Stumbling and Mumbling

The two agendas

Why are UK infrastructure projects so expensive, and what can be done about this?

To what extent is the rise of the far-right the result of economic stagnation?

How can we raise economic growth given that we're close to full employment and so ordinary deficit financing would be inflationary?

How do we divert labour towards construction, social care and public services without accelerating pub closures and high street decline, both of which could strengthen the far-right?

Are tax rises sufficient to do this, or do we need microeconomic interventions as well? 

What can be done to cut the UK's high energy costs?

How can we reform utilities given that regulation is ineffective?

How can we reform income tax to reduce any disincentive effects of 60%+ tax rates?

How can we alter the tax system to boost growth, either by simplifying it or by shifting taxes from incomes to property or wealth?

Do we have the management skill in this country to reform public services or deliver infrastructure projects on time and on budget, and if not what can be done about this?

What can be done to curb rentierism and stimulate productive entrepreneurship?

Which inequalities matter most - of income, power or wealth and if so between exactly which groups?

Is inequality itself a barrier to faster growth?

Would more economic democracy be a good idea, and if so of what particular form?

Is there a case for a sovereign wealth fund, either for purposes of economic stabilization or as a means of funding public spending?

Has the public sphere really deteriorated in recent years (or is thinking so mere nostalgia?) and if so what can be done about it?

How can we change politicians' incentives so they better favour the public good rather than the interests of plutocrats?

All these questions here - and you can no doubt add many more - bear upon the same general issue: how, if at all, might we improve the material standard of living for millions of people? Questions about the public sphere do this at one remove: a healthier democracy would perhaps lead to better policy-making.

And yet issues such as these rarely dominate mainstream discourse, being confined to a few marginalized economists on Bluesky. What has dominated the mainstream recently, however, are the ketamine-fuelled racist lies of a billionaire: nobody intelligent enough to be reading this thinks for a moment that Musk, Farage or Badenoch give a shit about working class northern girls.

What we have here are two agendas - one on how to improve the real world, and another dealing in fantasies and crank issues. Which is a contrast to what happened in my now-distant youth. Back then left and right were bitterly divided - maybe more so than now - but they agreed on what were the issues. And the right at least made some effort to engage with facts and thought; Thatcher regularly cited leading intellectuals such as Popper, Hayek and Friedman in a way that her epigones have not. Yes, we claimed that Thatcher was mistaken about economics, but we didn't think she was a liar or fantasist as we do her recent successors.

So, why are we in this mess?

Part of the blame lies with the media. There has been a rise in the number of speakyourbranes shows, Jeremy Vine's programmes being the worst of many. There aren't enough knowledgeable people to fill all this airtime: they have better things to do than wag their jaws in a London studio. The space is therefore fill by know-nothings, often from Tufton Street, happier to spout off about irrelevancies. It takes knowledge to talk about tax reform, but any fool can gibber about immigrants.

GBNews blurted out the truth here recently when it told Liam Halligan that it “doesn’t need an economics and business editor”. It doesn't, for the same reason that Mrs Brown's Boys doesn't need one: it's mindless entertainment, not an attempt to reveal the truth.

Also, as Sam Freedman pointed out in Failed State, journalism has seen a drop in the number of specialist reporters but increase in lobby correspondents which distorts how politics is discussed. Rather than ask "will this measure actually improve the real world?" the focus is on "how will this play out"? That encourages a short-termism that crowds out serious thinking about policy, as well as the chasing of headlines and soundbites about anything that will "cut through."

Some political scientists, I fear, play into this distortion with their focus upon opinion polls. Not only are these pretty much irrelevant when we're four years away from a general election, but they also beg the questions: how is public opinion formed? Why does it influence policy in some areas (immigration?) but not others (nationalisation?) What's the connection between public opinion and effective or ethical policy?

"Politics" as it is discussed by journalists and (ugh) "commentators" - and even many politicians - has become a melange of gossip, fantasy and lies divorced from material scientific questions of how to improve living standards. One nice but unremarked indicator of this is that Patrick Grant's Less is not regarded by the mainstream as a book on politics. That's because the things it discusses are not seen as "political": decommodification, the decline of craftsmanship and nature of capitalism.

Yes, it's the C-word again. One reason why the right is frantically grabbing for any culture war issue is that they have no even half-credible answers to economic stagnation.

What they do have, though, is the power to set the agenda. As Elmer Schattschneider wrote in 1960, "some issues are organized into politics while others are organized out." The right wants to organize into politics conflicts about immigration, race, trans rights and "wokeness" whilst the serious left wants to organize in questions about capitalism. And guess who's winning?

This raises a problem for us. In challenging the right's falsehoods, we are acquiescing in its choice of agenda and thus accepting its power. Worse still, we risk treating its bad faith as a legitimate concern, or treating as sane what is in fact a psychiatric disorder. And of course, we risk a backfire effect, whereby merely discussing their concerns lends them credence.

Every good general knows that it is important to choose the right terrain on which to fight. The problem for the left - and also for those centrists who are reality-based - is that it is the right that chooses the battleground.

The centre right: killed by economics

Why has the Tory party abandoned the centre-right*? This is the question posed by what Lewis Goodall has called the "Powellization" of the party. When Robert Jenrick echoed Enoch Powell by speaking of us "importing hundreds of thousands of people from alien cultures" Badenoch's response was to defend him, in contrast to Ted Heath immediately sacking Powell in 1968.

But we needn't go back so far to see how Badenoch differs from previous Tories. In 1974 Keith Joseph spoke of "the balance of our human stock" being "threatened". That killed his bid to be leader of the party. And in 2001 MP John Townend made similar remarks to Jenrick's, but was denounced by leader William Hague. There has always been at least an undertow of racism in the Tories (Theresa May called them the "nasty party" for a reason) but its leaders have tried to keep a lid on it. In the 80s and 90s they were helped in this by the fact that immigration was low - mass unemployment being the most effective immigration control the Tories have found.

Now, however, the mask is off. As Goodall writes:

The thinking of the Conservative Party has moved away from any form of liberalism, to a deep and overwhelming nativism and cultural conservatism.

But why has the centre-right vanished as a significant force?

It's not sufficient to claim that the Tories have been radicalized by social media. Those of us who remember the vicious homophobia, sexism and class hatred of the Sun in the 1980s know that the media was never an oasis of liberal civility. It's just that there were elements in the Tory party who were uncomfortable with that.

Nor is it enough to point to Johnson's withdrawal of the whip in 2019 from 21 centre-right MPs such as Kenneth Clarke and Dominic Grieve. That episode was a symptom of the weakness of liberal Toryism, not the cause of it: if it were, liberal Tories would have returned with the disappearance of Johnson.

Instead, I suspect that the centre-right has declined for economic reasons.

One of these is that the class base of its support has diminished.

It's well-known that Tory support is now concentrated among the old and uneducated. According to Yougov, 46% of the over-70s voted Tory in the 2024 general election compared to only 20% voting Labour, with the Tories also having a lead among 60-somethings. And the Tories lagged Labour by 18-42 per cent among graduates whilst leading 31-28% along those with GCSEs or less.

But it was not always thus. In 1983 and 1987 the Tories actually had big leads among 25-34 year-olds, and graduates were more likely (pdf) to vote Tory than Labour simply because having a degree was the path to a higher income, and wealthier people historically have tended to vote right.

So what changed? Quite simply, graduate jobs are not what they used to be. For many, they are not just less well paid but also require longer working hours whilst offering less autonomy; that's one effect of the triumph of managerialists over professionals. And of course, even in a reasonably well-paid graduate job one has little chance of buying a house without the bank of mum and dad. It's no surprise that people who don't own property and have no hope of doing so are disinclined to vote for the party of the propertied.

The class base of liberal Toryism used to be professionals who were prosperous or at least had the prospect of becoming so: think of yuppies in the 1980s. That base has disappeared. Sir Lancelot Spratt was no doubt a Tory but his successors are less likely to be.

This, however, is not the only way in which capitalism has weakened the base on which liberal Toryism rested. The economic stagnation we've seen since (or perhaps before) the financial crisis has given us exactly what Ben Friedman predicted it would - a growth in illiberalism, intolerance and reaction. That's strengthened the far right at the expense of the centre right; there's now abundant evidence that a weak economy fosters the far right.

Stagnation was of course exacerbated by austerity. And Thiemo Fetzer has shown that areas of the country more exposed to this were more likely to support Brexit. "The tight 2016 EU referendum could have well resulted in a victory for Remain had it not been for austerity" he says.

The pursuit of a hard Brexit, however, required the Tories to "fuck business" by miring companies in red tape. This in turn has further weakened the class base of liberal Toryism, because the party can no longer credibly claim to be on the side of business and free markets as it once was**. Small businessmen lapped up Thatcher's anti-union policies, but not so Brexit.

In the mind of Tories such as Cameron and Osborne, however, austerity was not supposed to do as much economic damage as it did. They hoped that the negative real interest rates - what Osborne called "fiscal conservatism, monetary activism" - would fuel a boom in capital spending which in turn would boost productivity and hence economic growth.

But this didn't happen. Business investment fell short of OBR projections in the early 2010s and, partly because of this, so too did productivity: in March 2011 the OBR forecast that this would rise 1.9% a year between 2011 and 2016, but in fact it grew only 0.6%. This shortfall was partly compensated for by increased employment growth, but even so the result was that by early 2016 the economy was 4% smaller than the OBR had projected five years earlier. That's equivalent to around half of annual NHS spending.

Had the economy panned out as expected, we'd have had less bad public services and, quite possibly, therefore, no Brexit and a weaker far-right. The more centrist Tories might still be in charge of the party.

That this didn't happen is not mere bad luck but rather an ideological failure. For decades, the centre-right has presumed (for many it has been an unspoken assumption) that the economy would grow healthily if only the right policies were in place: fiscal conservatism, low taxes, "sound money", freeish markets, the rule of law and so on. For years, this was the case. For the last 20 years, though, it has been wrong. Kickstarting a stagnant economy requires something more than the centre-right has traditionally offered.

Herein perhaps lies a reason why Cameron and his allies failed to make a positive case for remaining in the EU, preferring to rely on "Project Fear": they just had no credible vision for a healthy economy or society within the EU.

Whereas Badenoch can talk (unconvincingly IMO) of the damage done by the "bureaucratic class" (pdf) and Labour of the need to relax planning restrictions, the centre-right is offering nothing. It has become maladapted to the realities of latter-day British capitalism - and like any maladapted species is threatened with extinction.

Which doesn't mean it is condemned to such a fate. The centre-right has down the decades shown itself capable of responding to different times. To do so now, however, requires it to rethink capitalism in an environment that is materially and ideologically hostile.

* Many leftists might think there's nothing especially centrist or liberal about the likes of Cameron, Grieve or Clarke. They'd have a point. I use such terms for want of better.

** As David Edgerton has pointed out, Brexit was the pet obsession of a few billionaires with weak ties to the UK rather than something demanded by wider capitalist interests.

Against "if I were king" politics

The government should stop billionaires making big donations to political parties; should move towards rejoining the EU; should fine polluting water companies more heavily; should make a positive case for immigration; and revive local economies and redistribute income more in order to fight off the far-right.

All these suggestions, taken from a quick browse of Bluesky, seem like good, reasonable politics. Advocating sensible policies, however, is only half of what politics should be.

Of course, we need to do so if only to show that a better world is indeed possible. But we need more than this.

Such advocacy begs the question: if these are good ideas, why isn't the government pursuing them already?

It's not because it is stupid - although a party that talks of fiscal black holes and running out of money does invite the charge of mental incapacity. Instead, it's because powerful sectional interests have created incentives for the government not to do sensible things. To take just the issue leading recent headlines, the reason why governments have not yet tackled the problem of social care is that, as Nick Pearce says, the issue "does not generate institutional interests that are capable of powerful political expression" and that "older people using social care are not politically mobilised."

The point generalizes. The power of the media (by which I mean a handful of billionaire cranks) inhibits the positive case for migration or for rejoining the EU. Utilities and media companies have bought Ofwat, Ofgem and Ofcom, thus preventing proper regulation. Politicians hoping for a few crumbs from the tables of the mega-rich don't want strict limits on political funding. Lawyers and accountants don't want a simpler, more transparent tax system. And there's a network of interests - nimbys, incumbent monopolists, financiers and landlords - who don't want economic policies that derail their gravy trains even if these would raise growth.

Not that such people need always to actually do anything to exercise power. Adam Smith famously wrote that people have a "disposition to admire, and almost to worship, the rich and the powerful". This alone might explain why Wes Streeting is "willing to work with Elon Musk" and is handing over millions to Palantir.

Politics is not about intellect but about power. And this is disproportionately possessed by the mega-rich.

The question is therefore not merely: what are good policies? It is: how can we achieve sufficient influence to get these policies implemented? Without this question, politics is a mere fantasy ("if I were king..."). Worse still, it can be moral posturing which leads to a fragmentation of the left as we fall out over competing but equally unachievable utopias.

Even the very cleverest of us are prone to this mistake: my bookshelves have a goodly number of volumes by Nobel prize-winners such as Angus Deaton, Joe Stiglitz, Esther Duflo and Abhijit Banerjee which commit it.

But mistake it is. A sensible politics needs to ask: how can we create constituencies of countervailing power to the regressive rich?

Marx was of course alive to this question. He was wary of what he called writing recipes for the cookshops of the future because he thought the first priority was to ensure the emergence of a working class consciousness, as it was this, he thought, more than the nice ideas of intellectuals, that would be a force for change.

Which it was, if not as much so as his followers hoped. The emergence of strong trades unions in the mid-20th century created a powerful voice for equality (pdf) and social democracy - a voice which capitalists heeded because they feared the alternative was communism. It's no accident that the triumph of neoliberalism, fall of the Soviet Union and weakening of unions all coincided.

If what I'm saying sounds Marxian, it shouldn't. Basic Econ101 says that people respond to incentives. Our problem today is that politicians have incentives not to pursue policies which promote general well-being, but those that serve the interests of the mega-rich (and, worse still, sometimes not their interests but their pet obsessions.) The challenge therefore is to change these incentives. Every parent knows that the way to get a child to do the right thing is to not merely ask it to, but to give it the right incentives. What's true of children is also true of politicians.

Thatcher knew this. In weakening unions and in selling-off council houses she greatly enlarged the number of voters whose interests were those of property owners and diminished the power of labour. That shifted incentives.

Of course, this government doesn't seem interested in creating constituencies for change. Nevertheless, there are reasons for optimism. Socio-economic change very often isn't the product of conscious top-down government policy but instead is emergent. And some social forces are building more powerful groups disposed towards change, whether we like it or not.

One, described by Phil Burton-Cartledge, is the growth of immaterial labour, that producing intangible items ranging from research to social care. Such work, he says, is "socially cooperative, drawing on the competencies, knowledges and innovation of the social commons." This generates a bias towards pro-social attitudes rather than atomized individualism and hence an antipathy towards neoliberalism's predation upon the commons.

A second reason for optimism lies in the increased number of university graduates. These don't just have liberal, anti-reactionary values - seen, for example, in their support for rejoining the EU. Many are also disenchanted with the fact that graduate jobs, even for those who get them, are not as good as they were in their parents' generation. Doctors and lawyers work gruelling hours often for little pay - and certainly only rarely enough to afford a decent house. That's a radicalizing force.

Thirdly, there's the fact that people no longer read newspapers: circulation has fallen by around two-thirds since 2000, though it's difficult to say by exactly how much because the Sun and Telegraph no longer report their figures. Younger people especially are no longer so directly exposed to billionaires' propaganda.

There are, therefore, forces creating a constituency potentially hostile to actually-existing capitalism. Indeed, a recent Yougov survey found that 45% of voters had an unfavourable opinion of capitalism and only 30% a favourable one. Of course, this group is barely politically mobilized: Corbyn did so, but his effort was quickly suppressed. But it could potentially be so again in a different form.

What form? I don't know; our ability to foresee political trends is puny. But this is the issue. The big political question is not: "what should the government do?" Any child can think of ways to improve policy. It is rather: "how can we create pressures that force governments into positive change?"

The late Charlie Munger once said, "show me the incentive and I'll show you the outcome." What's true of business is also true of politics.

Repairing the public sphere

In 1968 Garrett Hardin wrote an essay (pdf), The tragedy of the commons, in which he argued that common ownership of assets such as land or fishing waters was incompatible with people being the selfish rational maximizers of economic theory. This is because if every herdsman can graze his cattle for free on commonly-owned pasture land each will want to put as many cattle on it as he can - until the land becomes over-grazed and barren. In this way wrote Hardin, "freedom in a commons brings ruin to all."

The same problem, warned Hardin, applies to pollution:

The rational man finds that his share of the cost of the wastes he discharges into the commons is less than the cost of purifying his wastes before releasing them. Since this is true for everyone, we are locked into a system of "fouling our own nest," so long as we behave only as independent, rational, free-enterprisers.

In saying this, Hardin was expressing in economic terms what many philosophers have pointed out - that there's a potential tension between the assertion of individual freedom and a thriving public realm. In 1935 John Macmurray wrote:

If the forces making for individual independence and initiative - for individualism in fact - become overmastering, they disrupt social unity and produce a catastrophe. (Reason and Emotion, p69)

Or as Charles Taylor put it:

A society of self-fulfillers...cannot sustain the strong identification with the political community which public freedom needs. (Sources of the Self, p508)

Many on the right used to be alert to this. They criticized alternative lifestyles such as "free love" and homosexuality on the grounds that they eroded traditional communities.

Today, though, we face the conflict in another context - that of the public sphere, the area in which questions get (or don't get!) debated.

This, like common land, a public good. A culture which values free scientific inquiry and the pursuit of truth, for example - and which embeds these in institutions such as universities - is likely to produce technologies and medicines which benefit us all. Likewise, most people believe that it's in all our interests that political debate facilitate good policies and good governance. One reason why John Stuart Mill and his followers valued freedom of speech and thought was that they believed these fostered better ideas from which we all might benefit.

Which brings us to the problem. Our public sphere as it now exists does not do this. Under Musk's ownership Twitter has degraded from a common forum into what Christina Pagel has called a means of weaponizing anger and disinformation. And Hardeep Matharu writes:

Social media platforms rife with conspiracy, disinformation, and hate are what people are seeing daily – and where they develop their sense of the world they live in. Social media is now the media. In this ecosystem, what matters is what resonates, regardless of how outrageous.

Which vindicates Hardin. Musk's pursuit of self-advantage has ruined a (once-) important part of the commons. But the problem is not just Twitter. Anyone who remembers the Sun in the 80s knows that the legacy media has always pumped out lies and hate. What's more recent, though, is that in an attempt to staunch losses caused by falling circulation, newspapers have slashed the number of specialist reporters. That, writes Sam Freedman in Failed State, "has degraded the quality of coverage and made it easier for politicians to pursue bad policy and avoid scrutiny." And our political ecosystem too often selects for snake-oil sellers, charlatans, liars and the incompetent.

We have therefore a tragedy of the commons.

So what are the alternatives?

To see some, remember that there's nothing inevitable or universal about the tragedy of the commons. Far from it. As Elinor Ostrom pointed out (pdf), common ownership of resources can very often be successful, under particular conditions.

What's needed here is that users of the commons do not "behave only as independent, rational, free-enterprisers". Instead, they must limit the extent to which they exploit the commons - a practice known as stinting (pdf). In our context, stinting would consist of something like what Habermas called discourse ethics: norms of honesty, openness, diversity and rationality. That's why there was traditionally a strong convention in parliament against lying to the House.

In principle, such rules could be voluntary, with users of the public sphere having the necessary virtues. Many, however, do not. In discharging hate and lies into the public sphere, they are fouling the nest for the rest of us. "Political entrepreneur" should be an oxymoron.

Virtues, then, must be complemented by sanctions. Historically, those who despoiled the commons were sometimes subjected (pdf) to "rough music", a form of public shaming. The latter-day equivalent of this is the mocking or correcting quote-tweeting of hateful or wrong claims. The problem with this, however, that it (sometimes) backfires. As Tim Harford has written:

Repeating a false claim, even in the context of debunking that claim, can make it stick. The myth-busting seems to work but then our memories fade and we remember only the myth.

This leaves another possibility: common ownership. Hardin's tragedy of the commons could be retitled the tragedy of private ownership, because if cattle or fishing boats were commonly owned the community could agree to restrain their exploitation of the commons. In our context, this argues for common democratic ownership of the media or at least for a media ecosystem more diverse than one controlled by a few billionaires.

But, but, but. We do have an organization which was founded in part precisely to resist the tragedy of the commons and to foster a flourishing public realm: the BBC. Its first boss, Lord Reith, saw its role as shoring up the public sphere:

As we conceive it, our responsibility is to carry into the greatest possible number of homes everything that is best in every department of human knowledge, endeavour and achievement.

In an anticipation of Hardin, he thought that private ownership could not do this. "No company constituted on trade lines for the profit of those composing it can be regarded as adequate" he said.

You only have to watch Laura Kuenssberg or (worse still) listen to Jeremy Vine to appreciate that the BBC is no longer fulfilling Reith's objectives*, preferring instead to give a platform to billionaires' gimps or even to outright racists. Which tells us that common ownership on its own is not sufficient. But what is? How can we democratize the media without it falling under the influence of cranks and fanatics pushing their own agendas?

The problem is that the degradation of the public sphere means that not only is there no adequate forum for answering this question, there isn't even interest in asking it; a big fault with our political system is that some important issues are off the agenda whilst trivial ones are on it. And this is one of the tragedies of the commons.

* Of course, there's far more to the BBC than current affairs. Ironically, the BBC meets Reithian principles better when making commercial programmes than when fulfilling its public service remit.

On legibility

There's an under-appreciated connection between two of this week's big political stories - Starmer's promise to "crack down hard" on benefit fraud; and the assisted dying bill.

The link is James C. Scott's concept (pdf) of legibility, which for my purposes we can understand to mean the degree to which the state can read, and thus control, society.

A big question with the assisted dying bill is: are there sufficient safeguards against people being influenced into taking their own lives? Formally, there seem to be: the bill provides prison sentences of up to 14 years for anyone who pressurises someone to have an assisted death.

But this raises the issue of legibility: can the state read the actions of a relative who puts such pressure onto someone? Of course, a court of law should be able to detect overt coercion. But the influence can be less than that. It can take the form of subtle displays of impatience: an eyeroll, a froideur, the occasional slightly harsh word. Even if there are witnesses to these (and there often won't be) they might not seem as strong to a jury in a decontextualized courtroom as they do to the individual thus pressured. And this is not to mention the extent to which the elderly and disabled might be influenced by the general culture in which they are considered a "burden on society".

What we might have here, therefore, is a lack of legibility: the state cannot fully read the pressures upon the vulnerable. To the extent that this is the case, the bill provides insufficient protections for such people.

A similar problem of legibility afflicts benefit reform*. Now, there is some fraud: the DWP estimates that it lost £5.7bn on Universal Credit fraud last year. But if the state were to try to prevent this by having tougher criteria for claiming, it would incur three costs: an administrative burden of having bureaucrats scrutinize each claim more thoroughly; a disincentive to the genuinely hard-up to make claims; and even more anxiety heaped upon claimants (who often have mental health problems to begin with) as they navigate the harsh bureaucracy.

Legibility - the ability to read "deserving" and "undeserving" cases and to distinguish between them - is difficult. Achieving it comes at a cost. Perhaps too high a cost.

Of course, these are not the only contexts in which the question arises of how legibile is society. It occurs in almost policy areas. Can central banks read the future of inflation and output and thus stabilize inflation? Can an organization as big as the NHS be read sufficiently well to be reformed for the better? Can governments read people's responses to tax changes and so design a tax system which provides incentives to work and invest rather than merely increase tax dodging? And so on.

In our context, however, we confront another problem. In a better world we'd not need the assisted dying bill. Instead, when people had helped loved ones to die out of despair at their suffering the police would simply turn a blind eye. Humanity and professional discretion can achieve what the law cannot. This world, however, does not exist - if it ever did. Like many professionals, the police do not have much discretion - and in their case, for good reason.

The issues here are genuinely tricky ones. And like many tricky issues, they don't get the attention they should. One reason for this is that our media (and in fairness much of the public) fails to apreciate the size of what Thomas Homer Dixon called the "ingenuity gap": the gulf between the complexity and unknowability of the world and our puny knowledge of it. Instead, they have an ideology of what I've called centrist utopianism - an unquestioned belief that society is perfectible if only we had wiser people in charge.

This error is magnified by the fact that politicians, like all professionals, have professional deformation; they see the world through a distorted lens. If they are well-motivated, people enter politics because they have an inflated idea of what policy can achieve. They are therefore selected to over-estimate the extent to which society can be read and controlled - an over-estimation compounded by the tendency for all of us to be over-confident about how much we can know.

The fact that politicians and the media cannot appreciate the problem here, however, does not mean that it doesn't exist. It does. If you think there are simple answers here, you are very likely wrong.

* In fairness to the government, much of its White Paper, Get Britain Working, talks about genuine support for the out-of-work and better opportunities for training and good jobs. Insofar as this is sincere, it is to be applauded.

On ideological blindspots

There's a big ideological blindspot in political debate. To see it, consider two quite different recent texts: Conservatism in Crisis (pdf) co-authored by Kemi Badenoch and many others; and Sam Freedman's Failed State.

Let's take Conservatism in Crisis first. The authors complain of the "rise of a new bureaucratic class" wherein "increasing numbers of middle-class jobs relate more to government rules than goods and services bought and sold in the market." The last two decades, they say, has seen a big rise in the numbers of HR managers, financial regulators, university staff, mental health professionals, and so on.

This is not a new observation or a uniquely rightist one; academics have been writing about the regulatory (pdf) state (pdf) for years. What is questionable is this:

The rise of safetyism, stifling of risk and a bureaucratic class to regulate and control us and protect the marginalised is rising steadily. The result of this has been a collapse in average per capita G7 large advanced economy growth rates...Across the Western world in general growth rates have come down while government has grown.

But, but, but. This is an example of what I've called Scooby Doo ideology - the notion that the economy would have succeeded if it weren't for those meddling kids. It overlooks an important possible direction of causality - that it is our economic problems that have fuelled the rise of bureaucracy, not just vice versa.

This is obviously true of the share of government spending in GDP. It has long been the case that this tends to rise when GDP growth is slow and fall when it is strong. The early years of the Thatcher government saw it rise whilst the early years of the Blair government saw it fall. This wasn't because Thatcher believed in a big state and Blair in a small one, but simply because economic conditions are stronger determinants of the share of public spending in GDP than is the ideology of the government. Given the UK's sclerotic economic performance in recent years, therefore, you'd expect the share of public spending to have increased.

What's true at the macro level is true of specific sectors too.

Financial regulation has increased because the 2008 financial crisis showed us that banks cannot regulate themselves. Other industry regulators such as Ofgem and Ofwat (which are in effect agents of the industries they purport to oversee) exist because there's no effective market to regulate the industries. The Food Standards Agency was created in response to fears about food safety: the salmonella and mad cow scares. Universities expanded in the 90s and 00s in part because the career prospects for less educated people looked grim - as indeed they have proved to be. And the growth of HR managers to deal with labour regulation has happened in part because workers are unable to defend themselves through trades unions and so demand protection through legislation: Philippe Aghion and colleagues have shown that weaker unions are associated with greater labour market regulation.

Now, I'm not saying this is the whole story. In some cases, bureaucracy has been created by ideologically-motivated governments as is the case with the Office for Students, which employs over 400 people. And bureaucracy feeds on itself: academic departments need lots of administrators merely to deal with bureaucrats in the rest of the university. And some of us have been decrying the growth of managerialist ideology for years. And it is indeed plausible that all this bureaucracy might stifle growth simply because there's an opportunity cost: if talented people are pushing paper they are not creating the goods and services that drive a dynamic economy.

The authors of Conservatism in Crisis, however, focus only upon the latter and do not consider even the possibility that the rise of the "bureaucratic class" is at least in part endogenous: it is the product of capitalist failure, not the exogenous cause of it. The inability to even ask this question is an ideological blindspot.

A similar blindspot exists in Sam Freedman's Failed State, wherein he shows how the UK has a " crisis of governance" because of excessive centralization; a weak civil service; inadequate parliamentary scrutiny and "a desire to keep the media beast fed." Worse still, as he is smart enough to say, governments have little incentive to change this: no Prime Minister wants to give away power to local or regional government; or to face tougher oversight from MPs; or to face a backlash from a media not getting what it wants.

Which poses the questions: why are we in this bad equilibrium? Why are there so little external pressures for change? Why has the right (which dominates the agenda) focussed on non-solutions such as Brexit rather than on policies that might improve the quality of governance?

It's because our bad government serves the rich quite well. As the FT has shown, the rich in the UK are doing as well as anywhere: it is the incomes of the median and poorer households that are so low by western standards. Insofar as there is a crisis of governance, it is a crisis for the working class. And it does not have sufficient power to force change.

Let's put this another way. Freedman's description of the failures of outsourcing is in many ways brilliant. But he doesn't ask: failures for whom? He's bang right that outsourcing probation services, care homes or children's homes is brainless if you want decent public services. What it does do, however, is generate profits for a capitalism that is unable to thrive on its own two feet. And that's what counts.

Similarly, Freedman is also right to partly blame the "media beast" for bad governance. Which only poses the question: whose interests does it serve?

Freedman and Badenoch are therefore making similar mistakes. They're not seeing that what they complain about - the "bureaucratic class", bad governance - are endogenous, the product of a capitalism that is failing millions and which grants political power to those opposed to useful change.
Now, I'm not accusing either of being stupid. We all have blindspots. Even Nobel prize-winners*. In Deaths of Despair, Angus Deaton makes much the same mistake as Freedman. Both fail to see that good policy isn't merely a matter of intellect and know-how. It requires the right material conditions, the right power bases. And it is these that are lacking in 21st century UK capitalism**.

Yes, capitalism. And there's the thing. Politicians and commentators do not call capitalism into question, any more than fish question why they are wet. The issue is so far outside the Overton window that even somebody as smart as Freedman doesn't raise it.

But we should, because so many of the problems of which we complain - not just excess bureaucracy and bad government but also things as otherwise different as the housing crisis and rise of right-wing extremism - are the result of a failing capitalism.

There used to be a crude version of Marxism which tried to claim that all social and political developments were caused only by the "economic base". Non-Marxists today have fallen into the exact opposite error, of believing that economic conditions have absolutely no impact upon politics. Such a view surely at least warrants examination. And that's what Marxism asks us to do. You don't all have to be Marxists, but an awareness of Marxian insights would greatly improve the quality of political discourse.

* Yes, including me.

** Those qualifiers "21st century UK" are important. I'm not claiming a universal tendency for capitalism to always produce bad government. Instead, as Edmund Burke wrote, "the circumstances are what render every civil and political scheme beneficial or noxious to mankind."

Against Scooby Doo ideology

There's an unspoken and apparently unquestioned presumption at the centre of this government's economic policy. We saw three examples of it this week.

The first came in Starmer's speech at an investment summit where he said:

We’ve also got to look at regulation – across the piece. And where it is needlessly holding back the investment we need to take our country forward…we will get rid of it.

However, the only example he gave of such regulation was how planning restrictions prevent the building of wind farms. That's a good example, but one he gave before the election. In his three months in power he has not, it seems, discovered any more.

The second and third examples are Wes Streeting's proposal to give the unemployed weight loss injections to help them get back into work, and Liz Kendall's idea for job coaches to visit the severely mentally ill in hospital to get them into work. Both echo the 1997-2010 Labour government which saw itself as capitalism's human resources department, ensuring a pliable supply of labour. As Stuart Hall said (pdf), that government "set about vigorously adapting society to the global economy's needs."

What these examples have in common is a belief that British capitalism is fundamentally dynamic and efficient.

Which is doubtful. Growth has slowed markedly in recent years. My chart shows that in the last ten years GDP per hour worked has grown by less than 1% per year. That's only a fraction of what we saw in the post-war "golden age" of capitalism, and close to the lowest growth rate since the long depression of the 1870s. This is despite the fact that governments have spent the last 40 years giving capitalism's loudest voices mostly what they want, such as lower top tax rates and weaker trades unions.

This week's remarks suggest that Labour seems to think this slowdown is because capitalism has been restrained by stupid government or by a defective working class. Which is not much different from the Tories blaming the deep state or bureaucratic class.

Both parties seem to have the Scooby Doo theory of capitalism: "I'd have succeeded if it weren't for those meddling kids."

There is, however, an alternative possibility. It's that capitalism itself has developed forces which reduce growth. I'll list five, though they are interconnected.

First, profit rates have fallen thereby reducing incentives to invest, as documented by economists such as Michael Roberts, Tomas Rotta and Rishabh Kumar. Note that what matters here is not just current profit rates (which are hard to measure because the capital stock is hard to measure) but expected ones. It's reasonable for companies not to invest in new technologies if they fear that future progress in AI or robots will render those investments unprofitable. William Nordhaus famously showed that companies captured "only a miniscule fraction" of the social returns from technological advances between 1948 and 2001 because profits were indeed competed away. Any manager who has learned from this will be loath to invest.

Secondly, David Ricardo had a point: rising rents are crowding out other forms of economic activity. The problem here isn't mere farmland, as Ricardo thought. It's wider than that, as Brett Christophers has shown. We're handing so much money over to owners of prime residential or commercial land, to owners of oil and gas fields, intellectual property and infrastructure that there isn't enough left to create enough demand for dynamic sectors of the economy.

Thirdly, there's Baumol's law. As Dietrich Vollrath says:

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)

Of course, this could change: in principle, AI and LLMs could make lawyers and accountants redundant. But this is not the world we live in today.

Fourthly, capitalist inequalities - not just of income but also of power - can themselves slow growth. It encourages the rich to invest not merely in increasing aggregate productivity but in methods to protect their privilege and power - be it in guard labour (pdf) such as supervisory staff, technologies such as CCTV or keylogging, or simply lobbying government. It can reduce trust (pdf) which depresses growth by making us loath to invest in risky projects, or by worsening the quality of government policy. A low-wage economy can discourage investment in labour-saving technologies. And big wage differences between CEOs and less senior managers encourage office-politicking and working towards measurable (pdf) targets (such as selling risky financial products) rather than strengthening corporate culture.

Finally, in creating winners capitalism creates powerful groups with a vested interest in maintaining stagnation: incumbent companies wanting to restrict competition; financiers wanting the low interest rates that economic stagnation brings; lawyers and accountants wanting a complex tax system that strangles growth; or landlords opposing new building or property taxes. Why bother investing in new projects if you have a monopoly position with a cushy job and big income? Why should you set up a new company if you have a big salary from a corporate bureaucracy? And why bother competing in a market economy when you can lobby government instead for protection, subsidies and tax breaks? As Joel Mokyr wrote:

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.

All this of course echoes Marx:

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.

We might have reached this stage of development. If so, raising economic growth requires more than deregulation and the harassment of fat people and the depressed. It requires instead an attack on rich and powerful vested interests.

The problem is, though, that there is no political debate about this. Questioning capitalism is off the agenda. Faith in it is based more in ideology and wishful thinking than in evidence. Refusing to engage with the left, however, now means refusing to engage with reality.

Beyond tax rises

Most people agree that we need to raise public spending to repair our damaged public services. Simon Wren-Lewis estimates that it needs to rise by around 4.5% of GDP eventually.

Such an increase, as Simon says, requires higher taxes. This isn't because the government needs the money. It's because it needs real resources - more doctors, nurses, carers, military equipment or prison officers and so on - and there isn't so much spare capacity in the economy that these can come from dole queues or by companies increasing their production with their existing workforces. We therefore need tax rises to divert labour from the private to the public sector. As MMTers say, the purpose of taxes is to reduce inflation - and right now big increases in public spending would be inflationary without higher taxes.

Of course, everybody knows these would be unpopular. What's not sufficiently appreciated, however, is that they cause more problems than just this.

The first is that, in cutting consumer spending, higher taxes would depress sectors where competition is strong such as retailing, pubs and restaurants. This matters because competition is a major cause of efficiency gains - which is perhaps why productivity growth in retailing has in recent years outstripped that in the economy generally. The decline in such sectors would thus tend to reduce our already lamentable aggregate productivity growth, especially when accompanied by a shift in resources towards the public sector where productivity has tended to stagnate for years.

It's not just the impact on productivity growth that should concern us, though. So too should the cultural implications. Success in retailing and hospitality require that companies be heedful of customers' wants - that they cultivate the Smithian virtue of sympathy, of putting oneself in others' shoes; this is why some are accused of being "woke". "Doux commerce" - the tendency for trade to soften manners - can work in domestic as well as international trade. In shrinking consumer sectors, this is weakened. Which is all the more regrettable because rentierism will not be. The tendency for economic success to accrue to those who merely own assets rather than to those who provide decent goods and services will thus be strengthened. That's regress - a move away from commercial society back towards feudalism.

A second problem is that declining consumer spending could foster doom loops. As fewer people go to pubs, the atmosphere worsens ("this place is dead") thereby discouraging others from going. And as shops close, high streets become more depressing and so fewer visit them, diminishing the footfall for the remaining businesses.

This is dangerous not just economically but politically. Thiemo Fetzer and colleagues have found "a significant positive association between high-street vacancy rates and UKIP support." And Diane Bolet has shown how pub closures also boost support (pdf) for the far right. This shouldn't be surprising. As Ben Friedman showed, and Markus Brueckner and Hans Peter Gruener confirmed, economic stagnation breeds intolerance and reaction. The most visible signs of that stagnation will therefore boost the far right.

The third drawback is simply that shopping, days away and nights out make us happy. That might be a price worth paying so we don't have to wait so long for a hip replacement. But is it one worth paying for military contractors' profit margins or Border Force agents?

This question might not trouble our joyless rulers but it should trouble the rest of us. In a supposedly advanced society, there must be more to the economy than drudge work and struggling to pay the rent and gas bill.

Higher taxes therefore are nasty.

This - rather than anything Reeves actually says - is a justification for Labour not having big, quick rises in public spending or large tax rises.

But there are other possible responses to this dilemma.

These do not include taxing the rich. Doing so might satisfy some conceptions of justice. But it does not solve our economic problem of how to release real resources for the public sector. If the rich respond to higher taxes by cutting their saving or by reducing the size of planned inheritances, no such resources are released. In such an event, increased public spending would be inflationary and the Bank of England would raise interest rates in response - and these too would curb consumer spending with the same adverse effects as tax rises.

There's a simple solution to this - to raise the inflation target. I'm surprised this isn't more widely discussed.

Another possibility is to raise public sector productivity. Doing so requires more than waffle about reform and privatization, however. It requires, as Dan Honig shows, giving frontline workers more autonomy and power.

But of course, it's not just higher productivity in the public sector we need. We need higher productivity growth all round simply because this would give us more of everything: private consumption, public services, leisure, whatever. Labour's talk of planning reform is a good start here. But it's just that - a start. Serious measures to raise productivity would require (among other things): stronger competition policy; shifting taxes from incomes to land; rejoining the single market; more support for universities (which are high-productivity export earners); and a liberal immigration policy. All these measures will be opposed by vested interests and the media. And this is only to mention mainstream thinking, let alone policies such as economic democracy or greater equality.

There's something else. The reallocation of labour towards public services need not be achieved by macro policy alone. There are tens of thousands of jobs which would not exist in a more efficient economy. There's excessive guard labour - including some security guards, supervisory staff and patent lawyers - which protect captalist property rights. There's the bloated financial sector sustained by tax (pdf) breaks and ignorance of fund managers' performance. There are the bullshit jobs described by David Graeber. There are too many government bureaucrats, tax lawyers and accountants who are maintained by an excessively complicated tax and benefit system. And there are too many workers in industries with negative externalities - those producing environmental, risk or intellectual pollution*.

In this context, Keynes is now irrelevant. "It is in determining the volume, not the direction, of actual employment that the existing system has broken down" he wrote. That might have been true in the 1930s but it is not now. Redirecting labour requires not macroeconomic policy but specific measures targetting these egregious jobs.

And here's the problem. The government is showing insufficient interest in how to achieve this reallocation of labour through microeconomic and tax policy, and (except for planning policy) little interest in attacking the vested interests opposed to policies that might raise productivity. That leaves higher taxes as its only option, even though these are dangerous.

The fact is, however, that if Labour is to succeed in improving public services and defeating the far right, it needs to get out of the straitjacket of centrist macroeconomic policies. An attack on the more predatory and reactionary elements of capitalism is not leftist idealism but a brute necessity.

* These aren't especially leftist points. They're the product of policy failures and of what Milton Friedman called spending "somebody else's money on somebody else." Free marketeers - assuming there are any left - should be concerned with these.

Playing by the rules

Many of us are frustrated by Labour's stupid economic talk of "black holes", spending "money we didn't have" and likening the public finances to those of a household; the latest idiocy (as I write) being Lucy Powell's claim that not cutting winter fuel payments would have caused "potentially a run on the pound, the economy crashing.”

It might help reduce our blood pressure if we understand why Labour talks such nonsense - and it's a reason that has nothing to do with economics.

It lies in something that might seem like a cliche. Sir Keir Starmer has for years stressed the importance of "playing by the rules". He has written (pdf) of "a contribution society: one where people who work hard and play by the rules can expect to get something back". And in his first speech as PM, he said "if you work hard, if you play by the rules, this country should give you a fair chance to get on."

Note that the phrase is "play by the rules", not "obey the law".

"Playing by the rules" was the essence of his electoral strategy. This was to exploit the first past the post rules to the max, sacrificing votes in Labour-held metropolitan seats in order to pick them up in marginals. And, except for a handful of losses, this worked remarkably well*. Although the party won only just over one-third of the vote it got almost two-thirds of the seats. In playing by the rules it did indeed get something back.

Labour's wider strategy is to play by the rules. These rules are unspoken (for reasons that'll become clear!) so we have to infer them from Starmer's and Reeves' behaviour. Here, in no order, are some.

1. Accept the media's framing of economics.

The media, including the BBC, spoke of the "nation's finances", "black holes" and "the nation's credit card" being "maxxed out" before Starmer became leader. It is of course gibberish. But it's not the job of the media to educate people about economics: POSIWID. Nor is it the job of politicians to educate journalists: "Never attempt to teach a pig to sing; it wastes your time and annoys the pig", said Robert Heinlein. Instead, they must operate in the environment as they find it. As Enoch Powell said, "a politician complaining about the media is like a fisherman complaining about the sea." Reeves' language makes sense in this context: she's not even trying to talk to economists but is swimming in the sea of media-speak.

2. Don't challenge the power of capital.

This means more than merely keeping nationalization off the agenda. It also means rejecting policies that even the centre and right might support such as increasing market competition, fighting back against regulatory capture - Ed Miliband recently reacted to Ofgem's decision to raise energy prices as if it were an act of nature rather than a mutable human decision - or serious tax reform. Yes, there's a possibility that capital gains taxes will rise, but it's unclear that Reeves will even go as far as Nigel Lawson did and equalize CGT and income tax rates.

It's in this context that we should understand the party's enthusiasm for public investment. Yes, this would help increase economic growth, if only slightly. But talk of infrastructure investment serves another function. It distracts us from discussing other ways to increase productivity and therefore stops us asking the question: might it be aspects of capitalism itself - such as rentierism, vested interests and inequality - that are holding back growth?

3. Increase profits.

If Labour were consistent about regarding government finances as like those of a household, it would act like a household in insisting upon borrowing at the lowest interest rates possible and looking for value for money. But Labour isn't doing this. Its plan to use PFI will add to borrowing costs and the pledge to increase the share of GDP spent on the military pays no heed to whether this will give us value for money. Both violate basic principles of good household management.

They make sense, however, in the context of sustaining corporate profits. PFI contracts increase those of the financial sector and higher military spending means nice profits for BAE Systems.

This helps explain why Labour doesn't talk about job destruction. Logically, it should do so because when we're near full employment more housebuilders, carers, teachers and doctors must mean fewer workers elsewhere. But where? Obvious possibilities are in a bloated and socially useless financial sector; in bullshit jobs; in the lawyers and accountants sustained by an excessively complicated tax system; or in the environmental and risk pollution industries. To cut these, however, is to threaten the profits of some industries. Hence Labour's silence.

4. Don't engage with the left.

There are good arguments against nationalization or fiscal expansion. But Reeves doesn't make them, preferring to dribble about their incompatibility with fiscal rules. This makes no sense if you think she wants an intelligent debate with the left. But she doesn't. She wants to pretend that the left doesn't exist. That's why she feels no need to engage with other leftist ideas either such as a maximum wage or economic democracy.

5. Let money talk.

Labour has lost 150,000 members since 2019, and the proposal to deprive members of the right to elect Labour leaders would continue the decline.

You might think the leadership would worry about this given that it entails a significant loss of revenue.

But no. A mass party is harder to control. As Phil says, a small party "makes politics easier" for the Labour right. A shrinking party, he says, "will be another step along the road of making Labour a party that can always be relied on, as far as capital is concerned."

Although ordinary people armed with ground truth about the economy, public services and society should not have a say, others should - those with money. The Labour leadership might be squeamish about party members, but it is not about lobbyists - even those with interests one might naively think antipathetic to Labour values such as private healthcare or oil and gas producers.

There's a common theme linking all these rules. It's that Labour must accept and defer to existing power structures. This is why, for example, it thinks a slum landlord a more appropriate MP than one who supports striking workers; why it has resiled from a Leveson II enquiry; and why it doesn't raise obvious questions about the quality of British management. It's also why it talks about reforming the NHS but not the police, despite evidence that NHS reforms don't work and that the police are misogynistic, racist, corrupt and incompetent. It's because reform has nothing to do with evidence and everything to do with deferring to those with power.

What Labour is doing, then, makes sense if we regard it not as engaging in intelligent debate but as playing by a few simple rules. POSIWID, and Labour's purpose is to play by these rules.

Why is it doing this?

One reason lies in Starmer's moral psychology. A clue to this is in the fact that he gave up playing the flute: “If I can’t be the best, I’ll leave it in the cupboard.” This suggests, in Macintyrean terms, a commitment to external goods rather than internal ones; he would rather win ("be the best") than play music for its own sake. And winning means playing by the rules. This, however, can easily shade into fetishizing rules; he regards fiscal rules as a good thing not because they're good economics - they're not - but simply because they are rules.

And here's the thing. Playing by the rules does indeed win the game: Starmer won a big majority by playing to the rules of FPTP. By contrast, Corbyn's attempt to challenge the unspoken rules of politics led to failure. One of the great rules in life is to not start a fight you can't win. Starmer has learned this well. Rather than criticize him for this, the left should ask the question: what conditions would have to be in place for a Labour leader to be able to fight successfully against these rules?

* Perhaps by the good luck of the right-wing vote being split between Tories and reform more than by Labour's strategy, as Phil explains here. 

The Unaccountability Machine: a review

In every branch of Timpsons there's a sign from the boss saying "our colleagues in this shop have my total authority to do whatever they can to give you amazing service." Dan Davies' wonderful The Unaccountability Machine is the story of why there are no such signs in other organizations.

It's because, he says, decisions are now made by processes and systems rather than by identifiable individuals, leaving little space for people to use discretion. The result is the emergence of "accountability sinks", complex systems wherein it is difficult to pin blame onto specific people. This is why public inquiries into organizational failures take years and end up making hundreds of recommendations.

Rather than even try to look for accountability, says Dan, we should follow the advice of cybernetician Stafford Beer and not peer into the black box but instead judge organizations by their outputs. Hence the phrase "the purpose of a system is what it does", or POSIWID. Just as market outcomes are independent of individuals' intentions - selfish people can sell great products and nobody intends stock market crashes - so too are organizational outcomes. To take Dan's example, academics might merely want to expand knowledge, but the outcome of academic publishing is citations for academics and profits for John Wiley and Elsevier. POSIWID.

Such accountability sinks are not necessarily bad things. Embedding knowledge in a company rather than merely within individuals permits it to do difficult things and to cope easily with the departure of even the best employees: organizational capital is important. As Alfred North Whitehead said, "civilization advances by extending the number of important operations which we can perform without thinking of them."

But there's a downside. One of the great strengths of The Unaccountability Machine is its history of cybernetics. This teaches us to regard organizations as information-processing devices. And accountability sinks, when combined with striving for profit maximization, can result in disastrous losses of information.

One of Dan's targets is the leveraged buy-out industry. When a private equity company buys a firm and loads it up with debt, it is setting up a system in which the only information that matters is: will we be able to meet the next interest payment? That can force managers to increase efficiency. But it can also cause them to neglect longer-term investment, leaving them with shabby places like WH Smith or KFC that can't compete against rivals.

In a similar vein Roland Bénabou and Jean Tirole have shown (pdf) how "distorted decisions and significant efficiency losses" arise when companies incentivize short-term performance such as sales targets or traders' profits to the neglect of longer-term goals such as investment in training, R&D or goodwill. In cybernetic terms, such companies prioritize information about short-term profits and throw away that about the longer-term.

The classic case of this was of course banks' risky behaviour in the run-up to the financial crisis. Charles Prince, then CEO of Citigroup, said in 2007:

When the music stops, in terms of liquidity, things will be complicated...But as long as the music is playing, you’ve got to get up and dance.

Prince knew Citi was heading for trouble but he was incentivized to discard this information and to focus instead on short-term profits. As Dan says:

Any system which is set up to maximize a single objective has the potential to go bonkers.

The inability of companies to process information wasn't confined to banks, though. Paul Ormerod and Bridget Rosewell have found (pdf) that the pattern of corporate failures is similar to that of the extinction of species, and conclude that "firms have very limited capacities to acquire knowledge about the likely impact of their strategies."

Everybody will learn a lot from Dan's book, and I urge you all to read it.

That said, I have some quibbles. I'd have liked a little more clarity about the precise link between the cybernetic movement and the rise of accountability sinks? Did companies build such sinks deliberately, or did they just emerge (as so many things do) through trial and error? I'd have welcomed some case studies of particular companies to tell us.

A bigger quibble, however, lies in the class aspect. Dan says that the "great unremarked class struggle" of the 70s and 80s was that between capitalism and managerialism, which managers lost. Maybe they did then. But since the 1990s the UK has seen rising CEO pay amidst quite modest stock market gains, suggesting managers have fought back.

And this doesn't mention workers. The rise of accountability sinks was accompanied not only by big rises in CEO pay but also by worsening relative pay and conditions for many workers - be it those who suffer from the power-biased technical change described by Frederick Guy and Peter Skott or frontline workers who must face customers' frustration when impersonal processes lead to them being bumped off of flights, having their trains cancelled or having self-service checkouts that don't work.

If we apply the POSIWID principle to accountability sinks themselves, we'd infer that their purpose is to generate inequality.

There is, though, a massive paradox here. Corporate systems and processes have reduced employees and managers' freedom, agency and autonomy. And yet these values have for centuries been highly prized. "Free will is intrinsically the noblest thing we can have, because it puts us (in a way) on a par with God" wrote (pdf) Descartes in 1647, a view followed by many, including cheerleaders for capitalism such as Hayek and Friedman.

It was of course Marx who saw this paradox. The "laws of capitalist production" he wrote, take the form of "external coercive laws having power over every individual capitalist." And for the worker:

His labour becomes an object, an external existence...that it exists outside him, independently, as something alien to him, and that it becomes a power on its own confronting him. It means that the life which he has conferred on the object confronts him as something hostile and alien.

In this way, social relations between men become "in their eyes, the fantastic form of a relation between things." Man-made systems come to dominate and oppress their creators.

Perhaps Marx's greatest criticism of capitalism was not that it generated inequality and injustice - which existed long before capitalism - but that it created oppression whilst promising freedom.

It's not just this, however, that brings the legitimacy of capitalism into question. Dan's book raises a question posed 50 years ago by Stephen Marglin: what do bosses do? We used to be able to say that they invented things and built companies, but in accountability sinks they are mere functionaries presiding over processes they barely understand. People might admire and defer to entrepreneurs, but why do so to overpaid bureaucrats?

This was the question raised by Joseph Schumpeter back in 1943 when he wrote (pdf) that large corporations replaced entrepreneurs with "rationalist and unheroic" bureaucrats who are "ill equipped to face the problems, both domestic and international, that have normally to be faced by a country of any importance," thereby anticipating the political backlash against managerialism:

The capitalist process, by substituting a mere parcel of shares for the walls of and the machines in a factory, takes the life out of the idea of property...Dematerialized, defunctionalized and absentee ownership does not impress and call forth moral allegiance as the vital form of property did. Eventually there will be nobody left who really cares to stand for it—nobody within and nobody without the precincts of the big concerns.

People could tolerate unfreedom, inequality and rule by faceless bureaucrats when capitalism was at least delivering higher living standards. But after almost two decades of stagnation, the question becomes more forceful: what's the point of capitalism?

The end of modernity

Recently, I've been listening to a lot of Public Service Broadcasting, a side-effect of which has been to remind me of a big and largely overlooked difference between this Labour government and that of Tony Blair.

What I mean is that much of PSB's work celebrates progress and modernity. Their latest single is Electra ("the future of flying"); an earlier song was called (I believe in) progress; and they've made albums about the founding of the BBC and the space race.

This invocation of futurity and modernity draws our attention, however, to the fact that this is precisely what Starmer is not doing. As Nesrine Malik writes in an acclaimed article, "Starmer’s weakest feature is his inability to paint a rousing vision of our modern country."

Which is of course a huge contrast to Blair who in the 1990s could barely open his mouth without speaking of modernization, not only of the Labour party but of government and the economy: "modernising social security...is a central plank of building a modern Britain"; "modern application of progressive values"; "a modern education system and a modern NHS"; and so on. A collection of his early speeches was titled New Britain: my vision of a young country. And even today he believes - based perhaps more on faith than evidence - that AI can transform government. Alan Finlayson wrote in Making Sense of New Labour that:

If there is a single word that might capture the essence of New Labour's social and political project then it is 'modernisation'.

In this, Blair was treading the path of his predecessors. Harold Wilson famously spoke of the "white heat" of the technological revolution wherein modern technocrats would replace outmoded aristocrats as rulers of industry. And one of Thatcher's motives for trades union reform was precisely to give managers the power to modernise the economy.

With one or two exceptions (which I'll come to), however, the Starmer government rarely speaks of progress, futurity or modernity.

Why not? You might think it's because modernity has failed. We see this every day, be it in the legacy of modern car-centric town planning left by men like Konrad Smigielski or Robert Moses or in the fact that many of Blair's improvements in public services were subsequently reversed.

And indeed PSB remind us of the failures of modernity. The high-mindedness of the BBC's founders contrasts horribly with today's intellectual pollution that is Jeremy Vine or Laura Kuenssberg; the manned space programme petered out; and Amelia Earhart's Electra crashed.

Fans of the late James C Scott (of whom I'm one) will think there's a good reason for the failure of what he called "high modernist ideology." Planners, he said, had much less omniscience than they thought; people were not mere pawns to be pushed around; and societies and cities were just too complex to be controlled from the top down:

If I were asked to condense the reasons behind these failures into a single sentence, I would say that the progenitors of such plans regarded themselves as far smarter and farseeing than they really were and, at the same time, regarded their subjects as far more stupid and incompetent than they really were. (Seeing Like A State, p 343).

Granted, Scott might overstate his case, but he surely has a point.

But it's one that Labour doesn't seem to grasp. One of the rare modernist exceptions in the party's programme is the plan to build new towns. And its distancing itself from anti-fascist street protests betokens a distrust of decentralized popular action. Both betoken a flat rejection of Scott's thinking.

For good or ill, therefore, we cannot attribute Labour's rowing back from modernization to Scottian ideas.

Instead, I suggest there's another reason why Labour doesn't talk of modernity and optimism - economic stagnation.

Basic maths tells us that if the economy is growing by 2% a year then it will double in size after 35 years. That doesn't just mean we'll have more stuff. It means the economy (and therefore society) will be different: economic growth, as Eric Beinhocker and Joseph Schumpeter said, is a process of creative destruction and increasing variety.

A growing economy, therefore, delivers change whether we want it or not, and so we must look ahead to a different future. In a stagnant economy, however, there is less need to do so. Yes, John Stuart Mill wrote that a stationary state would have "as much scope as ever for all kinds of mental culture, and moral and social progress", but the recent racist riots show that he was too optimistic.

But there's more than mere maths behind the decline of modernity. Economic stagnation shows us that today's capitalism (whether you call it neoliberalism, rentierism or whatever) is failing most people. Our ruling class senses this if only as a barely articulated gut instinct, and so doesn't want to talk about the future simply because capitalism doesn't offer much of one. A big reason why the right talks so much about immigration is that to talk about anything else - climate change, the cost of living, failing public services, unaffordable housing, flatlining real wages and so on - would be to bring capitalism into question. And that it must not do.

Yes, Labour isn't quite as squeamish as the right. But even so, it has a problem. And it's reluctance to even articulate this is one reason for its silence about modernity.

It's that even quite centrist plans to restart economic progress and productivity growth require an attack upon vested interests - upon what Joel Mokyr called the "forces of conservatism". Tax simplification would put lawyers and accountants out of work; cutting house prices or shifting tax onto land will hurt landlords; tougher competition policy, the break-up of monopolies or measures to encourage business start-ups will be resisted by incumbent companies; and Nimbys will oppose infrastructure spending and housebuilding.

Modernization today, therefore, means something very different from that in Thatcher and Blair's time. Back then, it meant attacking unions and the poor; today, it requires attacking the rich and powerful. The centre-left resiles from such a prospect. Hence we have less talk about modernity.

But this comes at a cost. Although modernisation has often disappointed even in its own terms it has offered something - hope. And that is lacking now. We have a joyless polity which offers little optimism for either individual or collective action. That threatens to undermine the legitimacy of the existing order - and, as we saw with the racist riots, the backlash to this might not take a rational form.

Government as household: if only!

Many of us economists are bald. One reason for this is that for the last 40 years we've been tearing our hair out whenever politicians liken government finances to those of a household. Although Thatcher popularized this woeful analogy (as early as 1949) it lingers on in Labour. Rachel Reeves' claims that "there's not a huge amount of money there" and (inverting Keynes) that "if we cannot afford it, we cannot do it" both appeal to it.

You all know this analogy is wrong. For one thing, households can cut their spending without cutting their income but governments sometimes cannot do so because cuts in public spending depress economic activity and hence tax revenues*. And for another, governments (in the UK if not euro zone) can print money, and so there is always "a huge amount of money there". The constraint on public spending is real resources - doctors, builders, management skill - not money.

For these reasons economists often say that the household analogy leads to bad policy.

And often they are bang right.

But not always. If the government were serious about managing the public finances as if they were a household, policy would actually improve in some ways.

I say this because of reports that Reeves is thinking of using private finance to fund the building of the Lower Thames Crossing, in exchange for which they would receive incomes from the tolls.

The problem here is simple. The government can borrow in the gilt market at a real cost of around 1% (depending on the maturity of the loan). Private financiers, however, will demand a higher cost than this; they wouldn't invest otherwise. The government will therefore in effect be borrowing at a higher cost than necessary. That's like a household choosing to take on expensive credit card debt rather than extending its mortgage at a lower rate. As Daniela Gabor has said, Reeves is in effect handing out subsidies to private financiers.

Of course, that might be her intention. But it's not something a sensible household would choose to do**.

She is doing this because of another way in which she is not running the public finances as a sensible household would. I'm referring to the fiscal rules, one of which is that "debt must be falling as a share of the economy by the fifth year of the forecast."

No sane individual would adopt such a rule, and not just because they know that one should never rely upon forecasts. It's also because what matters is the sustainability of debt over one's lifetime, not over five years. (There are only two things that can go wrong in personal finance; either you'll outlive your money or your money will outlive you).

Any fool can reduce debt in the short-term by selling their house, paying off the mortgage and renting a place. Whether you should do that depends upon whether the cost of renting is cheaper than that of borrowing, all things considered. That's a tricky calculation. But it's one that households wouldn't make if they were tied by that "non-negotiable" fiscal rule; they would just cut their mortgage and not worry about the fact that they'll have to pay the rent after five years.

This, though, is exactly what Reeves is doing in thinking of handing over future toll revenues to private financiers; she's giving up long-term income in order to meet a short-term target. As the Institute for Government has said, the fiscal rule "does little to promote fiscal sustainability." No sensible household would behave like that.

Such an absurdity is the result of another absurdity in the fiscal rules; they ignore the fact that balance sheets have two sides - assets as well as liabilities.

A sensible household would want to increase debt if in doing so it could buy an asset which yielded more than the cost of debt (adjusting for risk!) Buying a house - thereby saving on rent - or a business can be perfectly reasonable things to do.

Not so for Labour. Reeves has said that nationalizing utilities “just doesn’t stack up against our fiscal rules”. Which is drivel. Many utility companies have dividend yields well above the 1% it would cost to buy them, so nationalizing them would generate a net revenue for the government.

No household would rule out investing in a business on the basis of the level of its debt without also considering the cost of that debt relative to the income stream it is buying. But that's what Reeves is doing.

Of course, there are good arguments against nationalization, one being whether the companies would continue to yield so much under state control***. But this is exactly the question a sensible household would ask: is this business really as good as it seems? Can we manage it well? It would not rule out buying merely by saying "debt, aaarghh!"

There's another way in which the public finances would be better managed if governments took the household analogy seriously. It lies in Sir Keir's promise to raise military spending to 2.5% of GDP.

To see how daft this is, imagine a family decided that it wanted to eat more healthily. It would not be so stupid as to set a target of raising the share of its income it spends on fruit and veg. It could do that by spending £20 on a single carrot. Instead, it would buy a greater volume of fruit and veg and less of something else. It would be explicit about what it cuts from its weekly shop, and it would pay attention to value for money. Neither of these obviously sensible actions are contained in Sir Keir's target, which provokes the thought that just as Reeves wants to give handouts to financiers so Sir Keir wants to give them to military contractors.

You might object that there's a limit to my descriptions of what a sensible household would do. Sometimes, households are forced into bad decisions, such as by having to borrow at high rates if their creditworthiness is bad. But this doesn't apply to the government now. The fact that the gilt market is willing to lend to it at a real rate of just 1% tells us that the government is free to act sensibly. That it is not doing so is a policy choice.

Nor is any of this to say that Labour should run a significantly looser fiscal policy. I don't think it should, simply because there isn't enough slack in the economy to do so: boosting growth right now should be the job of supply-side reform and regional policy, not fiscal policy.

Instead, my point is simple. It's that if the government is to treat the public finances as if they were household finances it should be consistent in doing so, as this would actually lead to better policy-making.

* I say sometimes because if interest rates are high enough, monetary policy can be loosened sufficiently to offset the impact of spending cuts. This, however, was not the case with Osborne's austerity.
** In practice, however, many households do exactly this by paying too much in fees to fund managers - but few of us think they should do so.
*** There are other arguments. One is that nationalization just gives a future government something to sell off cheaply to its cronies. Another is that - given the pisspoor quality of UK management - the companies will be badly managed whoever owns them and its better than capitalists get the blame than that the government does.

Investment & growth: some problems

A while back, Dietrich Vollrath wrote a famous post called "You can't reform your way to rapid growth." We should add to this: you can't invest your way to rapid growth either. The government's "number one mission" of boosting economic growth is therefore a challenging one.

To see the issue, consider an aggregate production function:

Y = TK^aL^b

where Y is output; K is capital; L is labour; T is total factor productivity or, if you prefer, technology; a is the elasticity of output with respect to capital; and b the elasticity of output with respect to labour.

This implies that growth in labour productivity is equal to the growth in capital stock per worker multiplied by a (the elasticity of output with respect to capital) plus growth in technology.

So, how big is a? Or, in other words, how much extra output do we get if we increase the capital stock?

The answer is: not much.

One common approach here - well, more of a first pass really - is to assume perfect competition and constant returns. If so, it can be shown that a is equal to capital's share of income. Which is not much. Last year, corporate profits were 21.7% of GDP. If we allow for some of the income of the self-employed also being capital income, then a is around 0.3.

Which implies that a 10% increase in the capital stock, all else equal, will give us a 3% rise in output.

But 10% of the capital stock is a huge sum. The ONS estimates that the net capital stock excluding housing is £3.5 trillion. So a 10% rise in it is equivalent to 15% of GDP. It would take many years (and much else!) to achieve that.

If this sounds modest, remember that investment doesn't merely to add to output. It can reduce it. When Lidl invests in a new store, it reduces Tesco's sales, for example. And investment in wind turbines is intended to reduce the output of gas-fired power stations.

We've lots of evidence from different times and places that the elasticity of output with respect to capital is indeed small. In his famous paper which kickstarted this approach to thinking about economic growth Robert Solow estimated (pdf) that only one-eighth of the increase in US GDP per worker between 1900 and 1949 was due to increases in the capital stock. The rest, he said, was due to technical progress. In Fully Grown, Dietrich Vollrath estimated that from 1950 to 2000 a rise in the US's physical capital stock per person accounted for only 0.64 percentage points of the 2.2 per cent annual rise in real GDP per capita. Nick Crafts has estimated (pdf) that less than one-third of growth in advanced economies between 1913 and 1973 was due to a bigger capital stock. And Gavan Conlon and colleagues have estimated (pdf) that a fall in capital growth accounted for less than half of the slowdown in the UK's hourly productivity growth between 2001-07 and 2014-19.

Now, we shouldn't be fixated on precise numbers here. Aggregate production functions and measures of both the capital stock and depreciation have massive theoretical and practical problems: Solow himself said that such measures "will really drive a purist mad." But the picture here is clear: it takes a lot of capital spending to deliver only moderate increases in GDP.

Intuition, I suspect, confirms this. Imagine if the capital stock were, say, twice as large as it is. How much higher would productivity be?

Almost certainly not twice as high. Having twice as much office space won't make us twice as productive. Having twice as many lorries won't allow drivers to make twice as many deliveries in a week. Having more trains will get you to work in a less frazzled state, but not so much so as to double your productivity. More software would not necessarily eliminate bugs but would perhaps have more features which we just rarely use. And so on.

Let's put this another way. If the elasticity of output with respect to capital were large, then we might presume that capital investment was very profitable. But if this were the case, then we would already be seeing lots of it. Which we are not. Granted, this is partly because economic instability and a lack of finance have held back capital spending. But you have to argue that these are very powerful constraints indeed to solve this basic paradox.

Instead, elasticity optimists have a better potential response. It's that investment does not raise output merely by increasing the amount of kit we have. It's that new capital goods embody better technologies, so investment raises total factor productivity.

Yes, but by how much? The newest lorry, or latest version of any software package, isn't very much better than five-year old ones.

But what about investment in brand-new industries? Here, we run into two problems. One is brute maths. New industries, by definition, are small and so even if they expand tremendously their macroeconomic impact is small; an industry that accounts for 1% of GDP and trebles over ten years will add only 0.2 percentage points a year to GDP growth - and less insofar as it detracts demand from older businesses. The other is that new techs are often initially unreliable (do a Google image search for London Bridge) and it's hard to find workers and managers who understand them. That constrains both their expansion and efficiency. For these reasons, Nick Crafts has said (pdf) that "the early years of a general purpose technology will see little or no impact on aggregate productivity growth." Between 1760 and 1830, UK GDP per head grew by only 0.2% a year even in the face of technical changes that transformed lives.

In fact, there are two other reasons why increased capital spending won't increase growth very much.
One is that many investments won't yield the expected gains. This has little to do with the state making bad decisions. It's simply because of what Keynes called "the dark forces of time and ignorance which envelope our future". Nobody can reliably foretell which projects will pay off and whch won't and so some investment spending will inevitably be wasted. Indeed, because decisions are driven by sentiment ("animal spirits") Salman Arif and Charles Lee have found that increases in capital spending lead to lower, not higher, macroeconomic growth in the short-run.

There's a second problem. Devoting more of our national income to investment requires that we devote less to private or public consumption. That would entail uncomfortable changes in our standard of living. It would also require hundreds of thousands of people to change jobs, away from consumer sectors and towards producing capital goods; where else can the builders, turbine and solar panel installers come from? That would take many years simply because people are slow to move and retrain. There's little sign that the government is ready to face such changes in our economic priorities.

Obviously, none of this is to decry increased investment. It will raise growth - just not by much.

Instead, what I'm saying is that raising long-term trend GDP growth significantly is damnably hard, and it cannot be achieved by a single magic bullet or reliance upon a few new industries. Instead, what's needed is a broad spectrum approach using many policies. Not least of these is to adopt the Obama doctrine: "don't do stupid shit" such as preventing growth by planning controls, trade barriers or political instability. On this, Labour has at least made a start. But it is the start of a long and difficult journey.

Funding public services: A Bevanite approach

Every economist knows there's a big problem with this election campaign. Both main parties are ruling out increases in income tax and national insurance but such pledges are, as Helen Miller says, a "mistake" given that tax rises will be necessary to prevent further deterioration in the public services.

There is, however, a perspective that's missing here - one provided 70 years ago by one of our greatest politicians.

In his 1952 book In Place of Fear (pdf), Nye Bevan anticipated our current problem. There is, he wrote, a "deep antagonism between public and private spending" because people don't want higher taxes but do want more public spending:

Unless a radical solution is found, the political parties will tend to revolve around the ridiculous issue of sixpence on or off the income tax. This is pure Liberal polemics. In these circumstances the social services become a political football, kicked about from one election to another.

So, what is this radical solution?

It's not for the government to borrow more. Of course, everyone in the 1950s knew that governments could in principle borrow heavily; they had done so during the war and Abba Lerner's theory (pdf) of functional finance was well-known. But Bevan excluded this option because "the perils of inflation [are] ever threatening in conditions of full employment." 

Nor, he thought, did the answer lie in immigration: "in our crowded island no one should pretend that a shortage of labour in a particular industry is solved by bringing workers in from abroad."

Instead, Bevan's answer was nationalization.

The conflict between private and public spending, he thought, arose from the fact that "the property-owning classes believe that the function of disposing of the economic surplus should lie with them." But, he added: "once a larger proportion of industry is publicly owned, a larger part of public spending could be financed out of the surplus which now accrues to private owners."

Nationalization for him was a way of funding public services. And even a little nationalization would go a long way. In 1938 the profits of the mining, utilities and transport and communications sectors alone were equivalent to one-fifth of all public spending, and half of government spending on goods and services.*

Today, of course, things are a little different. But the general point still holds. The earnings of FTSE All-share companies are almost £180bn, well over one-sixth of public sector current spending and about as much as government spending on health and social care. Which is not nothing. Even a fraction of it dwarfs the £6bn that would be raised by the unthinkable atrocity of raising the basic income tax rate by a penny.

Hence the case for a sovereign wealth fund, as advocated (for different reasons) by economist such as Eric Lonergan, Roger Farmer and Miles Kimball. The government should, they say, issue bonds to buy productive assets, just as Bevan advocated.

You might object that this is no longer such a great idea now that the cost of debt finance is higher now than it was in the 2010s. Not quite. The dividend yield on the All-share index is 3.5 per cent, two percentage points higher than the real cost of government borrowing. Which means that borrowing to buy equities should be profitable over the long-run, and these profits could be used to help finance public services.

Of course, this doesn't solve the problem of how to fund public services today simply because it would take years to gradually build up the wealth fund. But that merely shows that starting a sovereign wealth fund is like planting a tree: the best time to do it is years ago. One function of good government should be to prepare for the future, which argues for starting to build a fund now.

There are, of course, objections to this. One is that it is not especially socialist. Under this sort of scheme companies would still be run for profit rather than for social purposes; it could not be otherwise given that the SWF would be a minority shareholder with little influence on management. All the drawbacks of capitalistic workplace practices - hierarchy, domination and inequality - would therefore remain**. There are big differences between a sovereign wealth fund and Meidner-type plans advocated (pdf) by Markus Furendal and Martin O'Neill in which ownership of companies is gradually transferred to their employees.

Indeed, it is perhaps capitalists who might welcome an SWF more than many, as the gradual build-up of such a fund would crate a guaranteed demand for equities whilst it would over time give governments more incentive to ensure that policies don't depress share prices.

Another objection comes from MMT. This says that the constraint upon expanding public services is not the inability of the government to raise finance but a lack of real resources: capital, labour, management skill and so on. Insofar as profits now are saved rather than spent, shifting them to funding public services would raise aggregate demand which would - at times of near-full employment - be inflationary. To offset that would require either higher taxes or higher interest rates. An SWF cannot avoid the basic fact that when an economy is near full capacity more public spending requires less private spending. It does not, therefore, solve the problem***. (Things are of course different when there are idle resources.)

The pros and cons of the idea, however, are not my point. The point is that the idea isn't even on the agenda, despite it having been advocated by top economists and by one of the most revered politicians of the 20th century. Which shows us that the purpose of politics is not to find technocratic solutions but to maintain private control of economic surplus.

And doing this requires not that some questions - such as the one Bevan raised of who should control the economic surplus - must remain off the agenda: one of the ways is which capital exercises power is its influence over what gets debated and what doesn't.

Silence on such questions requires a form of institutionalized stupidity. Here's Bevan on the logic of nationalization:

The fact that an industry is nationalized should provide additional income to the state for, among other reasons, compensation is paid at a low rate of interest on gilt-edged securities while the profit rate extracted in private concerns is usually much higher*.

Contrast this to Rachel Reeves, claim that "spending billions of pounds on nationalising things...just doesn’t stack up against our fiscal rules.” A self-taught miner 70 years ago knew that balance sheets have two sides, whereas an Oxford-educated former Bank of England economist today pretends not to know it. Which is a sign of how politics has been captured by institutionalized stupidity.

I wouldn't say that such stupidity is necessary to defend the status quo. But it's remarkable how many politicians give the impression that it is.

* Source: Feinstein Statistical Tables of National Income, Expenditure and Output of the UK, 1855-1965.

** Except insofar as it is profitable to ameliorate them. (which might be a big "except" but that's another story.)

*** I think this is a crucial objection. But it's not one available to those who reject MMT, as most of the Labour leadership implicitly do. 

Starmer's stability promise

"A vote for Labour is a vote for stability" said Sir Keir Starmer launching Labour's election campaign. This is more than just a soundbite. It opens the door for some sensible policies.

There is a solid economic logic to this desire for stability. Instability and uncertainty depress capital spending: why invest in a risky project in uncertain times if you can wait for the fog to lift? If government can offer stability - and, crucially, have businesses believe in its offer - then this alone can boost economic growth. This is why Gordon Brown famously spoke of "no return to boom and bust."

Which brings us to the problem. There are two sorts of stability, one of which governments can provide and one which they cannot. They can provide policy stability: in principle, Ms Reeves could announce Labour's tax and spending plans for the next five years within a few weeks of taking office and then promise no more Budgets. This would give us fiscal policy stability.

What it would not give us, however, is economic stability. Economies are always hit by shocks* which cause booms and slumps, as Mr Brown discovered in 2008.

The question, then, is: how can policy respond to such shocks and so create economic stability?

In the case of demand shocks, the answer is in principle simple. The Bank of England cuts interest rates and the government borrows more, thereby supporting demand. To her credit, Ms Reeves has an "escape clause" in her fiscal rules to allow current public spending to exceed taxation "if the OBR declared the UK was in an economic crisis."

Demand shocks, however, aren't the only sort. There are also supply shocks - things such as soaring oil prices** which depress both demand and the economy's supply potential. And some shocks are a mix of both supply and demand shocks - such as the pandemic and perhaps the banking crisis.

Policy responses to these have been ad hoc: after the pandemic and the surge in gas prices caused by Russia's invasion of Ukraine the Bank of England let inflation rise above target whilst the government gave one-off handouts to support demand.

But here's the problem. Shocks are unpredictable: Prakash Loungani and colleagues have concluded:

We find that the ability to predict turning points is limited. While forecasts in recession years are revised each month, they do not capture the onset of recessions in a timely way and the extent of output decline during recessions is missed by a wide margin. This holds true for both private sector and official sector forecasts.

During the financial crisis, for example, the Bank of England only cut Bank rate to what it then considered its lower bound in March 2003 - 12 months after output began to fall.

Conventional macro policy, then, can at best only ameliorate recessions after they have begun. The belief that "predict and control" can prevent economic instability is due to irrational overconfidence and the ideology of centrist utopianism, not to actual evidence.

If Sir Keir is serious about offering stability, he therefore needs to offer more than good macro policy.

But what?

One answer is to prevent shocks rather than react to them. Ms Reeves has recognised this. One lesson of 2008, she said in her Mais lecture, is that:

Stability was a necessary, but not a sufficient condition to generate private sector investment. An underregulated financial sector could generate immense wealth but posed profound structural risks too.

This is why greening the economy is so important. Doing so doesn't just (!) help save the planet. It reduces our vulnerability to one source of shocks: gas and electricity price rises.

But we cannot predict where all shocks will come from: will they be pandemics, wars, food price rises due to climate change or - quite likely - from something we've not thought of? Important as it is, prevention is not enough. We need something else.

That something, as Eric Lonergan pointed out during the pandemic, is that we have the means to react quickly and efficiently to shocks. We lacked this in 2008. And whilst help was quick during the 2020 pandemic it was not wholly effective: many self-employed people missed out on assistance whilst millions were lost to fraud.

One possibility here is to have a rule-based policy, to expand activity when GDP drops a certain amount below a pre-announced trend level (and contract it when it rises above it). The expansion, in emergencies, could take the form of tax rebates, zero mortgage rates or simply writing everyone a cheque.

There's a problem with this, though; GDP is only measured with a lag and so any such help will arrive late. One solution to this would be to develop macro markets (pdf), in which there are liquid markets in GDP-linked securities whose prices could be used to guide policy. Another solution would be to accelerate the development of nowcasting (pdf), ways of measuring GDP in real time.

But there's something else policy can do. We could have better automatic stabilizers, which include high enough welfare payments to avoid people suffering huge falls in income in bad times.

These aren't just necessary at the macro level. They are also necessary to ensure something more important than macro stability - individual security.

Even in stable macroeconomic times people suffer job losses. These are the counterpart of productivity growth. This occurs not so much because incumbent firms become more efficient but because of creative destruction, the closure of inefficient plants and firms and opening of better ones (pdf). A more efficient economy thus requires that people move job. But as Ms Reeves asked:

Without a safety net to fall back on, how can we expect an ordinary person to retrain, take a new job or change career?

This safety net must not only be high but must be stable and be genuine help, rather than harassment by a cruel bureaucracy. Which is one reason why some of us favour a citizens basic income.

Serious thinking about economic stability, then, requires a focus on big policy questions: how to go beyond "predict and control" macro policy; how to regulate key industries properly whilst ensuring resilience elsewhere; how to have a welfare state that supports incomes and facilitates necessary job moves.

Of course, you'll object to all this that it is not what Sir Keir has in mind at all. Maybe not. My point is that once we start talking about economic security, some sensible ideas naturally emerge. And this is one reason why leftists should welcome a Labour government, especially one with a big majority - because it would change the agenda away from media-inspired Tory drivel and towards more serious issues.

* I'm following economists' standard terminology here. In truth, some of the things that cause recessions aren't exogenous bolts from the blue but are in fact the product of developments within the system: I'd argue that the banking crisis of 2008 was one such, but that's another story.

** Some people prefer to call rising oil prices a terms of trade shock. Nothing I say hinges on this distinction.