled by a bloated public sector that is almost Soviet-sized in some areas of the North.

This seems to me to be a case of confusing correlation and causality. The reason why the public sector accounts for such a big share of economic activity in some areas is that the private sector in those places is so weak.

In fact, I’d suggest that – for the economy as a whole – a bigger state can work to the benefit of capitalism.

My story here is not about the several mechanisms through which the rich (pdf) disproportionately influence government policy, nor about crony capitalism, corporate welfare, bank bailouts and implicit subsidies, important as all these are.

Instead, let’s start in a less likely place - with a paper (pdf) written by Robert Merton in 1969. He showed that the proportion of wealth an investor should devote to risky assets rather than safe ones such as cash or bonds could be described by a simple equation. This says the proportion should be equal to the expected annual return on risky assets over safe ones, divided by the product of the variance of risky returns and a coefficient of risk aversion.

Let’s put some numbers into this. One bit of standard theory (p20 of this pdf) predicts that the expected risk premium should be only two percentage points or even less. The standard deviation of a well-diversified equity portfolio is around 15% giving us a variance of 0.0225. And a reasonable estimate of the coefficient of risk aversion is around three. This give us a solution to Merton’s equation of 0.02/(0.0225x3) = 0.296. Less than a third of one’s wealth should therefore be in risky assets.

For many people, the weighting of equities should be even less. If you could lose your job in a recession, equities are especially risky for you because they too would fall when your earnings disappear. And if you regard housing as an asset (say because you are planning on trading down) it too could fall in a recession, when shares fall. Both risks point to a low equity weight.

What’s more, for many people the opportunity cost of holding equities is not cash or bond yields but rather paying off the mortgage or credit card bills, the interest rate on which is higher than that on cash. Yulia Merkoulova and Chris Veld point out that, for these people, the personal equity risk premium is very low or even negative. That can justify holding no equities at all.

Some standard economics therefore predicts that demand for equities should be very low indeed. Which suggests that stock market capitalization should be paltry.

So why isn’t it?

Enter the welfare state. The wealth in Merton’s equation means your total wealth. Wealth is merely capitalized income*. And income includes pension income. The state pension is therefore a big part of your wealth. At current annuity rates, the basic state pension is worth over £170,000 for a 70-year-old. This means that, following the maths above, somebody with £100,000 of other wealth should have not £30,000 in equities but £80,000.

The state pension thus boosts demand for equities. In giving us a safe income, it allows us to take financial risks we otherwise would not.

Of course, this is not the only way the welfare state supports the stock market. It acts as an automatic stabilizer, helping to mitigate recessions; this is especially important as policy-makers cannot predict recessions and so cannot always use monetary and fiscal policy to stabilize the economy. Such stabilization policy reduces the cyclicality of corporate earnings and also our background risks such as the cyclicality of or jobs and small businesses. On both counts, it raises demand for equities.

We often talk of tax incidence, the fact that taxes aren’t necessarily paid by the people they directly fall upon. But there is also benefit incidence: welfare benefits don’t benefit only those who receive them, but also those who own the businesses where those benefits get spent.

In fact, there’s a third historic benefit of the welfare state. In buying off discontent, it has reduced the threat of revolution which has also supported shares.

All of this explains a big fact – that stock markets in developed economies did best whilst the role of government in the economy was expanding. The UK market made no capital gains on average during the free market era of the 19^th and early 20^th century, but soared in the post-war era.

One reason for the famous equity premium puzzle (pdf) of Mehra and Prescott is that the riskiness of equities fell in the latter part of the 20^th century and so share prices rose – as the threat of depression and political unrest fell. The larger welfare state is a big part of that story.

What Marx said in 1848 is therefore still valid: “the executive of the modern state is nothing but a committee for managing the common affairs of the whole bourgeoisie.” The state functions to support capitalism.

Of course, this is not to say that the current boundaries of the state are exactly those which are optimum for capitalism. Reasonable people can disagree on what these are: they might include a lot of social democracy.

Instead, my point is merely that there are many channels through which a big state can – and should! – sustain capitalism. Which is why few intelligent capitalists are minimal state purists, and perhaps why so many rightists have very comfortably abandoned the small state thinking of the 1980s.

* This is why wealth taxes should be redundant. If we’re measuring income properly (which the tax system does not), wealth taxes are just capitalised income taxes.

Cancel culture, & the death of classical liberalism

Most of us by now are bored with rightists complaining about cancel culture. But we shouldn’t be, because they show that the left has won an important battle about the meaning of liberty.

What I mean is that such complaints show that the right has abandoned a classical liberal conception of the term.

Let’s take Friedrich Hayek’s discussion of liberty. He defined this in negative terms, as the absence of coercion, where coercion is something which “occurs when one man’s actions are made to serve another man’s will, not for his own but for the other’s purpose.”

But what exactly is and is not coercion? Here’s Hayek:

Coercion should be carefully distinguished from the conditions or terms on which our fellow men are willing to render us specific services or benefits…in a free society these mutual services are voluntary, and each can determine to whom he wants to render services and on what terms…If a hostess will invite me to her parties only if I conform to certain standards of conduct and dress, or my neighbour converse with me only if I observe conventional manners, this is certainly not coercion. (The Constitution of Liberty, p135-6).

In this sense, “cancel culture” is not coercion and not therefore a violation of freedom. If hostesses withdraw your invitation to speak to a student union because you don’t conform to their standards you are not being coerced. Nor are you if the Guardian withdraws the benefit of its employment from you - because in free society that is its choice.

Of course, the student hostesses and Guardian might be unwise or silly to “cancel” you. But on Hayek’s view of freedom they are not depriving you of your liberty. It is stupid of the Daily Telegraph to deny their readers the benefit of my wit and brilliance by not employing me as a columnist, but in doing so, it is not denying me freedom in Hayek’s sense.

But isn’t such no-platforming an example of what Mill called the tyranny of the majority?

Not for Hayek. For him, Mill’s complaint “overstated the case for liberty”. Instead, for him social pressures could be a good thing:

There can be little question that these moral rules and conventions that possess less binding power than the law have an important role to perform and probably do as much to facilitate life in society as do the strict rules of law…Conventions and norms of social intercourse and individual conduct do not constitute a serious infringement of individual liberty but secure a certain minimum of uniformity of conduct that assists individual efforts more than it impedes them. (The Constitution of Liberty, p144-7)

This gives us a defence of “woke” social norms which forbid racism, homophobia or transphobia. Such norms “facilitate life in society” for people of colour, gays and trans folk by reducing the overt prejudice they used to suffer.

If the marketplace of ideas is to work properly, some thoughts must be cancelled. Just as a well-functioning market drives out shoddy goods, so it should also drive out bad ideas. “Cancel culture” is therefore an essential part of a market.

David Aaronovitch in the Times complains about self-censorship that arises from the fear “of losing our livelihoods, disadvantaging our families or of not succeeding”. On a Hayekian view, however, such extra-legal penalties are not coercion and not “a serious infringement of individual liberty”. They even serve a useful function: we want holocaust deniers, vax-opposers, racists and fruitloops to bite their tongue. If we didn’t self-censor, there would be a Hobbesian war of all against all. Do you really want to know my unself-censored opinions?

Again, you might object that our social norms are wrong. Fair enough. On a Hayekian reading, however, you cannot complain that they violate your liberty.

You might reply here, though, that Hayek’s conception of liberty was, as Martin Hagglund says in his superb This Life, merely “formal” and “utterly impoverished” as it is insufficient to provide substantive freedom.

Precisely.

Hayek had a reason for defining freedom this way. He wanted to show that coercion was something imposed by the state whilst the market and private sector were (except in circumstances he considered exceptional) “a very Eden of the innate rights of man*.” His idea of freedom was a way of promoting the market and a small state.

Those who complain about cancel culture being a threat to freedom, however, reject this project. If a few dippy students can violate your rights, mightn’t other private sector actors do so too in other ways? If employers limit your freedom by insisting you have particular political beliefs, don’t they also do so by insisting upon erratic or unsociable hours or low pay or bad working conditions? And if denying you a job for political reasons violates your freedom, isn’t your freedom also violated if the government, for political reasons, creates unemployment?

Once you think that “cancel culture” is anti-freedom, you are conceding the left’s claims that the private sector and employment relations are sources of unfreedom and that people should have not just political rights but substantive economic ones too, such as the right to well-paid work without oppressive employers.

We have, therefore, a lovely paradox – that classical liberalism in the Hayekian sense has been defeated not by the left but by the right itself.

So why did the right make this move? One possibility is that Hayek’s philosophy was only ever a cover for the pursuit of their material interests. In the 70s and 80s they regarded a smaller state and market forces as a means of asserting capital’s power over workers. Today, though, their concern is with protecting another type of inequality – the ability of old white men to spout off without challenge from hitherto marginalized people such as ethnic minorities, youngsters, or LGBTQI people. Conservatives’ main priority, as Corey Robin has argued, is to defend private sector hierarchies, and philosophy is subordinate to this end.

* That line is of course Marx’s.

The politics of abstraction

“Migrants will be turned back to France” cheers the Daily Express – alongside a picture celebrating Emma Raducanu who is herself a migrant, the Canadian-born daughter of Chinese and Romanian parents.

Of course, an Express front page should normally be beneath our notice. This one, however, is significant as I suspect it embodies a widespread phenomenon in mainstream politics – the prioritizing of abstractions over real people.

The Express’s doublethink has happened because, for much of the right, “migrants” are not real people such as Ms Raducanu, or the parents of most of the England team which did so well in the summer’s Euros, or the perfectly nice people you meet at work and in shops. They are instead an abstraction, a phantom invoking a vague sense of the nation (another abstraction) losing control of its borders. This is why hostility to immigration has often been stronger in areas with fewer migrants rather than in cities with many of them. And it is why Priti Patel is threatening to turn back boats carrying migrants. So what if they drown? It’s not as if they are real people.

It’s not just in attitudes to immigration that we see this abstraction. The same has happened with Brexit. This was never about improving the living standards of real people but rather an appeal to abstractions such as national sovereignty and taking back control*.

This isn’t to say that the prioritizing of abstraction over ground truth is confined to the right. It’s not. In all its reports on the state of the public finances the BBC has not, as far as I know, ever interviewed a real person who has described convincingly how high government borrowing has worsened their own personal life. Fretting about the public finances is elevating an abstraction over the real lives of real people as it means devaluing the truth that austerity probably caused thousands of deaths.

Centrists are guilty of the same thing in another way. The ground truth is that the financial crisis taught us that capitalism is more unstable and less capable of generating growth in real wages than New Labour believed. This should have led to a rethinking of how to best achieve stability and rising living standards. But it didn’t. All the political centre has to offer is abstract waffle about electability. Hence (for example) Sir Keir Starmer’s inability to answer the simple question of how to pay for increased public spending on health and social care.

Older readers will detect a puzzle here. Back in the 90s New Labour spoke a lot about evidence-based policy-making. A generation later, however, what we have is abstraction-based policy-making. The story of how one gave way to the other needs to be told – and it will be one with no heroes but many villains.

* You might object here that in causing shortages of lorry drivers and hospitality workers Brexit is driving up wages. But this is true only of a minority of workers. And the price rises that are the counterpart of their pay rises mean cuts in real incomes for others – which is inevitable if higher pay isn’t accompanied by higher productivity. Sure enough, the ONS reports that real wages have actually fallen so far this year.

What's the mechanism?

The late great Andrew Glyn always asked: “what’s the mechanism?” The west’s abject failure in Afghanistan highlights both the importance of this question and the fact that too many policy-makers and influencers fail to give it sufficient attention.

President Biden says “we did not go to Afghanistan to nation-build.” Which poses Andrew’s question: what, then, was the mechanism through which the Taliban would be defeated? We know for certain that it was not the ones actually operating: western military strategy as it was implemented failed.  

Exactly why this was the case is another matter, and one not relevant for my purpose*. Instead, my point is that the failure to satisfactorily ask and answer Andrew’s question was not confined to those supporting the military adventure in Afghanistan (or Iraq, or Libya). In fact, the failure is widespread.

For example, Anna Soubry still defends Tory-Lib Dem fiscal austerity, even though it caused (at the margin) the Brexit she detests. She is, even now, in denial of the mechanism that led to Brexit.

And then there are those centrists and Tories who now deplore Johnson’s corruption and incompetence but who failed to prevent it in 2019 by the only means possible – supporting Labour. In the 2019 election supporting Corbyn was the only means of preventing a Johnson premiership. Not doing so was to fail to ask: what’s the mechanism?

Much of the Labour right always fails to ask: through what mechanism can Labour win power if not (as a necessary but not sufficient condition) having a mass party to combat the effect of the mass media?

This failure, though, is not confined to airhead MPs and columnists. Even Nobel laureates are guilty of it. In Deaths of Despair Angus Deaton and Anne Case, having documented how American capitalism has been a force for mass social murder, write:

Capitalism needs to be better monitored and regulated.

They omit to ask: what’s the mechanism whereby this will be accomplished? There are many obstacles to it – one of which they themselves document: the fortunes spent on lobbying by big business. Humane, well-regulated capitalism requires a particular conjunction of class forces – one in which capitalists perceive that what’s good for workers is also good for them, and in which there is countervailing power (such as strong trades unions) to the tendency for capitalism to degenerate into cronyism. This conjunction existed in the post-war decades, but no longer does so. In its absence, the better-regulated capitalism urged by Deaton is as fantastically utopian as he believes socialism to be.

What we have here, then, is a widespread error. In not asking “what’s the mechanism?” we neglect the crucial importance of ground truth and implementation – the conditions of policy success or failure. Without these, however, policy-making is mere wishful thinking. This error of course is fuelled by a media bias: windbag opinion-mongers and Westminster gossips distract policy-makers and voters from facts on the ground, mechanisms and levers of power.

Which gives us a descent into crude identity politics. If you are not asking “what is the mechanism by which we defeat the Taliban, or Johnson, or Brexit?” you are left merely asserting your moral superiority without doing the hard work of thinking, discovering ground truth and – yes - making compromises. Which leaves you with little more than narcissism.

* I know nothing at all about foreign affairs, which it seems puts me on a par with the State Department and Foreign Office.

Ambition in capitalist society

Ambition, writes Lucy Kellaway, is both necessary and corrosive. She omits an important aspect here, which adds to its corrosiveness – class.

Class influences the level of ambition through two channels. One is that it distorts your awareness of opportunity. In Michael Apted’s superb TV series Up, the privately-educated Andrew knew (16'21" in) at the age of seven that he would go to Cambridge and become a lawyer. For the rest of us, our path to even modest success is not so pre-determined. I never thought about Oxford University until a teacher told me I could get in, and I never met anyone with a degree who wasn’t a teacher until I was in my 20s. If you’re not aware of the possibilities, you are less likely to be ambitious.

Another mechanism is that class sets the reference level of our income. When I realized that I would not have to worry about the leccy bill or becoming homeless, my ambition drained away. I was once one of those men brilliantly described by Adam Smith – a “poor man's son, whom heaven in its anger has visited with ambition”. But I was lucky enough to have learned before my deathbed that “wealth and greatness are mere trinkets of frivolous utility.” If you’ve nobody you want to impress, money soon loses its point.

By contrast, those from posher backgrounds can feel failures if they don’t emulate their father’s success. For many of them, wealth and greatness are not of frivolous utility but are instead the benchmarks by which they compare themselves to their parents and contemporaries.

Both these mechanisms help explain the fact that people who have experienced poverty as children earn less as adults even controlling for education.

But they also tell us something else. What seems to be ambition is in fact fear – whether it be the fear of poverty or the fear of falling short of parental expectations.

In this context, Lucy’s advice that we must sometimes slough off ambition is a counsel of perfection. It’s fine for those of us who have paid off the mortgage and so no longer fear homelessness. Younger people facing high rents or mortgage payments cannot afford a lack of ambition, even if they are consumed by anger when it is thwarted.

Again, class matters. It limits your options.

Here, though, we must ask: ambitious for what? Alasdair MacIntyre distinguished between goods of excellence such as mastery of a craft and goods of effectiveness such as wealth and power. Sometimes, pursuit of one brings the other: achieving the good of excellence in football will bring with it wealth, fame and at least some influence: Marcus Rashford’s campaign against child poverty would have been less successful if he’d played for Stockport County.

In other cases, however, the two conflict. I doubt that the country’s most excellent journalists are the best-paid. Being an excellent academic won’t necessarily bring you the big money that comes from being university vice-chancellor. Prime Ministers aren’t always drawn from the most excellent MPs or ministers. And bosses aren’t necessarily the people who were best at the jobs their underlings do.

One component of that slippery term “neoliberalism” is, I suspect, the valorization of wealth, power and hierarchy over goods of excellence such as professional standards and craft skills.

Ambition for the goods of effectiveness can, though, be corrosive not just for individuals but for the economy. The man who is hungry for power and income will seek advancement even where he is not equipped for the job. And because employers (and voters) don’t always know (pdf) what they are doing they will sometimes hire that man. Hence the Dilbert principle, of which Gavin Williamson is perhaps only the most prominent of many examples.

Here, incentives matter. Where there are disproportionate rewards in terms of income, power and status for advancement, people will seek promotion even when they are unsuited for it. You might prefer to be a first-rate coder than a third rate boss, but if being that boss means a big pay rise you will go for it. And so talent will be misallocated. What we have here therefore is yet another way (of many) in which big inequalities are bad for the economy.

To see my point, imagine an egalitarian socialistic society in which inequalities of power and income are small; there is less social distance between rich and poor families; and whose culture celebrates the goods of excellence in professional and craft work more than those of effectiveness: it would be a MacIntyrean or Walzerian-type utopia.

In this society, there’d be less incentive to be Dilberts like Gavin Williamson because you could earn a decent living as a first-rate coder (or third-rate fireplace salesman) and so have less need to “get on”. What John Stuart Mill called “the trampling, crushing, elbowing, and treading on each other’s heels” would diminish. And those who did “get on” would find their new roles, and the people they surround themselves with, less alien. So their ambition would not be the curse Smith thought it was. In these ways ambition would be less damaging to individuals and society.

You might think it hard to imagine such an environment. But then, as someone said, it is easier to imagine the end of the world than the end of capitalism.

Embracing Blair's legacy

Sir Keir Starmer wants Labour to “embrace Tony Blair’s political legacy.” Which poses the question: what is that legacy?

The usual response is merely an exchange of tribal grunts: “Iraq” versus “won three elections”. The truth is more interesting.

Blair’s (and Brown’s) great genius was to see that social democracy had to adapt to new times. So, for example, his expansion of universities was a response to the increased wage inequality between graduates and non-graduates; tax credits were an attempt to tackle the prevalence of low pay caused in part by the weakness of trades unions and globalization; fiscal rules were a reaction to high real interest rates; and the granting of independence to the Bank of England represented the awareness that policy uncertainty had contributed to economic instability.

This was serious, sensible economics. And it contributed to some genuine achievements. New Labour cut child and pensioner poverty – it’s easy to forget that the latter was a big problem in the 90s – improved the NHS, and the expansion of universities helped to create a large progressive-liberal constituency.

But he also had grave faults. The biggest of these, I suspect, was his managerialism, his faith in the ability of bosses and governments to impose order from the top down. It was this that underpinned the target culture that demoralized public sector workers; the excessive deference to bosses and tolerance of the increased power and wealth of the 1%; the clampdown on migrants and benefit recipients; and the illiberalism that spawned thousands of new criminal offences.

I would argue that the Iraq war was a consequence of this. It arose from what James C. Scott has called “high modernist ideology” - too much confidence in the possibility of centralized knowledge (and the wisdom of leaders) which led to an under-valuing of ground truth.

Which brings me to why Starmer is dead right. Labour must embrace Blair’s legacy, in the sense that it must do what he did and adapt to new conditions. For example:

 - In contrast to the 90s, real interest rates are now negative. This means tight fiscal policy is neither necessary nor – given the zero lower bound – desirable.

 - In the 90s, Labour, like most economists, thought that a stable macroeconomic policy framework was sufficient to achieve stable economic growth. The financial crisis and subsequent productivity stagnation has shown this to be too optimistic. To promote growth, government must be more activist.

 - Peter Mandelson was famously “intensely relaxed” about the very rich getting richer – a view consonant with Blair and Brown’s deference to business leaders. This can no longer be the case. It is very possible that the wealth- and power-grab of the top 1% is a cause of our poor economic performance.

 - New Labour thought that education was the route to prosperity. Given the degradation of erstwhile “middle class” jobs and the unaffordability of housing, this is now doubtful.

 - We have learned that there are limits what bosses and top-down management can do. New Labour’s excessive faith in these contributed to stagnant (pdf) public sector productivity and the financial crisis: bosses, it turned out, could stop banks going bust.  

My personal view is that answers to these issues should entail more democratisation of economic life. But that's not my main point. It is instead that we should embrace Blair’s legacy by addressing the question he asked and answered: “what does a modern social democracy look like?” He rejected the idea that Labour could live in the world as it was twenty years previously. We should follow him in that rejection. In this sense, Blair had a wisdom which is wholly missing in his epigones.

The social mobility con

Strange as it might seem, we owe some thanks to Digby Jones – because he has reminded us that social mobility is a con.

Over the weekend he tweeted:

Enough! I can’t stand it anymore! Alex Scott spoils a good presentational job on the BBC Olympics Team with her very noticeable inability to pronounce her ‘g’s at the end of a word. Competitors are NOT taking part, Alex, in the fencin, rowin, boxin, kayakin, weightliftin & swimmin.

Now, Ms Scott epitomizes the meritocratic ideal of someone coming from a poor background and succeeding through personal ability. She is a child of Thatcher:

 it doesn't matter what your background is. I believe in merit, I belong to meritocracy, and I don't care two hoots what your background is. What I am concerned with is whatever your background, you have a chance to climb to the top.

Jones by contrast is telling us that background does matter. However brilliant a working class person might be, he will find a way of hating them.

Of course, not all of those in the establishment blurt out their hatred as crassly as Jones did. Just as many racists avoid using the N-word, so class haters are rarely so explicit. Nevertheless, his attitude is widespread. Here for example is Sajid Javid: 

He describes going for an early interview at Rothschild and being confronted by a row of white men in pin-striped suits who asked him what his father did and where he went to school. “The British merchant banks in those days would always go to the old school tie. If you didn’t go to the right country parties and spend the weekends in the right place you had got no connection,” he says. “I thought even if they offer me a job I’m never going to fit in.” 

Everybody of obviously working class origin has experienced a degree of froideur in our encounters with posher colleagues, clients or bosses. With better men than Jones – and you can carve a better man than him from a turd – this will be subtle: those Rothschilds men were no doubt impeccably charming. But there is always a sense of being othered, a mutual awareness of difference – which, if you point it out, invites the accusation of chippiness. There is always, always, an undertow.

The best relationship the upwardly mobile can expect with posher colleagues is that of a trusted NCO with a good commissioned officer: it might be friendly and effective, but both sides always know there’s a difference.

One effect of all this is to depress social mobility. Sure, some people like Javid and myself can find well-paid jobs outside Rothschilds. But there are fewer places for us than there are for the posh boy.

And this can happen without overt class hatred of the sort displayed by Jones. It’s wholly reasonable for employers to want people they can trust or who look like they are safer bets. Like hires like – which diminishes the chances of people from working class backgrounds, or women, or ethnic minorities, or the disabled.

And those who overcome these barriers face another problem. We can never fully transcend the class of our birth. People from working-class backgrounds earn less than those from posh ones even when they have the same levels of experience and education. That’s because networks operate to their disadvantage.

Such networks diminish social opportunities as well as career ones. Men from poor homes are less likely to be married in later life (pdf), even controlling for their own incomes. This isolation, allied to the subtle stresses of living a life in unfamiliar surroundings is bad for our heath. As Michael Marmot has written:

Where you come from does matter for your health…Family background, measured as parents’ education and father’s social class, are related to risk of heart disease.

We know that immigrants tend to suffer from worse mental health than others. Perhaps migration across class borders has a similar effect.

All of which makes me think that Adam Smith had a point:

The poor man's son, whom heaven in its anger has visited with ambition…labours night and day to acquire talents superior to all his competitors. He endeavours next to bring those talents into public view, and with equal assiduity solicits every opportunity of employment. For this purpose he makes his court to all mankind; he serves those whom he hates, and is obsequious to those whom he despises. Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquillity that is at all times in his power, and which, if in the extremity of old age he should at last attain to it, he will find to be in no respect preferable to that humble security and contentment which he had abandoned for it. It is then, in the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments which he imagines he has met with from the injustice of his enemies, or from the perfidy and ingratitude of his friends, that he begins at last to find that wealth and greatness are mere trinkets of frivolous utility.

The point of all this is not to say that young working class people should not be ambitious. Instead, it is to suggest that social mobility is no substitute for genuine equality.