Stumbling and Mumbling

Against foxes

Nick Cohen makes a good point:

Political correspondents, who couldn’t find a big picture in a multiplex, buzz around Westminster hyperventilating about the number of letters sent to the 1922 Committee, and the replacement of minister X with junior minister Y, as if it mattered in the slightest.

The cliché is right. It is indeed easy to miss the wood for the trees. The fox (pdf), who knows many things, can indeed miss the big picture which the hedgehog (who knows one thing) sees. Those same political correspondents’ - despite or perhaps because of their knowledge of detail and minutiae - failed to anticipate Brexit and the rise of Corbynism.

It would, however, be wrong to single out political correspondents here. Nick’s point generalizes. Take, for example, finance. Advisors are often good foxes: they know many things. It’s better, however, to know one big thing – that active fund managers generally do not earn their fees (pdf) – and so simply hold market tracker funds.

A similar thing works in forecasting. Sometimes, it’s better to know one big thing. For example, if you’d wanted to know where stock markets were heading this year, one fact would have told us – net foreign buying of US equities. When this is high (a low point on my chart) it predicts that markets will fall in the following 12 months*. High buying last year predicted that the market would drop this. And yes, this indicator also warned us of the 2008 financial crisis. Knowing one thing would have served us better than knowing many things.  

In saying this, I’m echoing Gerd Gigerenzer. Simple heuristics (pdf) – knowing one robust and relevant thing – beat knowing lots of little irrelevant ones. Big Facts matter. Knowledge, prediction and explanation are three different things: you can have one without the other two. 

The issue here is whether we can distinguish between noise and signal. A mastery of detail can mean that you have full knowledge only of noise. This is handy for pub quizzes, which is no small thing (I write as a member of the team that’s top of division two of the RIQL) but it can blind you to what’s important. You have only cargo cult expertise. One reason why I’ve paid little attention to the day-to-day developments in Brexit negotiations (progress might not be the mot juste)  is that I’ve not known what’s noise and what’s signal.

Rogue companies exploit this. When they are under investigation from regulators or the police they often boast that they are cooperating fully. What they mean is that they are handing over terabytes of data and hoping the authorities will miss the wood for the trees.

You might think that in siding with hedgehogs against foxes I’m disagreeing with Philip Tetlock who has shown that foxes make better predictors than hedgehogs. I’m not sure I am. We mean different things when we distinguish between the two. I’m thinking of the distinction between those who know lots of small things and those who know one big relevant one. He instead uses it to differentiate between empiricists and grand theorists. In that sense, I agree with him. The problem with that sort of hedgehog is that the one big thing they know is sometimes wrong. You might have heard of such people.

* The reasoning here is simple. Foreign buying is an indicator of investor sentiment (pdf): high buying betokens high sentiment. And when sentiment is unusually high, it tends to mean-revert downwards, thereby dragging prices down.

Why the left needs "bottom"

Conservative men of a certain age used to speak approvingly of some men (it was always men) as having “bottom”. By this they meant a combination of a moral code and loyalties that gave them a solid reliability.

I was reminded of this by these words of John McDonnell:

We’ve got to convert ordinary members and supporters into real cadres who understand and analyse society and who are continually building the ideas.

This is absolutely bang right.

Underlying his words is a fear – that the massive current popularity of Corbynism might just be a fad.

There’s ample precedent here. The revolutionary ideals of the 68ers faded as they acquired careers and (cheap) property. The Greens won 15% of the vote in 1989, but that soon vanished. And of course there are countless people who, in Christopher Hitchens’ words, made the stagger from left to right – and who rarely became less employable as a result. Personally, I wouldn’t stake my wealth upon Aaron Bastani or Laurie Penny being vocal leftists in 30 years’ time.

The vogue for Corbynism could go the same way. Although McDonnell is giving the programme real and often inspiring economic content, there’s danger that Corbynistas themselves are motivated by what James Bloodworth calls “a vague and muddled ideal”, a backlash against “neoliberalism.” If your leftism consists only of an emotional spasm, a belief that Tories are “evil”, it will not long survive contact with real human beings.

Nick Cohen has long complained that leftists have lost touch with their better values and adopted a “my enemy’s enemy is my friend” mentality that has seem them “excuse antisemitsm, misogyny, tyranny, and obscurantism, as long as the antisemitic, misogynistic, tyrannical obscurantists are anti-Western.” I know many of you reject this account. But in a sense it speaks to what McDonnell fears – that a leftism which is just childish rebellion cannot last long or grow large.

It’s in this context that the left needs “bottom” – ballast that stops it drifting with the tides of fashion and instead becomes a genuine solid force for change.

Classical Marxists understated the problem here. They thought workers would be so desperately poor and exploited that they’d have nothing to lose but their chains and so would become radicalized. They were wrong. Yes, one factor behind Corbynism is that erstwhile “middle-class” jobs have become proletarianized; professionals have both lost some autonomy at work and become unable to afford a house.  Resentment alone, however, is not a strong enough base for lasting leftism. It might not survive career progression and more affordable housing.

It’s in this context that McDonnell is right to say the left needs an understanding of society. Of course, it would take far too long to spell out exactly what this would consist of. For me, a key principle here is that of complexity. Inequality – of power as well as wealth - does not exist and persist because the rich are evil. It also happens, as Marx recognised. because of impersonal forces which operate with only a little input from people’s intentions. Capitalists’ influence over the state, for example, happens because politicians want to create jobs and so need to maintain business confidence; support for inequality exists not just because our media is biased but because ideology is endogenous; exploitation occurs not (just) because capitalists are greedy but because competition forces wages and working conditions down.

Equally, the capitalist crisis is the result not just of “greedy bankers” – everyone would like a few quid more – but of impersonal factors causing a lack of capital spending and hence stagnation in productivity and real wages.

A lasting, well-rooted leftism requires an understanding of forces such as these – of why capitalism does not work as we would wish it to. Moralizing is nowhere near enough. The problem is that there are pitifully few institutions that enhance understanding and several powerful ones that actively militate against it.

Angry Brexiters

Brian Cox asks a good question:

The thing I don’t understand about these Conservative MPs is that they are such angry people. They haven’t done badly out of Britain - they aren’t on the receiving end of their own policies. And yet they want to smash everything up. The EU, The Union and now their own party.

It’s no coincidence that many of those he has in mind such as Rees-Mogg and Johnson - though we might add Farage and Banks – come from posh backgrounds. We know that our preferences adapt (pdf) to our circumstances. As Amartya Sen has written, “deprived people tend to come to terms with their deprivation”: Daniel Neff has shown how this is true for some of the poorest people in the world. Just as the poor resign themselves to their wretchedness, however, so too do the wealthy take for granted their privilege. Rather than rejoice in their advantages, they are irked by the small stone in their shoe. Just as the rich banker gets the hump with a £1m bonus if he expected more, so Brexiters are angered by slight (and often imaginary) infringements on their freedom from the EU.

In this sense, demand for Brexit is a little like white male resentment. Both are reactions against challenges to the privileges to which one has become accustomed.

There’s also a sense of entitlement here. Just as posh folk sometimes apply for jobs for which they are ill-suited – most famously David Cameron becoming PM because he thought he’d “be rather good at it” – so they noisily demand the removal of all obstacles to their whims.

All this is in fact at least as old as the Bible. It is mechanisms such as these that give us the Matthew Effect:

For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.

Socialization also matters. If you’ve got so many advantages in life, especially from a young age, you’ll be less aware of the importance of trade-offs – that, for example, academic and career success will estrange you from your family and cause loneliness. You will therefore not be as alive as the rest of us are to the words (pdf) of Isaiah Berlin:

The notion of the perfect whole, the ultimate solution, in which all good things coexist, seems to me to be not merely unattainable – that is a truism – but conceptually incoherent; I do not know what is meant by a harmony of this kind. Some among the Great Goods cannot live together. That is a conceptual truth. We are doomed to choose, and every choice may entail an irreparable loss.

They therefore fail to appreciate sufficiently that there are trade-offs between sovereignty and prosperity, or between controlling our borders and observing the Good Friday Agreement.

Such socialization-induced blindness isn’t however merely the product of upbringing. It’s also the result of recent political history. Throughout their adult lives Brexiters have got what they wanted from politics – lower taxes, the defeat of trades unions and victory of neoliberalism. Even the Labour government did not seriously challenge the power and prestige of the wealthy.

Victory, however, breeds complacency. It led Brexiters to forget what we Marxists have known all along – that there are some interests which the state lacks the will or the capacity to promote. They were therefore unprepared for the hard work of implementing Brexit. They failed to appreciate that politics sometimes requires something more than bluster. Their anger is a form of displacement – attacking others for what are in fact their own inadequacies.

Beer, & economic determinism

Devarshi Lodhia has a nice piece on the decline of the pub. I wonder, though: to what extent are the social and cultural changes that have contributed to their decline a product of raw economics.

My chart shows what I mean. It shows that since the mid-80s the price of beer in pubs has doubled relative to its price in shops. Today, for example, you can get 12 cans of Lager at Tesco for £8.50, which means that a pint of beer is 4.2 times as expensive in pubs as in shops. 30 years ago, it was only twice as expensive.

Millennials who are going to dessert parlours or staying home and drinking whilst playing Fifa therefore look like they are responding to price signals. The ONS tells us that increasing numbers of young folk are teetotal: 23% of 16-24 year-olds claim to be, compared to 16% of 45-64-year-olds.

Whilst this behaviour is harmless, there might be a nastier effect of this price change. When I was a 15-year-old kid, I’d drink in pubs. Today, higher prices plus tougher law enforcement means teenagers don’t go to pubs: even Wetherspoons has a door policy. They drink instead in parks which is more dangerous: there’s no barkeep to sling them out when they’ve had too many or to have a word when boys pester drunken girls.

There are two important mechanisms here.

One is peer effects: if your mates go to the pub, so do you. These create multiplier effects: if a few people stop going to pubs, others follow. Hence the large number of pub closures.

The other is habit formation. When we were kids getting served in a pub gave us a frisson of excitement and achievement. We came therefore to associate even the most mundane pub with good times, and this keeps us going to them today*. If young people don’t get that kick, and don’t get into the pub-going habit, they’ll stay out even if they get rich enough to afford to go.

In this way, short-term changes can have long-term effects. This suggests that pub-going will continue to decline as older pub-goers die out and are not replaced.

Now, it’s possible that the cultural changes that keep more young people out of pubs might have happened anyway**. What I suspect might be more likely, however, is that what we have here is a case of economic determinism: price changes cause cultural change. Which is why economics matters.

* This mechanism is much the same as Adam Smith’s account of conscience. The fact that aunts and uncles watched us whilst we were children inculcated into us a sense that an impartial spectator was overseeing us without us knowing it– a sense that persists throughout our lives.

** The obvious counter-argument to this claim is that if there had been a decline in demand for drink in pubs then their relative prices should have fallen. The counter-argument to that, though, is that tax changes and rent rises prevented this.  

Contrarians in public life

What role, if any, should contrarians play in public life? This is the question posed by the appointment of Sir Roger Scruton as housing tsar despite (or perhaps because of) his unconventional opinions on eugenics, date rape and gay rights.

The issue here is not a left-right one. We could ask the same question of John McDonnell: does his support of the IRA disqualify him from office?

In fact, for me the analogy is a quite close. Both men have valuable ideas. McDonnell’s ideas on fiscal policy and worker ownership are good. And Sir Roger is a rare rightist who can (sometimes) think and write well and who is fascinating for being a conservative whose mind isn’t addled by Brexit or free market simplicities: I’d recommend his books Gentle Regrets and England: an elegy. (Perhaps there’s another parallel; both men’s most deplored utterances are the products of their class, age and environments.)

The case for excluding such men is that the expression of bad ideas itself betokens a lack of judgment. Just because you believe something does not mean it should be said. The ability to shut the fuck up is much to be prized.

But, but, but. Excluding such men doesn’t just risk depriving us of talent. If people know that heterodox ideas will carry heavy costs we’ll end up with men falsifying their preferences – using politically correct language to disguise racist or sexist behaviour: Harvey Weinstein, remember, has been a keen supporter of liberal causes.

What’s more, if we select people for having uniformly orthodox opinions we’ll end up not with office being held by those with phronesis, but by poker-up-the-arse careerists who are too dull or stupid to challenge our managerialist conventional wisdom. One McDonnell or Scruton is worth a dozen of them.

Everybody is irrational about some things. Scruton and McDonnell join the long list of people such as William Shockley, Richard Dawkins, Larry Summers, Vicky Pryce, Bobby Fischer, Glenn Hoddle and James Watson – people of brilliance who also have made some terrible decisions. If you’re looking for people of uniformly sound judgement, you’ll find nobody but crooks, dullards and disappointments. In this context, I'd rather judge people by their best rather than their worst.

And then, of course, there is Mill’s famous point – that we need contrarians, even if they are wrong, to sharpen our perception of the truth:

The peculiar evil of silencing the expression of an opinion is, that it is robbing the human race; posterity as well as the existing generation; those who dissent from the opinion, still more than those who hold it. If the opinion is right, they are deprived of the opportunity of exchanging error for truth: if wrong, they lose, what is almost as great a benefit, the clearer perception and livelier impression of truth, produced by its collision with error.

Note that the silencing here need not be legal suppression; it could be via the tyranny of the majority, or simply self-censorship.

But again, there’s a but. Contrarians don’t always (or even often) provoke intelligent debate. They can be as tiresomely conformist as the dullest careerist: is there a more predictable writer than Brendan O’Neill?  And what looks like contrarianism is often no more than mindless tribalists whining about political correctness gone mad zzzzz: despite my analogy, how many defenders of Scruton would also defend McDonnell?

If all this sounds inconclusive, that’s because it is. My hunch is that Scruton should not be housing tsar not so much because of his regrettable ideas on some things, but simply because his merits do not extend to especial expertise on housing. This, though, does not solve the underlying questions: how tolerant should we be of otherwise useful people in public life who say things we hate? What is the proper place for those who question society’s flawed conventional wisdom? What, if anything, can we do to get a better and more diverse type of contrarian?

Stabilization policy with ignorance

Eric Lonergan’s good discussion of fiscal rules has triggered an intemperate debate about MMT. For me, though, it poses a question: from which fact(s) should thinking about macro policy begin?

For old-style Keynesians, the fact was that labour markets could not be relied upon to clear. For new classicals, it was that people were rational maximizers. I want to suggest a different fact – that recessions are unpredictable.

Prakash Loungani has shown that both private and official forecasters “miss the magnitude of the recession by a wide margin until the year is almost over”. In February 2008 for example – after the recession had begun – the Bank of England attached only a slight probability to GDP falling when in fact it fell more than 6% in the following 12 months*.

Exactly why this should be is a question for another day: I suspect it’s because recessions have micro-level origins which are magnified by network (pdf) effects between heterogenous firms.

Whatever the reason, this Big Fact has a devastating implication. It warns us that there are severe limits upon what demand management can achieve, whether it be through fiscal or monetary means. This is simply because there’s a lag between policy and outcome. Fiscal or monetary policy can boost demand once it has fallen. But it cannot reliably prevent all recessions. This point applies to conventional as well as unconventional policy. By the time the Bank of England knows there is a sufficiently deep recession to require (say) a helicopter drop, the recession will be well under way.

How can we respond to this?

We could follow Robert Lucas and say it’s a non-problem because the welfare costs (pdf) of economic fluctuations are trivial. Most of you, though, would resist this, and I think (pdf) rightly so.

Or policy-makers could reject conventional macroeconomic forecasting and place more weight upon the yield curve (pdf) to tell us the probability of recession. This, though, is inviting us to be smacked in the face by Goodhart’s Law.

This leaves a third response: we need better automatic stabilizers.

The obvious possibility here is more progressive taxation and a higher welfare safety net. Another possibility is for Shiller-style macro markets to enable those most exposed to the risk of recession to buy insurance: this requires state support for such markets. A third possibility is one suggested by Eric: a sovereign wealth fund. Insofar as this holds overseas assets, it would help diversify local UK economic risks, and would rise as sterling falls.

It’s in this context that a Job Guarantee becomes attractive (pdf). It would provide schemes which expand to create jobs in recessions, and contract as private sector jobs are created in the subsequent upturn. It’s another automatic stabilizer.

Now, there are issues with a JG, not least of which are administrative ones: how do we identify what work needs doing? How can we ensure a JG doesn’t deteriorate into demeaning workfare under rightist governments? And so on. Such problems are a case for thinking about a JG now, and for rolling it out in good times, so that difficulties can be addressed before the scheme needs to be scaled up.

We should regard a JG not as a faddish idea of some sect – although that it how it is sometimes presented – but rather as one of a suite of possible policy responses to one of the fundamental facts of the human condition: our inability to reliably foresee the future.

* It’s unclear that heterodox economists foresaw the 2008-09 recession; permanent warnings of the risk of recession are of limited use for the purposes of macroeconomic stabilization.

Not wearing a poppy

I agree with Harry Leslie Smith. I too am increasingly disinclined to wear a poppy.

The thing is that the nature of national remembrance has changed. For the first 60+ years after it began it was personal for pretty much everybody. Well over a million British soldiers and civilians were killed in the two world wars. Almost everyone therefore had lost a friend or family member. And everybody knew old soldiers who remembered the horrors of war and often still bore the mental and physical scars. 

But this is no longer the case. Almost nobody under the age of 90 fought in World War II. For increasing numbers of us, war is no longer personal: our grandparents who suffered in it have left us*.

My personal ties to war are confined to the death of a great uncle at Ypres and two friends who served in Northern Ireland – not that everybody wants to remember the latter.

Of course, there are many for whom this is not the case, who remember friends, husbands and sons killed in the Falklands, Iraq, Ireland or Afghanistan to name but a few. It would, however, be intrusive and even abusive for me to pretend to share their grief – which of course they bear every day, not just on Sunday. I respect it and sympathize with it. But it is their burden, not mine. To pretend otherwise is a con, a narcissistic flaunting of ersatz emotion.

One or two generations ago, Remembrance Day was about strong people struggling with horrors and grief we cannot imagine. For some, this is still the case. But for many others, it is a display of emotional incontinence.

There’s a paradox here. Although the memory of war is becoming different for us all, there are increasing pressures to conform by wearing poppies: those who refuse to do so, like James McClean or Charlene White, face abuse**, some of it racist. And this, I suspect, is deeply hypocritical. How many poppy fascists support benefit cuts for ex-soldiers and piss on the addicted homeless ones? It is abstract dead soldiers they claim to respect, not real living ones.

Of course, remembrance is not just a personal matter. There is such a thing as collective identity. We can remember our dead as a nation even if many of us individually have no memory of specific victims of war.

But here again, there are hypocrisies.

One is that Remembrance Day is linked with nationalism: how many union jacks will we see on Sunday? And yet it is nationalism that contributed massively to the deaths of those we claim to remember.

Another is that war is not some tragedy that befalls us by unavoidable accident. It is the result of policy error. The error might be the direct one of choosing to go to war, as in Iraq. But it’s also due to a failure to deal with the complex causes that led to WWI or to the rise of Hitler. If there had been better economic management – less harsh reparations, no hyper-inflation in the early 20s, no Great Depression – we might not have had Hitler and WWII. Von Clausewitz was right: war is the continuation of politics by other means.

It’s sometimes said we should wear poppies with pride. We should, in the sense of having pride in those who served their country. But we should also wear them with shame – same at the political mistakes that led to those wars.

Memory, if it is to be anything more than an empty gesture, must mean learning. The lesson of our war deaths is that politics is a deadly serious business. It is a job for serious people who must avoid egregious errors.

This, of course, is a lesson we have not learned. The Chilcot report describes how the errors leading to the Iraq war were ones which should have been well-known to anybody with a passing knowledge of decision theory. And the BBC executives who enforce poppy-wearing to the extent of expecting contestants on Strictly Come Dancing to wear one on their gym kit also give us TV shows in which politics is just fact-free banter between men who went to the right schools. They persist with the Old Lie, that politics a game for jolly good chaps in which – notwithstanding the imbecilic martial metaphors – the stakes are low. It’s not just our war dead who prove this to be an illusion: so too does Grenfell Tower and the thousands killed by austerity. And yet our rulers and media don't heed the message. 

Now, none of this is to say we should not have public commemorations of the war dead. We should. My problem is that these have been taken over by hypocritical posturing.

* Not that it was all suffering. My grandad – like many I suspect – had quite fond memories of the war.

** Not, I suspect, from old soldiers themsleves. Whenever I give to British Legion collectors but refuse the poppy, I sense a respect for my decision.

The picture is of 603 crosses in Oakham churchyard, one for every Rutlander who died in WWI.

The triumph of the liberal technocrats

Brexiters have something in common with anti-pornography campaigners. That’s the idea that struck me whilst reading Alwyn Turner’s account of the failure to establish public harms that result from porn.

What we have in both cases are failed attempts to translate arguments into consequentialist terms. The best case for Brexit is an intrinsic one – that it’ll give us a sense of independence and sovereignty. When its advocates try to argue that it’ll also make us better off, they make fools of themselves. Similarly, many of those who oppose pornography are motivated by intrinsic considerations – the belief that a society in which pornography looms large is a coarser and uglier one than one in which it doesn’t. When they try to cite public harms of porn, they push their case further than the evidence merits.

The same is true for opponents of immigration. A disquieting sense that immigration is changing society is one thing. It is when this leads to an argument that immigration does economic damage that they go wrong.

Some of you might add that egalitarians often do a similar thing. Rather than make a case for greater equality as an intrinsic good, we often make Spirit Level-type consequentialist arguments.

What’s going on here?

Part of the story is a form of halo effect. We tend to believe that good things go together to a greater extent than is the case, as do bad things: the hero in the films is better looking and a better shot than the villain. We thus overstate the case to which intrinsic goods also have good consequences.

This is exacerbated by the tendency for political arguments to be made by fanatics – people who, in overstating their case, become counter-advocates for their position.

Something else, though, is happening. This urge to express all arguments in consequentialist terms is an admission that liberal technocracy has won. The only acceptable arguments for any policy, it is believed, are consequentialist ones – ideally, along the lines of making us materially better off. And everybody seems to accept Mill’s harm principle, and thus argue for bans on the – often elusive – grounds that the activity in question does indeed impose harms onto others.

Although the country has had enough of experts and there is a backlash against liberal elites, liberal technocratic philosophy has won.

I wonder, though: did it really do so through explicit argument? If so, when and how exactly? Or did it win by default? Maybe Alasdair MacIntyre was right. We’ve lost the ability to make coherent moral arguments and so have retreated into a (pseudo-)scientific managerialism. To his credit, Ben Cobley seems pretty much the only person to see this, and to see that there are alternative forms of argument here.

This retreat, however, does not solve fundamental ethical problems. If we are imposing costs onto others so that others may benefit, the nature of those costs and benefits are second-order. Whether they are financial or the fulfilment or frustration of some preference, all the issues with utilitarianism remain: under what circumstances may we impose hurt upon some to benefit others?

Yes,it could be that people adopt liberal consequentialist arguments for tactical reasons - that these are a means of reaching inter-subjective agreement which other philosophical positions cannot. I'd like to believe so, but the shrillness and partisanship of so much debate makes me suspect this isn't always the case. 

What’s more, I’m not sure how important it is that advocates of some of these positions cannot articulate them clearly. If you ask Brexiters why they value sovereignty, or anti-immigrationists what exactly their disquiet is, you often don’t get a very coherent reply/ But so what? Michael Polanyi had a point when he said that tacit knowledge, gut feel and instincts are important too.

Now, in saying all this I’m arguing against my own beliefs. Arguments that we should accept less prosperity in exchange for greater sovereignty or less migration leave me cold. And instinctively, I’m on the side of free movement and freedom to see what you want. I'm glad the liberal technocrats have won. 

My perspective, though, is a partial one. My upbringing gave me anti-authoritarian instincts and a belief that prosperity matters – beliefs hardened by my economics education. What surprises me is that these views are, implicitly, so universally shared. And as Mill himself said, it is attitudes that we all share, often without doubt, that we must question. 

Halloween, finance and ideology

Our tastes are seasonal. As winter approaches, we eat less salad and fish and more stews, and I for one listen to less swamp pop and more Leonard Cohen and Townes Van Zandt. What’s true of music and food is also true of appetite for risk. This increases in the spring but declines as the nights draw in: for centuries, May Day has been a celebration of hope and optimism whilst Halloween marks fearfulness and anxiety.

All this is obvious. And it has an obvious implication – that stock market returns are seasonal. As the nights draw in and anxiety rises, prices fall too far to levels from which braver investors are well-rewarded for taking risk. And as the nights get lighter in the spring, so prices rise as optimism increases. This year’s events – with markets surging in April and May and falling in October – fit this pattern like a glove.

This helps explain my chart. Shares tend to do well (on average of course) in December and January, because they were too low in the autumn. And they rise strongly in April as optimism increases. That however leaves them over-priced, which means returns in the summer months are mediocre.

But here’s the thing. Mention this to most investors, whether amateur or professional, and they’ll think you a crank. This isn’t for want of evidence. Ben Jacobsen and Cherry Zhang have shown that the “sell on May Day, buy on Halloween” rule has worked in almost all stock markets since data began*. I obey this rule myself: I transferred some of my pension from a money fund into an All-share tracker this morning.

There is infinitely more evidence for a Halloween effect in stock markets than there is for the idea that conventional stock-picking works. And yet talk of a seasonal pattern in returns marks one out as a loon, whilst active managers are Very Serious People.

In fact, there’s another example of this. We have tons of evidence that momentum investing works. And yet few fund managers act upon this – although there are many ETFs which claim to exploit the phenomenon. Not many tell their clients: “we’ve bought these stocks simply because they’ve gone up a lot.”

What we have on both these cases is a massive disjunct between what’s credible and what has an evidence base. Halloween or momentum investing have empirical justification but no credibility; conventional active management has credibility but little (pdf) empirical base.

This tells us two things. One is that evidence-based policy-making isn’t necessarily cold technocracy. In finance, evidence-based activity can be a radical challenge to the Establishment.

It also reminds us that finance is ideological. There’s a good reason why there’s so much resistance to the Halloween and May Day indicators. Fund managers are selling an image. They want to pretend that they are sober hard-headed men who can be entrusted with out money. Stock market seasonality undermines this self-image by showing that their decisions are swayed not merely by cold facts but by the same atavistic swings in sentiment to which stone age men were prone.

As Alasdair MacIntyre wrote in After Virtue, claims to expertise are also claims to power. Sometimes the facts undermine those claims: It’s for this reason that there’s as much hostility to the Halloween indicator as there is to index funds. As Upton Sinclair famously said, “it is difficult to get a man to understand something, when his salary depends on his not understanding it.”

* Yes, the effect is larger in the northern hemisphere than south. In New Zealand there’s no difference between returns from Halloween to May Day and from May Day to Halloween. And in Australia the difference is a below-average two percentage points. We’d expect some positive difference simply because markets are globalized, so Aussie stocks are pushed up and down by northern ones.

Another thing. You might think that investors should by now have wised up to seasonality, and thus eliminated it. They obviously didn’t do so this year. And there might be a reason why not. Think of stock markets as being like Keynes’ famous beauty contest. The more aware people become of seasonality, the more they might worry in the autumn that others will become anxious. (Or worry that others will worry that others will worry, and so on). If so, they’ll drive prices down even if they themselves don’t feel nervous.  Equally, they might buy in the spring in the hope that others will have seasonal risk appetites. In this way, knowledge of an apparent anomaly can cause it to persist or even increase.

Not debating diversity

Was Mill right? This, ultimately, is the question raised by the argument over whether centrists should debate with rightists whether diversity is a threat.

Mill thought that:

[Mankind’s] errors are corrigible. He is capable of rectifying his mistakes by discussion and experience. Not by experience alone. There must be discussion, to show how experience is to be interpreted. Wrong opinions and practices gradually yield to fact and argument: but facts and arguments, to produce any effect on the mind, must be brought before it.

This wasn't wholly wrong. If he were to return to us today, Mill would probably be impressed by our progress since his time on attitudes to (for example) religion and women’s rights: the latter weren’t achieved by terrorism alone. And even during my adult life, we’ve seen a decline in racism and homophobia.

But. But. But. There are big dangers with debating diversity. One lies in the mere exposure effect. By treating the claim that diversity threatens the west as a legitimate issue, we risk making it respectable. In this way, racists come out of the margins and into the mainstream. It’s for this reason that Richard Dawkins refuses to debate with creationists.

Another problem is that very few of us are rational Bayesians. Instead, when confronted with contrary evidence, we double down on our priors. And we tend to be much more sceptical about opposing evidence than supportive evidence. Even the most rational debate can therefore lead not to rectifying mistakes but to attitude polarization. This was first pointed out (pdf) back in 1979 by Charles Lord, Lee Ross and Mark Lepper. They showed people mixed reports on the effects of the death penalty. They found that, after reading these reports people who supported capital punishment became stronger in their support, whilst opponents of the death penalty also became more dogmatic. I’m not sure that events since then have shown that their finding was an isolated instance. The "marketplace of ideas" does not always select for the best. 

Yes, some people can be persuaded by single debates. But these tend to be those who were open-minded to begin with, rather than partisans. 

All this would be true even if racists and near-racists were debating in good faith. Many, however, are not. You can’t debate with liars.  

In this context, I fear that centrists are committing an old error, a version of the Wykehamist fallacy. This is the tendency to believe that their interlocutors are, at bottom, good chaps who are amenable to reason because they went to the right schools (as, in fact, many actually did).

You don’t need to disprove ideas – assuming such a thing can be done – to defeat them. You can marginalize them by ignoring them instead.

In saying this, I’m not arguing for infringing freedoms of speech. Just because you don’t share a platform with someone or give them prominence in other ways does not mean you are denying them rights to free speech. I’m not invited to write columns for national newspapers or to address student unions, but my rights are not thereby infringed in any way. The same should be true for anti-immigrationists.

So far, all I’ve said rules out debating with anti-immigrationists as equals but is compatible with us arguing in blogs and newspaper columns that diversity and immigration are good things.

There are, however, two dangers with doing even this.  

One is that it might commit a framing error. Framing the immigration issue in terms of the question “is diversity a threat?” begs the question. It assumes that we collectively have a right to reduce diversity by excluding others from our society. But as Chris Bertram has so ably shown, this is not necessarily the case.

In fact, though, I have another problem here. It’s about opportunity cost. If we are debating diversity, we are not debating other things. This matters, because an under-rated facet of political power is the ability to decide what gets onto the agenda. The more we debate immigration, the less time we devote to debating the failings of contemporary capitalism. In this sense, doing so serves a reactionary function, by taking debate about radical progressive social change off the agenda. I’ll leave others to speculate upon whether, for centrists, this is a bug or a feature.

Our feeble intelligence

I don’t have cancer. I know most of you don’t give a damn about this, but it highlighted for me an under-appreciated fact - of just how limited a role intelligence plays in our life.

A week ago, I had a slightly alarming symptom I hadn’t experienced before. I thought it might be a side-effect of some eye-drops I’d been prescribed the day before, so I rang the doctor, expecting to either get the prescription changed or be told not to be such a big jessie. Instead, I was sent to hospital to test for a form of cancer, where I got the all-clear yesterday.

When the doctor told me there was a very tiny chance it could be cancer I didn’t hear the words “tiny”, or “chance” or “could”. All I heard was CANCER. Nor was I comforted  by statistics on high survival rates. Instead, I went the full Jacques Brel.

A bit of me knew this was irrational. Bayes’ theorem told me there was indeed only a tiny chance of cancer. My prior probability of having cancer was slim (no other symptoms, no family history) and I had little reason to substantially update this: my one symptom was, I knew, compatible with many benign possibilities.

But what use was such reasoning?

Fuck all.

Intellect told me to heed the words of the Great Man:

Fear is in your head, only in your head
So forget your head and you'll be free

But I couldn’t. My rational mind was impotent against my primal fears. It could not tame the beast in me. My little words were lost. There’s a huge gap between having intelligence and using it sensibly. Between thought and expression lies a lifetime.

There are of course countless examples of this sort of thing. Heightened emotions -  anger, joy or fear – can cause us to take more risk than we otherwise would. Sadness can cause us to make short-sighted financial decisions. And whilst my judgment was distorted by fear, others’ can be warped – especially in financial matters - by wishful thinking. In still other contexts such as investments or corporate takeovers intellect can be over-ridden by hubris (pdf) and overconfidence. In yet other cases, poverty reduces IQ by depleting cognitive bandwidth: you have to take so many decisions to get through the day that there’s little bandwidth left for thinking.

IQ alone, therefore, is feeble. It can be weakened or side-lined by passions, misjudgement or ill fortune.

To be useful It must be allied to something else. In the workplace, these somethings are soft skills. In the cases I’m considering, though, they are something else - self-control. You all know this from university: the best degrees go not necessarily to the most intelligent, but to those with the discipline to revise. When James Buchanan was asked the secret of success, he answered: "keep the ass in the chair". 

The ancient Greeks called this phronesis – an ability to apply intelligence properly in the appropriate situation. Not only does this require emotional control, but it also requires an ability to adapt to different situations. Sitting here at my desk in a state of calm, I’m intelligent enough. Put me into unfamiliar surroundings where I’m emotionally aroused and I’m an idiot. 

At risk of sounding solipsistic or of committing the false consensus error, I suspect I’m typical. Very few of us have phronesis. People of great ability in particular contexts often behave stupidly in others. Think of Vicky Pryce going to prison because anger overwhelmed her intellect, or Bobby Fischer, William Shockley or James Watson being ostracised because they couldn’t shut up, or the countless businessmen led by overconfidence into terrible decisions. (One of the most tragic examples here was that of Jimmy Donley, one of the greatest singer-songwriters of all time who committed suicide in poverty and obscurity).

What’s true of individuals might also be true of whole societies. A nation might be well-stocked with people of ability, but this will avail it little if those abilities are diverted into finance, rent-seeking or soulless drudgery. Nations, as well as individuals, need phronesis.

This, though, isn’t my main reason for writing all this. We hear all the time about people “battling” cancer. What we don’t hear so much are the thousands of everyday stories of tests being negative.  Through the availability heuristic, this increases our fears of having cancer. I hope this story helps redress this imbalance.

Also, being confronted, even irrationally, with one’s mortality forces one to realize what’s important. Hence the links.

Echo chambers: a defence

It’s become fashionable to decry “safe spaces” and echo chambers and to call instead for cognitive diversity. Instinctively, I agree: cognitive diversity is one counterweight to the tightly bounded knowledge and rationality that afflict us all.

In this context, then, I’m pleased to see a recent paper (pdf) by Ole Jann and Christoph Schottmuller which defends echo chambers.

To see their point, consider what happens when a rightist says a government can’t raise much money merely by taxing the rich. Leftists reply: “you’re just a shill for the rich. Who fnds you?” A useful message is therefore ignored. Imagine then we are segregated into echo chambers of left and right, and a leftist says the same thing to a leftish audience. Because s/he cannot be dismissed as a shill, the same message is taken seriously. Worthwhile information thus enters leftist thinking.

There are many examples of this. If CNBC says something disobliging about Trump, it’s “fake news”, but if (ex hypothesi!) Fox were to do so, it’d have credence with Trump voters. And whereas Jacob Rees Mogg’s diatribes against the EU are ignored by Remainers, criticism of the EU (some of which is warranted) would be taken seriously if uttered by Remainers.

In these ways, echo chambers can actually promote worthwhile discourse by filtering out comments that’d not be taken seriously because they are discredited by association with our opponents, whilst giving proper credence to similar comments coming from like-minded people.

Jann and Schottmuller say:

Segregation into small, homogeneous groups can be a rational choice that maximizes the amount of information available to an individual. In fact, homophilic segregation can be efficient and even Pareto-optimal for society

There’s another way this can be true. If we know we’re speaking among friends, we can be more candid. “Safe spaces” can free like-minded people to express sentiments they would otherwise repress if they feared they’d be exploited by their opponents. The model here is perhaps the Chatham House rule, which allows speech to be reported outside as long as it isn’t credited to a particular person. This frees people to speak more freely than they otherwise would. “Safe spaces may provide opportunities to communicate that would otherwise not exist” say Jann and Schottmuller.

Now, there are caveats here. All this takes for granted that there is sharp polarization. It would be better if there weren’t and that we could speak freely and credibly across divisions. Given that we cannot, however, echo chambers might be a way to improve communication and to get messages across that would otherwise be ignored.

Also, this requires that there be some degree of diversity within the chambers. If people were to endlessly split and create new echo chambers after every slight disagreement – as the People’s Front of Judea and some Trotskyites have done – then information is lost anyway.

The issue here is crucially important. In a polarized world, how can we best promote credible and high quality political communication? I’m not sure if Jann and Schottmuller are right that echo chambers really are the answer – although I welcome their challenging of my priors. But theirs is a much more useful intervention than partisan mythologizing about threats to free speech.

McVey's Rumsfeld assumption

When she was told yesterday that some Universal Credit victims were being driven into prostitution, Esther McVey replied:

Tell these ladies that now we’ve got record job vacancies – 830,000 and perhaps there are other jobs on offer.

This, I suspect, is an example of a longstanding and widespread error on the right.

I don’t mean merely the failure to see that what’s possible for one person cannot be possible for all. Even if every unemployed person were to magically fill one of the 832,000 recorded job vacancies, there’d still be 531,000 unemployed and a further 1.9 million people out of the labour force who’d like to work.

Instead, she’s committing what we might call the Rumsfeld assumption. He famously said “people are fungible. You can have them here or there.” But this is not true in the labour market. Just because there are lots of vacancies, it does not follow that the unemployed can fill them. If vacancies are for bricklayers or software writers, an unskilled woman will be unable to fill them. People are not fungible. They cannot move to any job that’s available. Each unemployed person is slightly different from the next, and each vacancy slightly different. What matters is that the two match up. Rightists under-estimate this problem. Take three examples of this:

 - In 1981, Norman Tebbit told the unemployed to get on their bikes and look for work. He under-estimated the fact that it was difficult for jobless manufacturing workers to adapt themselves to the (few) new jobs that were available.

 - During the miners strike, Patrick Minford supported pit closures on the grounds that the unemployed miners would find work elsewhere. Generally, they didn’t.

 - Some Brexiters today claim that any jobs lost in exporting to the EU will be compensated for by new jobs in – I dunno – exporting to Discworld or Narnia.

In all these cases, the right over-estimate fungibility. They under-estimate the amount of sand there is in the wheels of the market mechanism, and so under-estimate market frictions. Ms McVey is following a long tradition. Here, for example, is John van Reenen and colleagues on Economists for Free Trade:

Minford uses a 1970s-style trade model in which all firms in an industry everywhere in the world produce the same goods and competition is perfect. There is no product differentiation – a German-made car is identical to a Chinese-made car.  Importantly, trade does not follow the gravity equation – everyone simply buys from the lowest cost producer.

In other, words, Minford’s world is one in which everything and everyone is fungible. But they are not. Just as some leftists have a unrealistically utopian vision of how socialism works, so some rightists are too utopian about markets and thus about our ability to adapt to disturbances such as to aggregate demand or trading rules. It is no coincidence that support for Brexit and faith in free markets are so correlated: both derive from the same dubious assumption.  

Brexit, Marxists & the state

Was Marx wrong? This is the question posed by Brexit.

I’m prompted to ask by this from the government’s advice to business on what to do about a no-deal Brexit:

UK companies and limited liability partnerships that have their central administration or principal place of business in an EU member state may wish to consider whether they need to restructure to satisfy the requirements for incorporation in that EU member state.

Faisal Islam says this is the “first time in history a UK Govt [has] effectively suggested shifting HQs out of UK.” We’ve gone from Johnson’s “fuck business” to “fuck off business”. Brexit threatens even worse than prolonged slower growth than we’d otherwise have.

This challenges Marx. He thought “the executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie.”

Now, there’s tons of evidence for this far beyond the state’s role in protecting property: state education prepares workers for capitalist drudgery; the welfare state helps to stabilize demand whilst incentivizing people to enter the labour market; and under Thatcher and Blair, a big part of economic policy was aimed at attracting businesses and maintaining confidence.

But no more. Brexit is antagonistic to the interests of capitalists. How, then, can we maintain Marx’s view that the state is a means of promoting the interests of capital?

One possibility is that the interests of capital do not consist merely in high and rising profits. They also require that capitalism be seen as sufficiently legitimate that it can persist without grievous unrest. Because egregious exploitation and inequality would undermine its legitimacy there is therefore a role for the state to impose some progressive taxation or labour regulation. Sometimes, capitalists must be saved from themselves; it is their collective interest that matters, not that of individual spivs. 

I’m not sure, though, that this is relevant to Brexit. Granted, backtracking from Brexit might undermine the legitimacy of the state in the eyes of some. But it wouldn’t delegitimate capitalism. And whilst it might provoke civil unrest, this probably wouldn’t be so great as to cost capitalism more than would a hard Brexit.

This leaves us another possibility, described by Ralph Miliband – that the state has relative autonomy. To borrow a neat analogy (pdf) from another discipline, think of the relationship between capital and the state as being like that between a woman and her dog on an extendable lead. In the short-term, the dog can run a long way from his mistress and do all sort of damn fool things. But ultimately, it usually* gets dragged back into line. Chile in the early 70s, France in the early 80s and perhaps the Tsipras government in Greece more recently are examples of this.

Brexit could fit this pattern in one of two ways. One way would be for us to end up with a “Brexit in name only” – if economic chaos, or just warnings thereof, cause a backtracking from a hard Brexit. Whether this happens via a general election or “people’s vote” is not important in this context.

But there’s another way. With even a smooth Brexit likely to depress longer-term growth, it’ll be more imperative than ever for governments to attract capital and maintain confidence**. In this way, capital’s hold over the state will strengthen; if Brexiters weren’t so stupid, I’d suspect this was their motive.

All this, however, leaves Marxists with a problem. If any policy whatsoever could be seen as examples of promoting accumulation, sustaining legitimacy or of relative autonomy, what might represent refutation of our theory of the state? Does this just become an unfalsifiable theory?

I don’t think so. The theory predicts that where there is a choice between promoting human flourishing and the interests of capital, the state will eventually opt for the latter. This prediction can be refuted by events, though it rarely is – but this is another story.

* In my picture, the dog runs to its death. Some of you might think this undermines my metaphor, others that it strengthens it.  

** Fiscal policy is not the issue here. MMTers are right to say the state can borrow as much as it wants, subject only to an inflation constraint. But this doesn’t alter the fact that tax and industrial policy must sustain profits.

Adam Smith's two economies

Adam Smith thought there were two economies – meritocratic for the poor and powerless and anti-meritocratic for the powerful:

In the middling and inferior stations of life, the road to virtue and that to fortune, to such fortune, at least, as men in such stations can reasonably expect to acquire, are, happily in most cases, very nearly the same. In all the middling and inferior professions, real and solid professional abilities, joined to prudent, just, firm, and temperate conduct, can very seldom fail of success…The good old proverb, therefore, That honesty is the best policy, holds, in such situations, almost always perfectly true. (The Theory of Moral Sentiments, Part I, Sec 3, Ch 3)

But:

In the superior stations of life the case is unhappily not always the same. In the courts of princes, in the drawing-rooms of the great, where success and preferment depend, not upon the esteem of intelligent and well-informed equals, but upon the fanciful and foolish favour of ignorant, presumptuous, and proud superiors; flattery and falsehood too often prevail over merit and abilities. In such societies the abilities to please, are more regarded than the abilities to serve.

This fits the theory of a friend of mine. He says that further up the hierarchy one goes, the longer it takes to identify merit, and so the more chance shysters and bluffers have of thriving. You can spot immediately whether someone is capable of sweeping a factory floor, but it takes longer to discover whether they can manage the factory.

Which raises the question: how extensive is the anti-meritocratic economy? Karen Bradley’s recent admission to being clueless about the province’s politics before she became Northern Ireland secretary was merely the latest and most egregious reminder that in politics merit and abilities are not always decisive to preferment.

And since Smith’s time, we’ve seen the rise of celebrity culture – a whole sub-economy of media and entertainment where abilities to please (and dumb luck) produce Adler superstars (pdf), people whose success rests upon simply being talked about. Boris Johnson and Kim Kardashian have much in common in this respect – the difference being that one has a massive arse and the other is a massive arse.

It’s easy to believe the same is true near the top of corporate hierarchies. Top managers often prefer to hire men in their own image – partly because they are more likely to trust them. This gives (pdf) us the Peter principle – that people are promoted to their level of incompetence – and the Dilbert principle, that duffers are more likely to be promoted. And their charm and deceitfulness mean that psychopaths are over-represented in top jobs.

All this is compatible with evidence that there is a “long tail (pdf) of extremely badly managed firms” with low productivity (pdf): this is what we’d expect if managers are promoted on factors other than ability. (And no, the wheels of competition don’t grind so finely as to swiftly eliminate such laggards.)

In this context, a new paper (pdf) by Andrew Oswald and colleagues challenges my priors. They estimate that only around one-eighth of workers in Europe has a bad boss – fewer than one would expect if ; flattery and falsehood too often prevail over merit.

Perhaps, though, the question here is not merely about numbers. Instead (as is often the case) it is about mechanisms. Are the mechanisms that select for merit and abilities rather than flattery and falsehood really as extensive as they should be? And if not, how can we change this – assuming of course that we want to?