Stumbling and Mumbling

On economic intuitions

Recently on Twitter Will Bott asked: “a piece of string is wrapped tightly around the Earth. In order for the string to be lifted an extra metre in each direction, roughly how much longer would it need to be?”

Less than half of respondents got this right*, and 37% were wrong by a factor of 10,000. Which tells us that our intuitions can be not just wrong, but wrong by orders of magnitude.

This is not the only evidence here. Shane Frederick has devised a cognitive reflection test – three questions in which there is an intuitive but wrong answer and a non-intuitive but right answer. He has found that even at the US’s top universities, less than half of students get all three questions right.

Which poses the question: if our intuitions can be so wrong, might people’s intuitions about economics also be wrong with adverse impacts on policy-making?

Yes. The most obvious example is the idea that the government’s finances are like a household’s and so governments must “balance the books.” You don’t need me to tell you this is nonsense.

Another, albeit less egregious example, is immigration. Intuition tells us that an increased supply of workers bid down wages and so immigration must be bad for workers. The truth, however, isn’t so simple because there are other mechanisms at work: migrant workers also add to demand; any incipient fall in wages raises demand for workers, or cuts prices or interest rates, and so on.

David Leiser and Zeev Kril show that laypeople interpret economics by using a “good-begets-good heuristic.” Which might explain attitudes to Brexit; if you think Brexit is a good thing for whatever reason, you’ll be inclined to think it good for the economy too.

Of course, all this is old hat. Back in 1850 Frederic Bastiat warned against relying upon our intuitions because the economic mechanisms which we see are only a few of those that actually operate. And more recently Bryan Caplan has argued that irrational voters systematically misunderstand economics:

Compared to the experts, laymen are much more skeptical of markets, especially international and labor markets, and much more pessimistic about the past, present, and future of the economy. When laymen see business conspiracies, economists see supply-and-demand. When laymen see ruinous competition from foreigners, economists see the wonder of comparative advantage. 

But, but, but. The public’s intuitions are not always wrong. Leiser and Kril say that one example of the good-begets-goo heuristic is that people think that a good thing such as falling unemployment is associated with another, such as lower inflation. That contradicts the Phillips curve. But it’s not a catastrophic interpretation of the 2010s, when joblessness declined in the UK and US whilst inflation also stayed low.

Similarly, right-wing economists have for years objected to the public’s intuitive support for minimum wages and rent controls on the Batiatian grounds that these have unseen adverse effects. We now know, though, that such effects are small. Arindrajit Dube summarized the evidence as pointing to “a muted effect of minimum wages on employment.” And J.W. Mason says “there is no evidence that rent regulations reduce the overall supply of housing.” (In both cases the reason is similar: the interventions offset monopoly or monopsony.)

Non-economists’ intuitions aren’t always terrible.

We’ve other evidence on this point. One is that yield curves are far better predictors of recessions than economists, who are essentially useless for this purpose.

The other is my chart. It shows that the ratio of retail sales to the All-share index has been an excellent predictor of medium-term equity returns. When spending is high relative to the index equities subsequently do well, and when spending is low they do badly.

This is partly evidence that equities over-react: the ratio of prices to a simple time trend can also predict returns. But it’s also because spending is partly forward-looking: we spend more if we expect good economic times – and these are times when equities do well.

Intuitions, when aggregated, can then be correct. Bond investors intuitions about future rates, and households’ intuitions about their future incomes, tell us something about future economic conditions that economists cannot.

Hayek and Polanyi were, therefore, right - sometimes. Our knowledge of the economy doesn’t consist only of conscious evidence-based propositions but also of hunches, gut feels and instincts – which are sometimes correct.

Which poses the question: when are intuitions right, and when wrong?

I’d suggest two criteria, which aren’t necessarily 100% reliable.

One is: are people backing their belief with real money? Bond investments and household spending decisions involve hard money. Voters’ opinion on fiscal austerity, by contrast, is not. And cheap opinions are more likely to be poor quality ones.

Another is: do the conditions for there to be wisdom of crowds actually hold? One of these is that opinions be uncorrelated. Except where there are strong peer effects, this is likely to be true of household spending decisions. But it is not true of attitudes to politically-charged questions such as austerity or Brexit, where the influence of the media (among other forces) generates correlated and incorrect opinion.

So, this is one area where we need triangulation. Sometimes, we should listen to laypeople’s intuitions and ignore experts and sometimes we should do the opposite. Our problem is that existing institutions do a bad job in selecting for when listen and when not.

* The correct answer is around 6m. You don't need to know the circumference of the earth to work this out. You just need to know that the circumference is equal to 2πr.

Full employment, capitalism - and beyond

Is genuinely full employment possible? And if it is, is it compatible with capitalism? These are questions raised by President Biden’s ambition for an economy where “employers have to compete for workers.” This, he hopes, will “give workers more ability to earn a higher wage” and “the power to demand to be treated with dignity and respect in the workplace.” This, he claims, “isn’t just good for individual workers, it also makes our economy a whole lot stronger.”

This might not be a purely American question. James Meadway has argued that a world of ongoing pandemic risk “is one in which the balance of power at work can shift dramatically back in favour of labour.”

Certainly, there’s a precedent for por-worker policies making economies a whole lot stronger. In the 50s and 60s western economies had fullish employment (for men at least). And profit rates and equity returns were good: the S&P 500 for example delivered a real total return of 9.1 per cent per year between 1952 and 1972, which is even better than it has done in the last 20 years.

There are good reasons for this. Because workers tend to spend more of their income than billionaires, transferring cash to them can boost demand. The assurance of high demand can encourage firms to invest more. And the prospect of rising wages should incentivize them to invest in labour-saving technologies – things which can boost productivity. Through these mechanisms, everybody wins. This is what Marc Lavoie and Engelbert Stockhammer call wage-led growth (pdf).

But can we really return to the 1950s? One reason for thinking so is that anti-labour policies and low taxes in most developed economies have led to slower growth in both output and productivity. This fact, say Özlem Onaran Giorgos Galanis, suggests that wage-led growth is possible (pdf).

I have my doubts, however. As Steven Marglin and Amit Bhaduri – and the bitter experience of the 1970s crises - showed, cooperative capitalism is only one possibility (pdf). It is also possible that full employment will squeeze profit margins and depress animal spirits and investment, resulting in lower growth and the end of full employment.

The first thing to note here is that the full employment Biden has in mind is very different to that of the 50s and 60s. Back then, aggregate demand was high largely because of high private sector demand, in part because the war had created a backlog of demand for civilian capital goods; the federal budget was in rough balance for much of this time. Biden’s ambition for full employment by contrast is founded upon an expansion in public investment. That’s an admission that in a world of capitalist stagnation, the private sector won’t get us to full employment.

It’s theoretically possible, however, that public spending will stimulate private investment via accelerator effects.

There is, however, an offsetting mechanism. It’s that neoliberalism is performative; it creates behaviour as much as describing it. For the last few decades the ruling ideology has been that low wages and low taxes are business-friendly. Capitalists might well therefore regard a world of rising wages and higher taxes as a scary prospect, and so they’ll depress animal spirits and capital spending. Also, whilst in the 50s and 60s businesses had the technical skills to replace labour with capital, these skills might well have been lost after years in which the question for businesses has been of how to exploit cheapish labour: “robots taking jobs” is something which is much more discussed than observed – as indeed, the productivity stagnation demonstrates. Sustained high aggregate demand, then, might not be sufficient to kick-start productivity growth.

There’s another reason for doubt. Remember a basic national accounts identity for profits. By rearranging the facts that GDP is equal to both the sums of expenditures and incomes, we get:

P = (C – W) + I + (G – T) + NX.

This tells us that if consumption (C) rises as much as wages then – ceteris paribus – profits (and indeed the share of profits in GDP) don’t change. What capitalists lose in high costs they recoup in higher revenues.

For much of the 50s and 60s this was indeed the case. In the early 70s, however, C grew more slowly than W and so profit margins were squeezed: this was more pronounced in the UK than US. I fear this could happen again if workers use higher wages to reduce debt or simply if those higher wages result in the government clawing back tax credits. (There’s also the issue that, with economies more open now than in the 50s and 60s, higher wages will leak more overseas in the form of increased imports rather than domestic demand.)

Even if all my doubts are wrong, however, there’s another problem: do capitalists really want full employment even if it is compatible with decent profits?

One problem here was famously described (pdf) by Michal Kalecki:

Under a regime of permanent full employment "the sack" would cease to play its role as a disciplinary measure. The social position of the boss would be undermined and the self assurance and class consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laisser-faire…But "discipline in the factories" and "political stability" are more appreciated by the business leaders than profits. Their class instinct tells them that lasting full employment is unsound from their point of view and that unemployment is an integral part of the " normal " capitalist system.

The other problem is that recent years have in the UK and US seen a big increase in the influence of finance capital relative to that of industry. And whilst full employment might have been good for General Motors (it increases demand for cars) it is not so good for Goldman Sachs. Finance capital requires low interest rates both to support asset prices and to render profitable strategies of “picking up pennies in front of a steamroller.” Low rates, however, require a sluggish economy.

We’re already seeing fears of higher inflation, in the UK and US. Economists reply to this that there’s a simple solution to higher inflation – to raise interest rates or reverse QE. Technically, this is correct. But it ignores the class aspect – that higher rates jeopardize some powerful interests. And it also ignores the fact that higher rates reduce inflation precisely by increasing unemployment. We could square this circle by tolerating higher inflation; as Servaas Storm says, wage-led growth requires (pdf) loose fiscal and monetary policy. But one lesson of the 70s is that higher inflation can itself kill off full employment, not least by creating uncertainty.

Biden’s hopes for full employment are therefore a bold experiment. But what if they fail?

The answer is not to retreat back to regressive neoliberalism. Instead, as Marglin and Bhaduri concluded, we must “recognise the ultimate desirability of making accumulation independent of profitability”.  As William Beveridge wrote in 1944:

If…it should be shown by experience or by argument that abolition of private property in the means of production was necessary for full employment, this abolition would have to be undertaken. (Full Employment in a Free Society, p23)

Mainstream economists have long forgotten this – if indeed they ever knew it – and have discussed employment and inflation on the implicit assumption that capitalistic ownership is immutable. But it needn’t be. James Meade and Martin Weitzman, for example, thought the solution to the collapse of wage-led growth was to introduce a big dose of profit sharing between capitalists and workers. As long as firms’ aggregate revenues – wages and profits combined – are growing well, they (only might) have an incentive to expand.

Of course, a lot of work needs doing on the precise form such post-capitalistic ownership structures will take: it’ll vary from industry to industry and country to country. And it poses the question: what function do capital-owners actually fulfil?

But that’s my point. Biden’s talk of fiscal expansion, higher minimum wages and full employment shows that the left has won a lot of intellectual battles. But the ultimate battle – about who should own companies and how – has barely even started.

Playing the victim

Here are four recent developments:

 - The University of Leicester is sacking academics because they are doing research in critical management studies. The Tories, however, are silent on this whilst at the same time condemning a handful of students who are unsuccessfully campaigning to get Eric Kaufman sacked from Birkbeck. They tolerate actual violations of academic freedom whilst deploring attempted ones.

 - Laurence Fox calls for the Leicester City players who carried a Palestinian flag after the FA Cup final to be hounded out.

 - Matthew Offord MP demands that the BBC not broadcast an edition of Desert Island Discs because of Alexei Sayle’s ant-Zionism.

 - Several people complained to the police about a tweet from an SNP councillor about the Eurovision song contest.

These are all examples of how the right (and bosses) are opposed to free speech. And of course there are countless other examples of Tory hostility to freedom such as their harsh immigration controls, clampdown on protests and erection of trade barriers within the UK.

And yet these attacks upon freedom come from people who claim to be champions of free speech and protectors of academic freedom. They present themselves as victims of repression, beleaguered by “wokesters”, “not allowed to say that these days”, and subject to no-platforming. Oliver Dowden, for example, recently whined about a “cancel culture whereby a small but vocal group of people claim to have the monopoly on virtue, and seek to bully those who dare to disagree.” In this, way, as Will Davies said:

 A reader of the Times or the Daily Mail can convince themselves that they are a marginalised minority.

It’s not just in the context of free speech that the right makes this pretence. They also claim to be victims of “EU bullies”.

This is strange. Traditionally, political movements and politicians have wanted to project power: think of things as otherwise diverse as the Nuremberg rallies; Thatcher rejoicing in the nickname “the iron lady”; the classical Marxian hope that the working class would grow strong enough to overthrow capitalism; Black Power; gay pride; Blair and Brown’s endless talk of “strong leadership”; or leftists boasting of the number of people on large demos. What we have here is the exact opposite – a claim to weakness by those who in fact are in power.  We have Harry Flashmans masquerading as Tom Brown.

What’s going on here?

In part, it’s that old saying: “when you’re accustomed to privilege, equality feels like oppression.” As Dawn Foster says, the right think free speech means the right not to be criticized. They are perturbed to find previously marginalized people and perspectives challenging their own viewpoint and their historical myths.

More troubling for them is the sense that these challenges are the shape of things to come. The right’s voting base is greying and dying whilst the future will be that of immaterial workers and graduates sympathetic to socialism; Tories are less rooted in statecraft and with the elite than they used to be; and the party has lost serious intellectual foundations (Thatcher had Popper, Hayek and Friedman: who has Johnson got?). Of course, there right are in power now, but this power is brittle.

And its pretence of victimhood serves to shore up such power. It effaces inequalities. Men can pretend they are oppressed by feminism and white people by “critical race studies”, thereby denying the realities of gender and racial inequality. 

And, of course, class inequality. The idea that privileged people are being bullied by wokesters and eurocrats has allowed public schoolboys like Johnson and Farage to pretend to be men of the people – even though the latter is so weird he doesn’t listen to music or watch TV. The revolt against elites has merely facilitated the rise of another elite.

The art of bourgeois politics has of course always been to hide the true nature of inequality. What is remarkable is just how many ways those in power have of performing this trick.

Starmer, skill and luck

Why is Sir Keir Starmer making such a mess of being Labour leader? A good perspective on this comes from a 2006 article (pdf) in the Harvard Business Review by Boris Groysberg and colleagues: I fear most journalists and Labour activists have overlooked this because the HBR is too left-wing for them.

They looked at what happened when senior managers at General Electric became CEOs of other companies. And they found that bosses with similarly impressive CVs had hugely different performances in their new firms. This, they say, is because what matters is not so much the individual boss’s skills but the match between those skills and the job requirements. So if for example a cost-cutter took over a firm whose priority was to grow rapidly, he failed, whereas he succeeded if he took over a firm that needed to cuts costs in order to undercut its competitors.

Starmer’s problem is that whilst there was a good match between his skills and the job requirements of being Director of Public Prosecutions, there is a less good match between them and what it takes to be a good Labour leader. As DPP one can occasionally get away with dumping blame upon an underling, but this is harder for a Labour leader especially when those underlings have a significant powerbase and mandate of their own. More importantly, a DPP needs mainly to just keep the organization running. He doesn’t need a vision with which to inspire waverers. But a Labour leader certainly does. To use Groysberg’s framing, moving from being DPP to Labour leader is like moving from running a monopolistic utility to a growth company needing to catch customers’ attention in a competitive environment. It’s no surprise that a man can succeed at one but fail at the other.

Of course, there’s nothing at all unusual in a man being a good fit in one job and a bad one in another. It is the story of many football managers: Jose Mourinho was a great fit with Chelsea at least in his first spell there but not so much at Sp*rs, for example. Many successful businessmen who go into politics have mediocre careers. And countless men are geniuses in one field but fools in others: think of Bobby Fischer, William Shockley, James Watson, Richard Dawkins…

You might object here that this assessment of Starmer is founded upon hindsight.

Damn right it is. And that’s the point. We often cannot tell in advance who will be the best fit for the job – which is why so many hiring decisions go wrong. As William Goldman famously and rightly said, nobody knows anything.

We should therefore change our frame. Success can be the product not of skill and intention but of the luck of being the right person in the right place at the right time. Think of politics and indeed business as being like natural selection: randomish chances spring up – particular individuals, companies or strategies – and the environment selects for and against these. For example, whilst they were MPs it was not at all obvious that Boris Johnson would make a more successful Prime Minister than Theresa May – which is why Tories voted her leader in 2015. But he has, because the environment has selected for his mix of strengths and weaknesses whilst it selected against hers. (Whether this will remain the case is, of course, another matter.) To take another example, John Denham says the Tories have “managed extraordinarily well to appeal to English-identifying voters". He's right. But Tory appeals to nationalism failed abysmally in the late 90s and 00s, so why are they succeeding now? Could it be because the environment that once selected against such appeals now select for them? 

People are, however, terrible at distinguishing between luck and skill. The most striking evidence for this comes from experiments by Nattavudh Powdthavee and Yohanes Riyanto. They got students in Singapore and Thailand to bet upon tosses of a fair coin and found that they were willing to pay to back the bet of students who had correctly called previous tosses. “An average person is often happy to pay for what could only be described as transparently useless advice” they concluded. Startling as it seems, this has been corroborated by other experiments.

And people make this error even when they have real money at stake. Investors around the world (pdf) lose money because they buy unit trusts that have performed well for a few months, failing to see that short-term returns are largely due to luck.  They “confuse risk taking with skill” says Christoph Merkle. They “lose money because they buy unit trusts after short periods of good performance, failing to see that this can be due to dumb luck rather than to fund managers’ skill” say Andrew Clare and Nick Motson at Cass Business School.

Most fund managers are not skilful – but some get selected for by the luck of the environment. Maybe the same is true of politicians. And Starmer is being selected against and Johnson for – at least for now.

You might think that my depiction of success as owing more to luck than skill is a leftist mindset. But the left has a long (and I think ignoble and ineffective) habit of ignoring this principle and instead looking for heroes – from Napoleon through Ho Chi Minh and Che Guevara to Hugo Chavez. But there are no heroes, and even if there were we would lack the talent to find them.  

Markets & the right

Samuel Gregg reminds us of an important fact about rightist thinking – that the right has always been ambivalent about markets.

This is as true in the UK as in the US. We saw this, for example, in the 19^th century when the Tories split up over the abolition of the corn laws and when Thomas Carlyle damned economics as the “dismal science” for wanting to abolish slavery. We saw it too in Roger Scruton’s mixed feelings about Thatcher:

She leaned too readily on market economics, and ignored the deeper roots of conservatism in the theory and practice of civil society.

And we see it today in the Tories imposing trade barriers not just between the UK and EU but even within the UK. Perhaps the most spectacular example of this is John Redwood’s seamless move from ardent Thatcherite to supporter of autarky.

All this poses the question, though: why is it now that the right is moving away from free market thinking rather than twenty or thirty years ago?

The answer, I suspect, lies in part in the one thing that conservative thinking has always been consistent about – its concern to protect private sector hierarchies. As Corey Robin says:

The priority of conservative political argument has been the maintenance of private regimes of power.

And here’s the thing. Free markets sometimes help maintain these regimes but sometimes threaten them. In the 80s and 90s, markets helped to entrench capitalist power, because deindustrialization and globalization helped to weaken the power of organized labour. (This isn’t to say that the decline of unions was purely due to market forces: the coppers at Orgreave were agents of the state.) In these circumstances, the right discovers a love of markets.

At other times, though, markets disrupt hierarchies. The free trade espoused by Smith and Ricardo was bad for landlords: Smith was, in his day, a heterodox economist. 

What we’re seeing today is a reversion to those times. Markets now are a danger to the existing order, in three different senses.

First, some employers are befuddled by the unusual sight of localized labour shortages. Obviously, Econ101 says the answer to this is to raise wages – which some are loath to do. The notion that market forces might actually work to workers’ advantage rather than capitalists’ is an unfamiliar and disturbing one.

Secondly, in a free market employers can hire whom they want – which means immigration. A market society is a cosmopolitan society. Rightists who feel awkward about hearing foreign languages don’t want that*.

And thirdly British capitalism is now to a large extent a rentier economy, as Brett Christophers has shown. A genuinely free market, however, would undermine this. Freer copyright laws would curb intellectual property rents; ending banks’ implicit subsidy and encouraging competition would cut financiers’ rents (pdf); more competitive government tendering could reduce what Christophers calls contract and infrastructure rents; and shifting taxes from income to land value would end landlords’ power to expropriate for themselves the positive externality of improvements to local areas. In ways such as these, introducing more market forces would undermine actually-existing capitalism.

It’s no accident, therefore, that the right should now be falling out of love with free markets – because these are no longer a way of preserving the existing order. You cannot tell intellectual history purely through the lens of ideas. Material interests matter, and it is these that are turning the right away from markets.

If this sounds conspiratorial, it shouldn’t. Think of politics as being a little like natural selection. Policies and ideas arise if not as random mutations then at least sometimes wholly or partly independently of material interests. But the environment then selects which ones survive or thrive – and a key part of the environment is class interests. The Tories good fortune has been to find a way which reconciles voters’ longstanding hostility to free markets with both their own interests, their love of order and inequality and electoral success.

My story here is not just about the right, however. There’s a message for technocrats. They tend to see markets as a mere engineering problem: sometimes they work well and sometimes they need fixing. Maybe this would be true in an ideal society. But we don’t live in such a society. Instead, we have a class-divided one in which capitalists and rentiers have the whip hand – and that hand determines when and how markets get to work.

And there are points here for the left. The powerful sections of the right are no longer free marketeers. Pretending that they are is a tactical error, which fails to see that one of the Tories’ great strengths is its ability to change. Also, if markets can be a threat to actually-existing capitalism, perhaps many leftists should rethink their instinctive antipathy to them.

* No. Immigration does not reduce natives' wages (except very slightly for a minority).

Class

There’s much talk, some sensible and some less so, that the Labour party has lost touch with the working class. Khalid Mahmood for example complains that the party is “doing better among rich urban liberals and young university graduates than it is amongst the most important part of its traditional electoral coalition, the working-class.”

Of course, you can use words to mean whatever you want them to, but to those of us in the Marxian tradition, such a complaint makes no sense because of how we define “working class”.

For us, being working class is not about your lifestyle or background but about economic relationships. If you don’t own (significant) means of production and must sell your labour-power, you are working class. By this definition, young graduates and people drinking fancy coffees in That London are just as working class as an older manual worker in Hartlepool. Ponces are just as working class as racists. 

Nor is class simply a matter of income. An employee on a high wage is working class whereas a self-employed person on a lower income is not: s/he is a petty bourgeois in Marx’s words.

Being a worker matters in capitalism because it is a source of unfreedom and alienation. The unfreedom might be merely (!)  a matter of having to spend time doing something you’d rather not, or it could mean suffering tyranny and degradation. The alienation comes from the fact that our work is a way not of realizing our nature but rather is foreign to us.

On both counts, graduate jobs can be as bad as manual labour. One feature of recent years has been that professional jobs have seen more onerous hours, less autonomy and more precarity - which is one reason why such workers have become less likely to vote Tory . And bullshit jobs are experienced as pointless and alienating whilst some manual work can be a source of pride. 

And on both counts, we can't really speak of retired people as working class. If they don't need to work (and increasing numbers of over-65s in recent years have had to) they are free from the unfreedom and alienation that is the plight of the working class. 

Of course, members of the working class differ in their individual bargaining power and many can use this power to claim a share of profits. This does not alter the fact that they are working class: their share of the pie is conditional upon them selling their labour-power*.

From this perspective, the working class comprises much more than older, white less educated people. Migrants, ethnic minorities and LGBTQIA people are just as working class too. What matters is whether one must sell one’s labour power. This simple fact unites people with otherwise very different experiences and viewpoints.

There working class have never been an homogenous mass. Labour’s old Clause IV, written in 1917 by the Fabians Sidney and Beatrice Webb, spoke of “workers by hand or by brain” precisely because it saw a commonality between manual and non-manual work. That was right, just as today the working class can be in the material or immaterial economy. 

Of course, Marxists have always known that class in this objective sense differs from how people feel. As Erik Olin Wright said, "it’s never been true that class, by itself, explains consciousness". It often takes redundancy or a bad boss for people to learn what class they are in. Ash Sarkar is right:

How people perceive their own class has little to do with the economic base. As the oft-quoted Stuart Hall once said, “politics does not reflect majorities, it constructs them.”

You might object that by this definition almost everybody is working class.

This isn’t quite true: I’m not as I can afford to live off my capital and am working only to retain optionality. Insofar as it is, however, this a feature not a bug.

For one thing, it vindicates Marx’s prediction that the working class would grow:

The lower strata of the middle class — the small tradespeople, shopkeepers, and retired tradesmen generally, the handicraftsmen and peasants — all these sink gradually into the proletariat…Thus the proletariat is recruited from all classes of the population.

And for another thing, the fact that so many people are working class means that class politics can be a source of unity and solidarity. As Janan Ganesh – no Marxist he – has written, the class divide:

feels less fraught than the rifts over race, gender and sexuality that make up what we know, for want of a better euphemism, as identity politics. It is a matter of numbers. A crude campaign against the one per cent would put, at least in theory, all other Americans on the same side.

Which brings us to the point. There are powerful reasons why the right and their quislings want to deny this perspective on class. They want to distract us from the fact that the economy and society is structured around ownership and that what you own determines what power you have. They also want to divide and rule. The more people are divided between towns and cities, graduates and non-graduates, leavers and remainers, black and white, trans and cis, and so on and on and on, the less likely they are to realize how much they have in common.

Of course, bourgeois politics has always been pulling these tricks, and one way of doing so has been to pretend that class is just another lifestyle rather than a manifestation of economic structure. What is remarkable is that such tricks are as successful today as they always have been.

* A more awkward type for Marxists is what Wright (whose work I commend) called “contradictory class locations (pdf).” Bosses and investment bankers, for example, are working class in the sense that they sell their labour, but are capitalist in that they get a chunk of the proceeds of others’ labour and so are exploiters. I’m not sure how this invalidates the Marxian scheme though: a taxonomy can be useful even if some people are members of more than one set.

On centrist vacuousness

What would you think of a political party that promised to: cut unemployment by one million over two years; increase public investment; borrow more to finance extra welfare benefits and NHS staffing; increase foreign aid; promote worker coops; and aim for “a major extension of profit sharing and worker share-ownership to give people a real stake where they work”?

It’s pure Corbynism isn’t it?

Well, no. All these were in the 1983 Liberal-SDP manifesto. Back then, they were centrist policies.

Not that this was unusual. In 1924 – the year of picture opposite – Liberals called not just for workers to get a share of profits but also for the compulsory purchase of land for housing development and came close to advocating a land value tax.

By contrast, today’s centrists show no such enthusiasm for empowering workers. The LibDems had five years in government without expanding worker coops an inch. Change UK (remember them) were silent on them. And the Labour right are hardly deafening us with their calls for greater worker democracy.

I suspect there’s a simple explanation for this. Centrism is intellectually parasitic, preferring triangulation to developing its own ideas. Its support for coops and profit-sharing was a way of splitting the difference between the right’s belief in private ownership and the left’s in more full-blooded public ownership, and a way of trying to pacify a militant labour force. With workers having been defeated in recent years, however, centrists see no need for such pacification. Indeed, they don’t even need to use the language of “capital” and “labour” as they did in the 1920s. Instead, they’ve retreated into the comfort zone of acquiescence to capital – as demonstrated by the post-Westminster careers of Nick Clegg and the Cukkers.

This explains something else – centrists’ lack of interest in economic policy, or indeed policy generally. It’s clear what they don’t want – the sort of Corbynite policies centrists advocated in the early 80s. But it’s much less obvious what their positive agenda is. What, for example, are their answers to the problems of inequality, stagnant productivity and real wages, unaffordable housing and so on?

We heard this vacuousness from Peter Mandelson on the Today programme yesterday (2’19” in). Nick Robinson asked him what changes he’d like to see Labour make. “I’ll come to that” replied. But he didn’t.

Even when they have deigned to write down some ideas, political centrists have ignored such issues. Pretty much the only reference to economic policy in Change UK’s launch manifesto was to the need for the government’s “responsibility to ensure the sound stewardship of taxpayer’s money”, as if we were still in a  world of bond vigilantes. And Chris Leslie’s Centre Ground paper (pdf) made almost no reference to the fact that the financial crisis and subsequent stagnation in real wages and productivity requires centrists to re-assess the economic idea they had in the 90s.

Instead of intellectual analysis, centrists offer us two things. One is pure retail politics, accommodating itself to a selective perception of what voters want: Mandelson – once a Remainer – for example now thinks Labour must embrace “Brexit values” without also noting that higher taxes on the rich and more nationalization are also popular. Among its many flaws – among which is that this would alienate lots of Labour voters - this ignores the fact that public opinion is changeable: Brexit, for example, moved from being the obsession of a few cranks to the dominant issue in politics as a result of right-wing campaigning and economic stagnation. Taken opinion as given thus means skating to where the puck is rather than to where it is going.

A second strand of centrism is more common among media centrists. Take for example Jonathan Freedland’s anger at Johnson’s corruption. When given the choice between Johnson and the alternative centrists like Freedland ducked out, failing to appreciate that real life is sometimes a choice of the lesser of two evils. In this sense, centrism is a form of identity politics – an urge for what Richard Sennett called a purified identity which leads to a whine about “why can’t you all be sane, rational and honest like ME?”

Now, in saying this I’m not damning all centrists. If we look outside the political-media circle we can find signs of intelligent life such as in Radix or in Sam Bowman and Stian Westlake’s work. Much of this, however, underplays the class problem – of how to build support for policies such as land taxes or tougher competition policy in the face of hostility from rentiers.

That’s a separate argument, though. The fact is that even where centrists do have good ideas these have not (yet?) found their way into the political centre.

Hence Labour’s problem right now. Whilst people will vote for something, even if it’s lousy, they don’t often vote for nothing. The vacuity of the centre has left Labour with a clapped out leadership bereft of ideas without a vision or a coherent message. As Grace says: “Labour has a choice to make: socialism or Pasokification.”

Of course, it has not always been this way. It’s easy to forget that New Labour actually had an intelligent and coherent – if flawed – economic narrative. The challenge for the Labour right is to either discover a version of that narrative fit for the 2020s, or to remain the braindead quislings of rentier capital.

Capital's political power

The Tories are corrupt. That’s the message of handing out PPE contracts to government cronies; Cameron’s lobbying for Greensill; the murky financing of Johnson’s home “improvements”; and Robert Jenrick’s doing the bidding of Tory donors. All this, says Grace Blakeley, highlights the problem of “politicians and business people being in each others’ pockets.”

All this, however, is only part of the story. Even if our politicians were honest and even if the media were unbiased capitalists would still have disproportionate (pdf) power over government. Grace is right to say that “our ‘democracy’ works for the powerful, not the people.” But this is due not to the shortcomings of particular individuals, but to systemic forces.

One of these was pointed out by that great left-wing economist Adam Smith. We have, he wrote, a “disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition”:

We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent…The great mob of mankind are the admirers and worshippers, and, what may seem more extraordinary, most frequently the disinterested admirers and worshippers, of wealth and greatness.

Gordon Brown – a more honest man than his successors – was prone to this. He praised top bosses as “wealth creators” and courageous leaders, inviting several to become ministers or advisors, such as Mervyn Davies, James Crosby, Shriti Vadera and David Freud.

The financial crisis and decade-plus long stagnation in productivity have of course shown that bosses in aggregate do not have the especial expertise Brown imputed to them. But the deference continues. If you listen to pretty much any 7.20 interview on Radio 4’s Today programme you hear bosses being interviewed as if they were impartial (even heroic) experts, whereas trades unions are portrayed as sectional interests.

It’s not just politicians and journalists who are deferential, though. So too are voters. How else to explain their belief that the Tories are economically competent when the truth is that they are criminally stupid?

Such deference amplifies a separate lever that capitalists have – business confidence. This, it is believed, is essential for investment and job creation. And so, wrote Michal Kalecki, “everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.” Hence the success of demands for low corporate and top tax rates.

There’s a third lever – ideology. John Jost has written of system justification theory (pdf), which he defines as the “process by which existing social arrangements are legitimized, even at the expense of personal and group interest.” This works through many mechanisms. There’s a form of anchoring (pdf) effect: Kris-Stella Trump shows how our perceptions of what’s fair are heavily influenced by the existing distribution of income. There are reference group effects: we compare ourselves to those around us, so many low-wage workers resent benefit claimants more than rich bosses. Then there are status quo biases and the just world illusion – mechanisms whereby we tolerate or even deny existing injustices.

Related to this is an asymmetric noise effect. As Amartya Sen pointed out, the very worst off are often “more easily reconciled to deprivations than others reared in more fortunate and affluent circumstances” (Ethics and Economics, p45). And so they make less noise than the wealthy, even if the latter’s complaints are trivial or arise from narcissistic over-entitlement.

I’ve no doubt that our media magnify these ideological biases towards capital. But I’m not sure they create them. One reason I say this is that we see the same cognitive biases that dispose voters to accept inequality in other domains such as the stock market. For example, analysts’ forecasts for a firms’ earnings growth are wrongly anchored (pdf) by the industry average growth, and the same reference group effect that causes people to punch down or across rather than up might help explain where there is often no risk-reward trade-off in finance. It has long puzzled me that when I write about cognitive biases in stock markets I’m seen as an intelligent technocrat but when I discuss the same ones in politics I become a loony Marxist drivelling about false consciousness.

None of this is to say that it is always a terrible thing that capital has undue sway over politics: sometimes the interests of capital and labour coincide. Our problem is that, in recent years, it has been the most backward segments of capital that has had most influence – rentiers rather than genuine entrepreneurs.

My point, though, is that the political power of capital over governments is not merely the result of cronyism and corruption. It is not therefore something to be cured simply by electing decent, honest people – although this job seems too much for the British electorate. If we are to have genuine democracy – in the sense of equality of political power – we need structural change.

On selection mechanisms

Market research is vital. Had the breakaway six done some, they’d have known it was an unpopular idea and so wouldn’t have destroyed their bargaining power with UEFA and their (in some cases tiny anyway) popularity with fans.  

Market research is a menace. Sir Keir Starmer’s concern with focus groups is creating timidity and a lack of direction. It’s causing him to reject Wayne Gretzky’s advice to skate to where the puck is going to be rather than to where it has been. Henry Ford never actually said “if I had asked people what they wanted, they would have said faster horses.” But it captures a limitation to how much we should listen to market research.

Which of these paragraphs is correct?

Both. What we have here is an example of Niels Bohr’s saying: the opposite of a great truth is another great truth.

We should think of all decision-making systems – be they corporate management, research methods, government regulation, our own mental habits and so on - as selection mechanisms.

Sometimes, such as in politics, these selection mechanisms select the worst, leading to inadequate politicians and bad ideas. Other mechanisms, though, can select against the worst whilst not necessarily selecting the best. I suspect this is true of market research. It’s perfectly possible that market research would have told the breakaway six they were backing a turkey whilst at the same time not telling Labour what will win most votes: one reason for this could be that people don’t actually know their preferences, and certainly not their future ones.

If this is the case (and this post is not really about that) then what we have here is one of a set of decision-making systems which function better at weeding out egregiously bad results than they do as selecting for the best ones.

Perhaps the best-known example of this is the US constitution. Its function is more to protect against tyranny than it is to ensure the best possible government, which might on occasion require a more activist state than the constitution permits.

Another example is Friedman’s idea (pdf) of monetary policy. The best it can do, he thought, is to “prevent money itself from being a major source of economic disturbance.” It cannot itself achieve really good things such as lasting full employment or rapid growth. That requires the working of “those basic forces of enterprise, ingenuity, invention, hard work, and thrift”. Friedman, I think, was too optimistic about the extent to which monetary policy would facilitate the latter. But the point is that, for him, good monetary policy was mostly “a negative proposition: avoid major mistakes” – advice which, admittedly, his epigones did not wholly follow.

Yet another example comes from my day job. There’s a lot stock-pickers can do to reduce the chance of bad outcomes such as avoiding the recency bias and disposition effects, knowing the edge of one’s competence, or not trading too much. These rules reduce the chance of us losing a lot. But they don’t much help in picking the best stocks – not least because, as Hendrik Bessembinder has pointed out, these are only a tiny fraction of all the stocks on the market.

A further example is medical regulation. Demanding that drugs meet stringent safety standards before coming to market can prevent catastrophes. But this comes at the expense of delaying the roll-out of a vaccine that would allow life to return to normal. In this case, procedures that select against bad outcomes can also impede good ones.

In his new book, Economics in One Virus, Ryan Bourne claims this is true generally.  Regulations, he says, “restrict businesses and individuals’ adaptability to new conditions – they curb within-market innovation.”

Selecting against bad outcomes, then, is different from selecting for good ones. And indeed, doing the one can sometimes actually impede the other. Neoliberal management of universities, for example, has probably done a good job of selecting against academics who are idle drunks, but given the replication crisis – incentivized by the pressure to publish – it’s done less well at selecting for good work.

Which selection mechanism we should adopt depends upon context: what would have worked for the breakaway six (arguably) doesn’t work for Starmer. As Edmund Burke said: “The circumstances are what render every civil and political scheme beneficial or noxious to mankind.” If you’re running a nuclear power station your focus should be upon avoiding worst-case outcomes, whereas in creative industries mechanisms should instead select more for best-case ones: this entails trade-offs because, as Dan Ariely has shown (pdf), dishonesty and creativity are often two sides of the same coin.

My point here is simple. We must ask of any decision-making system – that is to say, any power structure – what does it select for, and what does it select against? Yes, this is true of government regulation, but it is equally true of corporate management and political processes.

Capitalists against competition

Capitalists hate competition. That’s the message of plans by several big clubs – as well as Sp*rs – to form a “super” league in which they’ll be protected from the danger of relegation or from competition from emerging teams.

The smarter capitalists have of course long known that profits come from avoiding competition. Warren Buffett advises shareholders to look for companies with “economic moats” – things that protect them from competition. And Peter Thiel says start-ups should aim to become monopolies. “Competition is for losers” he says.

But here’s the thing. Striving for monopoly is by no means always a bad thing. The pursuit of brand power – one of Buffett’s moats – causes firms to try to make high-quality products consumers can trust. The urge for more market share causes them to undercut rivals and so keep prices low. Or the desire to win the natural monopoly that comes from having a dominant platform business leads firms such as Facebook or Twitter to give away services.

In ways such as these, capitalists’ attempts to overcome competition can work for everyone’s benefit.

But, but, but. This is only part of the story. Proposals for a breakaway league remind us that there are more malevolent ways of seeking to over-ride competition. Adam Smith famously saw one of these:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. 

We can add to this the pursuit of restrictive patents and copyrights; driving down of wages and working conditions; or lobbying governments for special favours.

Which poses the question: what can be done to ensure that capitalists strive for monopoly in benign rather than malign ways.

Changing ownership is not always the answer. Yes, there’s a case (pdf) for football clubs to be run by fans. But accountancy firms have long been worker-owned, and few people pretend that business is a model of a well-functioning market. This isn’t to say there’s no case for worker ownership – there definitely is. It’s just that coops’ many merits do not include being a magic bullet for producing the right kind of competition.

Nor, I suspect, are laws and regulations. Technocrats often forget that the law is endogenous. It is not imposed from outside by benign philosopher-kings, but is instead prone to being captured by capitalists. As Pablo Torija Jimenez has shown, the state serves the interests of the rich.

A third possibility – proposed for example by Jesse Norman in his book, Adam Smith: What He Thought and Why it Matters – is for capitalists to have the right kind of social norms, a sense of fair play. But of course, if they ever had such norms, they no longer do so.

Which leaves one other option – countervailing power. Strong trades unions in the post-war period, for example, not only prevented wages (of white men at least) being egregiously cut but also limited bosses’ rent-seeking.

If we are lucky, such countervailing power will kill the European super league. If enough players and managers resist it, along with fans, then club owners might cave in.

I’m reminded here of something Luigi Zingales has said. He points to what happened in 1994 when shareholders tried to stop Maurice Saatchi giving himself a lot of share options. He flounced off, taking with him clients and colleagues. The lesson of this, said Zingales, is that formal ownership is not the same as control. In the same way, Fenway Sports Group might formally own Liverpool FC but if Jurgen Klopp and some players were to oppose a super league, could they really force the club into it?

There’s no point making a firm prediction here: we’ll find out soon enough.

Instead, the point is that capitalists’ hatred of competition sometimes works for the public good and sometimes not. Which it is – and whether non-capitalistic forms of ownership can do better – depends upon context and environment which differ from industry to industry, place to place and time to time. It does seem, though, that recent years have seen these contexts change for the worst.   

On generational difference

There’s been a little pushback to this claim by Ezra Klein, but I suspect there’s a lot in it:

I’ve been struck by the generational divide within the Democratic Party. Washington is run by 20- and 30-somethings who run the numbers, draft the bills, brief the principals. And there is a marked difference between the staffers and even the politicians whose formative years were defined by stagflation, the rise of Reaganism and the relief of the Clinton boom, and those who came of age during financial crises, skyrocketing personal debt, racial reckonings and the climate emergency. There are exceptions to every rule, of course — see Sanders, Bernie — but in general, the younger generation has sharply different views on the role of government, the worth of markets and the risks worth taking seriously.

We have lots of evidence that our formative years can shape our perceptions many years later. For example, Ulrike Malmendier has shown that people who experienced recession in their youth own fewer (pdf) equities than others even in old age; that CEOs who saw the Great Depression run their companies more conservatively (pdf) than others; and that FOMC members (pdf) who saw higher inflation when young and impressionable are more likely to be hawks. And Erin McGuire writes:

Individuals who begin their lives by observing an economic downturn remain pessimistic and risk averse with respect to investments over the course of their lifetimes.

Napoleon, then, was correct: “to understand the man you have to know what was happening in the world when he was twenty.”

This, I suspect, bears upon the debate about how big a threat is inflation. Oldsters (like Larry Summers?) whose formative years saw high inflation are more worried about it now than are the (western) under-40s who have never experienced it.

This is consistent with David Hume’s thinking. What we see when we are in our teens and early 20s are impressions, things which enter our mind with “most force and violence.” What happened before then is what we read about in books, and what happens after are events which have less impact on our crusty minds. They are ideas, which are mere “faint images”.

Now, put yourself in the shoes of someone who is, say, 30. The financial crisis happened when you were in your late teens, and your subsequent years have seen stagnant real wages, unaffordable housing and high student debt. The impression you get is that capitalism doesn’t work. Of course, some older folk will tell you that there was a time when capitalism was functional, but for you this is a mere idea, a faint image.

By contrast, someone in their late 40s might well have had the collapse of communism make a forceful impression on them, whilst they saw affordable housing and years of economic stability. They have a much more favourable impression of capitalism therefore.

But of course, not all of us wrinklies have such an impression. My formative years were ones of violent class struggle, industrial decline and the deep recession and mass unemployment of the early 80s. Hence my sympathies with the likes of Grace Blakeley and Aaron Bastani.

Many of my contemporaries as teenagers had experiences like this:

Father (who left school during the full employment of the late 50s): Get off the settee and get a job.

Son: There aren’t any jobs.

Father: There are if you look.

Much effing and jeffing by both parties. Son slams door and walks out – to visit his grandad who, having grown up in the 1930s, knows his predicament.

Of course, not all 50-somethings share the formative experiences of my youth. David Cameron and Boris Johnson are around my age. But the 1980 recession looked very different from Eton than it did from a single-parent terraced house in inner-city Leicester. Napoleon’s point still holds. Class matters, as well as age.

We could extend the point. One reason for the generational divide over Brexit is that older folk who came to maturity before we joined the EU have the impression that we can do well outside the EU, whilst younger folk who have known nothing but EU membership see no reason to rock the boat.

All of this (as you'd expect) is to echo Marx:

The mode of production of material life conditions the general process of social, political and intellectual life. It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness

The conditioning, however, is not simply mechanistic: it’s not that this year’s economic circumstances alone influence our thinking, but rather that those of our formative years do so.

This helps explain why some bad ideas – such as a belief in fiscal rectitude – linger on after their material justification has vanished. We do not sufficiently update the thoughts acquired in our formative years, but rather are Bayesian conservatives who cleave to our priors. OK, boomer?

Prince Philip & the communist ideal

One unintended and unremarked effect of the eulogies to Prince Philip is that they have reminded us of Marx’s vision of communism.

What I mean is that several of his admirers describe him as a “renaissance man” on account of his wide range of interests.

This, however, is an example of a common error – of ascribing to agency what is in fact the result of economic forces.

Prince Philip could afford to pursue so many different passions because the day he married the Queen he was freed from what Marx called “the dull compulsion of economic relations.” For most of the rest of us, however, this compulsion forces us to specialize, to develop just one skill to the detriment of other interests. Capitalism rests upon the division of labour. But as Adam Smith saw, this can destroy us:

The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging.

A man’s mastery of one skill, said Smith is “acquired at the expense of his intellectual, social, and martial virtues.” And there’s plenty of evidence for this. Think of William Shockley, Bobby Fischer, James Watson, Larry Summers, Morrissey, Richard Dawkins….

In fact, the early history of capitalism was marked by workers’ fierce reluctance to devote long hours to doing just the one thing. Sidney Pollard (pdf) and E.P. Thompson (pdf) have documented how capitalists strove to instil an unnatural work discipline into their employees. As Pollard put it:

Men who were nonaccumulative, non-acquisitive, accustomed to work for subsistence, not for maximization of income, had to be made obedient to the cash stimulus, and obedient in such a way as to react precisely to the stimuli provided.

Of course, working conditions and hours have improved since Smith’s day and many people have internalized the capitalist work ethic. But not all of us. Research by Alex Bryson and George MacKerron has found that even people in good jobs are more miserable whilst at work than they are in any other activity bar being ill in bed. Which is why thousands of those who can afford to do so opt out of the rat race to do what Prince Philip could do – pursue a variety of interests. One reason why I’m looking forward to retiring (next year, I hope) is that I want to spend more time reading, gardening, learning music and learning Italian.

Which is where Marx comes in. His vision of communism was one in which the division of labour no longer suppressed our development as Smith thought it did. (Marx, of course, had read Smith much better than have today’s admirers of him):

As soon as the distribution of labour comes into being, each man has a particular, exclusive sphere of activity, which is forced upon him and from which he cannot escape. He is a hunter, a fisherman, a herdsman, or a critical critic, and must remain so if he does not want to lose his means of livelihood; while in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic.

You might object that Marx’s vision was one of a society of (surprisingly bucolic) dilettantes. That misses the point – that in communist society you will be able to pursue just one activity if you want: you’ll be free to choose.

Yes, free. Marx’s main beef with capitalism was not so much that it was unfair but that it generated unfreedom by alienating us from our nature. As William Clare Roberts puts it, capital “bends labour power to an alien and unnatural end.” Marx, says Clare Roberts, was a theorist of freedom.

Those of us who are rich enough can step away from the alienating and repressive division of labour by retiring early – although of course not without damage. But is what’s possible for a privileged few possible for all?

Only in a sufficiently developed economy. Marx thought that a particular level of affluence was necessary for communism, and that whilst capitalism could provide the potential for this affluence, it would not fully realize that potential and that there would come a time when capitalism ceased to develop productive forces but instead held them back. It would, he thought, require communism to allow that potential to be realized for everybody. Aaron Bastani’s “fully automated luxury communism” is in this tradition.

Whether this is feasible is of course another matter. The answer lies in the outcome of the race between technical change and diminishing returns and rising rents, and personally I think forecasting the former is a mug’s game.

For my purposes, though, this isn’t the point. I merely want to point to a nice irony – that Prince Philip’s eulogists have, perhaps inadvertently, made the case for Marx’s vision of communism.

The need for institutional brains

“The trouble with you, son” said Bill Shankly to a young player “is that your brains are all in your head.” I was reminded of this line from the great man by reading Ian Leslie’s Conflicted, on how to have more productive arguments.

His advice is good: define exactly what the disagreement is about; make your interlocutor feel good and secure; acknowledge your own uncertainties; be less tribal; and so on.

In the heat of argument and when the teacups are flying, however, it is easy to forget these principles. We then have what the ancient Greeks called the problem of akrasia, of lack of self-control. Just because we know the right thing to do does not ensure that we’ll actually do it; even self-confessed “moderates” are apt to forget their own advice on how to argue well.

This is what Shankly was getting at. He wanted players who were so well-drilled and who had such muscle memory that they did the right things in the heat of battle instinctively, without thinking. Ditto musicians, who must know a piece so well that they can perform it without conscious deliberation.

In such cases, we need our brains not in our heads but in our feet or fingers.

But brains need not and should not be confined to our bodies. They can, and should, and sometimes do, reside elsewhere.

One place is in our habits. I invest into tracker funds by direct debit each month. Most of my investment is done without thinking. 

Strictly speaking, this isn’t optimal: stock markets aren’t fully efficient and tracker funds can be beaten by momentum and defensive stocks (pdf) (but, I suspect, not by any other strategy). Implementing such strategies, however, would require me to think. And if I did that I’d fall prey to the gazillion cognitive biases that I warn IC readers against.

My habit, therefore, saves me from error in the same way that Ulysses tied himself to the mast of his ship to save himself from steering it onto the rocks. Government who have made their central banks operationally independent have done a similar thing: in renouncing control of interest rates they have given up the temptation to change them for political rather than economic reasons.

In ways such as these, we protect ourselves from akrasia by taking our brains out of our head and placing them into habits or institutions.

These aren’t the only examples of intelligence being embedded in institutions. No single individual knows how to build a jet plane. But Boeing does. Good companies have brains that no individual has. This is organizational capital. If there is a justification for the high valuations on big tech companies, it lies in this capital. I’d suggest that the Tory party is an example of this. Each individual in the party is cognitively limited. But the party as an organization has a fearsome ability to reinvent itself and win elections.

Companies aren’t the only institutions in which intelligence can exist. Take this observation from P.J. O’Rourke in 1998:

Why do some places prosper and thrive while others just suck? It's not a matter of brains. No part of the earth (with the possible exception of Brentwood) is dumber than Beverly Hills, and the residents are wading in gravy. In Russia, meanwhile, where chess is a spectator sport, they're boiling stones for soup.

The difference, of course, lies in institutions. The people of Beverly Hills have for decades had institutions which make best use of their limited brain-power, not least of these being moderately well-functioning markets. Russians, however, have not enjoyed these. Their tragedy has been (and still is) that their brains were all in their head.

This is why I can’t work up any enthusiasm for the idea that genetic editing could increase our intelligence. What we need is not more brains in our head, but in our institutions – ways of making better use of what intellect we have. Without such institutions, high IQ people merely become efficient rent-gatherers, to the detriment of society.

Which brings me back to Leslie. The question is: do we have the institutions which embed the principles he advocates?

I suspect not.

Yes, any well-run company should organize its meetings in a way to embed his ideas – and if they are not doing so already they should.

In public discourse, however, such institutions are absent. Any guest on one of the BBC’s many moron-yak shows who followed Leslie’s advice to show humility, introduce novelty or make their interlocutor feel good would probably not be invited back. Unproductive slanging matches are “good” TV and radio.

The point generalizes. Our “marketplace in ideas” is obviously broken. Not only does it not exclude bad arguments, or ones in bad faith, but it actually favours bare-faced lies and (to paraphrase Burke) the noise of half a dozen grasshoppers over the silence of thousands of great cattle,

What we have in public discourse is not the institutionalized intelligence that has made Beverly Hills or Boeing prosper, but institutionalized stupidity.

It need not be so. We could have institutions (pdf) of deliberative democracy such as citizens’ assemblies and rules about admissible evidence which would embed some of Leslie’s suggestions: “a set of agreed norms and boundaries that support self-expression”; not trying to control one’s interlocutor; establishing trust; valuing challenges to the consensus; ensuring that you understand your interlocutor; and so on.

But of course, a big reason why we don’t have such institutions is that our current media-political system suits those in power just fine.

And herein lies a problem. What does it mean to have a productive argument? It could be a way of reaching the truth. Or it could be a way of clearing the air so that colleagues and partners can get along better. Leslie’s book is aimed more at the latter: its subtitle is “Why arguments are tearing us apart and how they can bring us together.”

But there can be a trade-off here. The truth could be that your partner is a lazy lying cheat and you could do better for yourself. Sometimes, we’re better off not being brought together but rather ending toxic relationships – yes, cancelling people. I doubt that Leslie wants to have productive arguments with, say, anti-semites or fanatical Islamists.

Which leads me to a cynical thought. In a world of huge inequality of power in which we lack institutions which embed good rules of argument, there’s a danger that Leslie’s call for us to be reasonable merely means us accepting injustice, inefficiency and dishonesty.

Complicated motives

This week Boris Johnson claimed that the roll-out of the vaccine was the result of capitalism and greed; Goldman Sachs workers complained about long hours; and I got my jab. There’s a link here. All three episodes shed light on the role of motivations.

Johnson is of course wrong. The Oxford vaccine was discovered by academics and is being produced by AstraZeneca at cost, and the Biontech vaccine was discovered by people who were already billionaires. It’s nearer the truth to say that the vaccines’ discovers were motivated less by greed and more by intellectual curiosity. And this, of course, is only one of countless motives, which include pride, ego, loyalty to colleagues, force of habit, fear of failure, peer pressure, altruism, and so on.

And these non-financial motives are powerful things. The vaccine roll-out has been conducted with impressive efficiency by people who were working either for nothing or for lowish wages. That contrasts with the failure of Test and Trace which has spent millions on expensive consultants. A sense of vocation or of doing good can produce better results than the cash nexus: this is why workers in the public sector are more likely to do unpaid overtime than those in the private sector.

Of course, money matters; it is what gets workers through the door.  But whilst it is usually necessary to get a job done, it is not sufficient to get it done well, at least where contracts and worker supervision are incomplete. Instead, it gives us workers who, as Homer Simpson says, go in every day and do it really half-assed. Those Goldman Sachs employees who leave before getting their bonus remind us that we need more than money to induce us to work long hours.

Which brings us to the problem. Trying to motivate people by appealing to their greed can crowd out these many other motives (pdf). Don Revie discovered this in 1974 when he became England manager and proudly announced to the team that he’d raised their appearance money. He immediately lost the respect of players such as Emlyn Hughes who would have paid for the privilege of playing for England.

In the same vein, high-powered bonuses encourage bankers to take on too much risk. Or they encourage managers to focus on what can be measured (such as the next quarter’s earnings) rather than important things that cannot such as innovative activity or a good corporate culture, as Jean Tirole and Roland Benabou have shown (pdf). High CEO pay can incentivize office politics and selfishness as senior bosses jockey for the top job. And as John Kay showed in his book, Obliquity, companies such as ICI and Boeing were more profitable when they focused on making chemicals and planes than when they shifted to focusing on shareholder value.

There are several different mechanisms causing crowding out. One is a selection effect: if you offer big pay you’ll tend to attract people who are motivated by money who might well be more selfish and less moral than others. Also, financial incentives change people’s self-identity. The man who thinks “I’m a prudent banker” won’t take reckless risks but the one who thinks “I could get a big bonus” will. And then there’s the risk of a loss of reciprocity: if all you are offering is money, workers are less likely to feel respect or loyalty to you, as Emlyn Hughes demonstrated.

All this might explain two big facts. One is the serial failure of government outsourcing. Subcontracting replaces what Julian Le Grand called “knightly motives” (pdf) such as public service with the cash nexus. The other is that labour productivity has slumped as neoliberal management has spread, with its emphasis on target and incentives rather than other motives.

But, but, but. The crowding out of intrinsic motives by cash incentives is only part of the story. It’s also the case that financial motives can crowd in these other motives, as Sam Bowles has shown (pdf). This is the message of George Akerlof’s classic paper (pdf), Labour contracts as partial gift exchange. Good pay can sometimes promote reciprocity and hence get workers to put in more effort than necessary. It also allows workers to focus more on their jobs because they are less worried about money. Or financial incentives can serve as signals: a small tax on plastic bags, for example, told us all to use less plastic.

It cuts both ways.

You might think this just shows the weakness of economics. When done properly, it often concludes: “it all depends.”

But there is a strong message here. It’s that the network of motivations within any organization is a delicate eco-system which is sensitive to context. Any manager who blunders in with faux-cynical theories of human behaviour like Johnson’s risks destroying this system. Sometimes – and only sometimes – things are more complicated than they seem.

The paradox of financial innovation

Back in 1964 Kenneth Arrow showed that, in theory, competitive markets could produce optimal allocations as long as there were state-contingent securities which allowed people to trade risks and so insure against them. The problem is, he said, that: 

Many of the economic institutions which would be needed to carry out the competitive allocation in the case of uncertainty are in fact lacking.

Almost thirty years later, Robert Shiller showed that this remained the case. “The insurance industry has not devised policies that insure against many…causes of fluctuations in incomes” he wrote in Macro Markets in 1993.

He proposed creating GDP-linked securities which people who were optimistic about economic growth could buy whilst those worried about recession could go short. This would allow ordinary people to buy (via insurance companies (pdf)) insurance against recession. In the same spirit, he showed, securities could be created whose prices were linked to the incomes of specific occupations. These would serve a signalling function, showing young people which jobs to enter and which avoid, and an insurance role, allowing people to hedge the risk of a decline in demand for their skills. And, he added, we could also have house price futures. Young people who fear not being able to get on the "housing ladder" could buy these as insurance against rising prices, whilst people worried about falling prices (such as Buy-to-Let landlords or those planning on downsizing) could go short.

In ways such as these, financial markets could help people spread risk better.

But almost sixty years after Arrow and thirty after Shiller, such markets still don’t exist or do so in still-rudimentary form. Judged by the standard of Arrow’s ideal of complete state-contingent markets, we’ve seen astoundingly little useful financial innovation during my long lifetime. And this is not to mention the other failures of the financial system such as its tendency to generate crises; to commit crime; to mis-sell useless products; and (in the UK at least) fail to finance industry: for every pound that UK banks have lent to non-property SMEs, they have lent £11 in residential mortgages.

What we have seen in recent years, though, is a lot of innovation of dubious utility such as non-fungible tokens, special purpose acquisition companies, initial coin offerings, platforms to facilitate the mug’s game that is day-trading, and Mintme’s plan for people to issue tokens in themselves. And then there is the fact that it is not obvious what (lawful) need is fulfilled by cryptocurrencies.

Why, then, do we have so little useful innovation and so much useless?

It’s because of a collective action problem. Imagine we had a thriving market in, say, house price futures. Who’d gain? The main beneficiaries would be ordinary people who could trade away their house price risks. Those who devised the securities, however, would get only origination fees, which should in principle be bid down as other firms entered the market.

And markets don’t spring up from nothing. In his excellent An Engine Not a Camera Donald MacKenzie describes how Leo Melamed, head of the CME, encouraged growth of stock index futures, one of the few examples of useful financial innovation. A market, said Melamed, “is more than a bright idea. It takes planning, calculation, arm-twisting and tenacity to get a market up and going. Even when it’s chugging along, it has to be cranked and pushed.” In other words, it requires somebody to solve a collective action problem. Markets must be liquid but liquidity is a collective good: it requires many traders to come together.

Financial innovation, therefore, suffers from the problem described by William Nordhaus – that producers of new innovations capture only a “minuscule fraction” of their social gains. Which means that innovation is under-provided by the market.

What’s not under-provided, however, are forms of innovation in which innovators can extract big rewards. And these come from being able to, in Keynes’ words, “pass the bad, or depreciating, half-crown to the other fellow.”

What we have here, then, is a simple failure of capitalism – the fact that the pursuit of private profit prevents the fulfilment of genuine social need. Mariana Mazzucato’s point that the state can be a source of innovation applies especially to finance. State ownership of financial institutions might be necessary to solve the collective action problem that blocks useful innovation. One could imagine state-owned banks originating GDP or occupation-based securities which the government then gives to everybody as part of people’s QE. When I say state ownership, I mean ownership that forces banks to become providers of public service (and not just in the context of improving financial innovation) rather than the botched nationalizations of 2008 that left the monkeys in charge of the zoo.

You might think this is a Marxian demand. In this context, though, it’s not. There’s a tradition in Marx (which I’m not wholly comfortable with) which sees markets as irrational, alienating and sources of chaos and unfreedom. Advocating more financial markets is therefore unMarxist. What it is, though, is bog-standard orthodox economics. If we really want to achieve the fundamental theorem of general equilibrium economics in which free markets are Pareto-optimal, we need more complete markets – and this requires state ownership and control of banks.

Which gives us a delightful paradox – that in a sense, conventional economics is more radical than Marxism.