Stumbling and Mumbling

Power, not prices

We’re heading for a cost of living crisis because of big price rises for essential items such as gas and food. Everybody knows this. Which is unfortunate, because it’s not quite true.

Of course, I don’t deny that prices are rising. They are. What’s doubtful is that they are the sole cause of falling real incomes.

Simple statistics tell us this. Since quarterly data began in 1955 fluctuations in annual inflation (measured by the consumption deflator) have explained only 4.2% of the variation in annual growth in real households’ incomes; for longer-term changes such as three or five-year ones the explanatory power is even lower. This tells us that rising prices alone have been only a tiny cause of changes in real incomes.

What’s more, our period of highest inflation actually saw real household incomes do well. Consumer prices more than tripled during the 1970s, in part because the oil price rose by a factor of ten. But real households’ disposable incomes then grew by an average of 3.4 per cent a year – more than twice as much as they grew in the ten years before the pandemic, a period of low inflation.

Inflation on its own, therefore, is not a sufficient explanation of falling real incomes. Sometimes, as in 2016, real household incomes fall when inflation is low. And sometimes they rise when inflation is high, as in the 70s.

So, what does explain variations in real incomes?

Power, that’s what. There are two big differences between now and the 70s.

One is that back then many workers had the bargaining power to extract pay rises to maintain their real incomes in the face of rising prices. In the mid-70s the wage share in GDP rose sharply. It was capitalists and shareholders who suffered a crisis, not working households.

The other was that government borrowing rose markedly, which helped support incomes. Because that increased debt was devalued by inflation (in those naïve days before index-linked gilts) this meant there was in effect a transfer of real resources from gilt investors to other households.

Today, things are different. Except in a few industries, workers don’t have the power to protect real wages that they had for a while in the 70s. ONS data show that average weekly wages rose 4.2% in the year to November and that median monthly pay rose 5.3% in the year to December. Both measures fall short of CPI inflation.

What’s more, fiscal policy is being tightened. The OBR foresees cyclically-adjusted net borrowing falling by 4.4 percentage points of GDP in 2022-23. Higher NICs, the cut in Universal Credit and public sector pay restraint are all taking real incomes from households.

Real household incomes are not, then, falling solely because of inflation. They’re falling because people lack the market or political power to protect themselves from external shocks in the way they did in the 70s. Back in the 70s, working people were portrayed as greedy knaves; today they are seen as pawns, victims lacking agency (to borrowing Julian Le Grand’s terminology (pdf)). There’s a reason for this change.

A fall in some people’s real incomes at a time when GDP is growing – as is likely this year – is a transfer of real resources, from those without power to those with it. Inflation is a means (often unintended) whereby this transfer occurs. It is not the sole cause of it.

The “classical dichotomy” – the idea that real variables affect only things and monetary variables (such as prices) only monetary ones – is sometimes wrong. But not always; it usefully reminds us to think about real factors, not just monetary ones.

Those who attribute the cost of living crisis to inflation are therefore wrong. But their error is an old one. It’s what Georg Lukacs called reification, the process whereby:

A relation between people takes on the character of a thing and thus acquires a ‘phantom objectivity’, an autonomy that seems so strictly rational and all-embracing as to conceal every trace of its fundamental nature: the relation between people.

It’s what Marx called commodity fetishism – the way in which relations between people assume “the fantastic form of a relation between things.”

Even well-meaning talk of inflation, therefore, is ideological: it effaces a brute fact about capitalism, that some people have more power than others.  

How to commit fraud

It is fitting that Boris Johnson’s premiership should be in doubt so soon after Elizabeth Holmes has been found guilty of defrauding investors, because both show us how easily people are fooled.

Inspired by them, here are some tips for any would-be con artist.

Exploit wishful thinking. Experiments by Guy Mayraz have shown just how easy it is to induce this. People want to believe there’s been a great medical breakthrough, or that an obscure mining company has discovered huge mineral deposits, or that they’ve met “the one” who won’t cheat on them.

Ms Holmes preyed on this: people wanted to believe there was a new Steve Jobs, and the wish was father to the belief. Similarly, Johnson’s supporters in 2019 thought you could get Brexit done by sunny optimism rather than hard bargaining. And, writes Robert Hutton, ministers are now defending him in the “hope that, when Johnson is finally removed from office, the stink won’t linger on them or their party.” 

FOMO is your friend. This is clearly the case for Prime Ministers or would-be PMs: MPs will support you in the hope of winning office themselves, and journalists will do so for fear of being frozen out and denied scoops. But it also worked for Ms Holmes. Private equity investors not wanting to miss the next unicorn pile into start-ups, sometimes without adequate research.  Fear of missing out drive stock market bubbles, and it also enables fraud.

Be glamorous. “Investors are attracted to stocks that have emotional ‘glitter’” says Alok Kumar. We’re also attracted to people who glitter. We’re apt to trust good-looking ones even if they don’t deserve it – a fact Ms Holmes used on Henry Kissinger.

Of course, Johnson doesn’t have physical attraction on his side. But his schtick of raffish charm, bumbling good humour and optimism appeals to some. You’d rather go for a drink with him than Theresa May, even if you would have to buy it yourself.

Like attracts like. Affinity frauds are good business, because it’s easier to win the trust of people who think you are one of them. Bernie Madoff, for example, sold his Ponzi scheme to people like himself - affluent, respectable-looking Jews.

Similarly, Ms Holmes appealed to the rich because she was from a “good family”. One investor “says he thought Holmes would come by medical talent naturally because her grandparents had their name on a hospital.”

Hence the power of the “Boris” brand. Calling him by his first name creates an impression that he’s your mate. And you trust your mates, don’t you?

Have a story. Vanity Fair reports:

Holmes also paid indefatigable attention to her company’s story, its “narrative.” Theranos was not simply endeavoring to make a product that sold off the shelves and lined investors’ pockets; rather, it was attempting something far more poignant. In interviews, Holmes reiterated that Theranos’s proprietary technology could take a pinprick’s worth of blood, extracted from the tip of a finger, instead of intravenously, and test for hundreds of diseases—a remarkable innovation that was going to save millions of lives and, in a phrase she often repeated, “change the world.

Narratives matter. People believe them more than they should. And better still, as Robert Shiller shows in Narrative Economics, some of them go viral. People will do your work for you, by repeating your story.

Johnson also has used this trick. “Get Brexit done” and “levelling up” are stories – albeit ones we have to fill in ourselves.

Exploit deference. We have, wrote Adam Smith, a “disposition to admire, and almost to worship, the rich and the powerful.” You don’t have to be very rich or powerful to get such admiration. Some experiments in 1968 showed that drivers were less likely (pdf) to honk their horns in impatience at expensive cars than at cheap ones, for example.

This gives the fraudster his chance. If you pretend to be a bank official or policeman, somebody will hand over their account details to you out of deference.

And it’s part of the secret of Holmes and Johnson: journalists at least defer to bosses and Prime Ministers. The corridors of power turn venality into virtue and stupidity to wisdom.

Be different. In a superlative paper (pdf) the late Werner Troesken showed how snake oil salesmen thrived for centuries in part by differentiating their products. Disenchantment with some quack remedies therefore merely fuelled demand for others.

Ms Holmes exploited this. Merely by being a woman she stood out in male-dominated Silicon Valley.

And it’s part of Johnson’s success too. Tom McTague has written:

Johnson is nothing like the other prime ministers I’ve covered. Tony Blair and David Cameron were polished and formidable. Gordon Brown and Theresa May were rigid, fearful, cautious. Johnson might as well be another species.

That’s his appeal. In differentiating himself from both the cold fish Theresa May and from the technocratic style of New Labour, people disillusioned with both of those thus turned to him.

Now, in writing all this I’m not suggesting that you become fraudsters. For one thing, it’s difficult to pull off these tricks, especially if you are from the wrong background. For another fraudsters, like other businessmen, need not just personal skills but the right opportunities too. And for another, I've missed out some necessary advice - how to have an exit strategy and avoid getting caught. 

Instead, what I’m trying to do is solve a puzzle raised in the Times recently by Matthew Parris. He describes how “scores of individuals” have had their reputations ruined because “they got themselves mixed up with a superlative confidence trickster”. What he doesn’t do is say why so many people fell for Johnson. It’s not because they are stupid. Isaac Newton and Jonathan Swift both lost money in the South Sea bubble which tells us that even brilliant men can fall for cons. Instead, it’s because there are so many ways to trick even intelligent people.

Against work

The FT has a nice piece on the rise of the anti-work movement in the US, which encourages people to cut down on their paid employment: although different, this movement has something in common with the “financial independence, retire early” community.

All this contrasts with the Labour party since the 1990s, most of whose leaders – Sir Kier Starmer included – have valorized “hard-working families”*.

By this, they don’t mean people who work hard tending their allotments, practicing guitar or painting Warhammer figures. Instead, what Labour values – and the FIRE and anti-work movements do not – is paid employment.

There is, of course, a very long tradition on the anti-work side. Ancient Greek intellectuals despised manual workers because they could not devote their time to cultivating the mind – a tradition that inspired the ideal of the gentleman amateur in England.

Adam Smith had this in mind when he described the debilitating effects of the division of labour:

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

It's not just manual work that has such effects. John Malesic describes how it leads to burnout. And John Danaher complains that employment “colonizes” our lives by dominating our mental space. Those contestants on Christmas University Challenge illustrate his point: “distinguished careers” (a malefaction I have been spared) can lead to an ignorance of everything outside one’s work.

Which aren’t the only problems. As Danaher says, “work is a source of freedom-undermining domination”. This isn’t only true in the many cases of egregious tyranny. As Martin Hagglund describes in his superlative This Life, even benign work steals that important scarce resource, time.

There is nothing “natural” about any of this. In his Stone Age Economics Marshall Sahlins shows how stone age men typically worked only a few hours a day. “Work as we know it is a modern invention” wrote Andre Gorz in his Critique of Economic Reason. The ethic of hard work, he wrote, “was a revolution, a subversion of the way of life” of pre-industrial times – a revolution, as Stephen Marglin showed, imposed by capitalist hierarchy. E.P Thompson has described (pdf) how it arose – over generations - from “the division of labour; the supervision of labour; fines; bells and clocks; money incentives; preachings and schoolings; [and] the suppression of fairs and sports.”

Hard work, then, is at best like physical courage – a virtue only in unpleasant circumstances.

Which has led to ideas such as Aaron Bastani’s fully automated luxury communism, a society in which commonly-owned technologies free us from drudge work.

Bastani’s terminology and inspiration might be Marxist, but you certainly don’t need to be a Marxist to buy into this ideal. In fact, historically, the great Liberals have espoused it too. John Stuart Mill wrote in 1848:

I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other’s heels, which form the existing type of social life, are the most desirable lot of human kind, or anything but the disagreeable symptoms of one of the phases of industrial progress….It is only in the backward countries of the world that increased production is still an important object

 In this tradition, Bertrand Russell wrote In Praise of Idleness, in which he looked forward to a short working week encouraging arts and science and “simple happiness”. And Keynes famously thought (pdf) that a 15-hour working week would be “quite enough to satisfy the old Adam in most of us!”

All of which poses the question. If the case against work is so strong, why has the Labour party for years valorized hard work so much?

There is a good reason. The transition from a world of hard work and accumulation to one of degrowth is difficult enough for individuals – which is why so many of us postpone retirement – and harder still for societies: it requires enormous social and cultural change.

But there are also bad ones. One is Labour’s fear of being seen to be on the side of benefit recipients. (There’s actually no evidence that it is, but evidence rarely plays a big role in party politics). Another is that politicians tend to be monomanic dullards, and they are sublimating that vision of life onto the rest of us. Also, social democratic politics requires economic activity to finance a big state: valorizing hard work and economic growth are alternatives to demanding massive redistribution.

And then, I fear, there is capitalist realism. It is too easy to see capitalist jobs – with their alienation, unfreedom, burnout and thwarting of our potential – as unavoidable. But in fact they might be, as Mill thought, merely “disagreeable symptoms of one of the phases of industrial progress”.

* Ironically, the one leader least prone to use that cliché – Jeremy Corbyn – was the one who more than the others actually won the votes of working people. Which might be a neat example of John Kay’s obliquity.

Class, sympathy & solidarity

The conviction of Ghislaine Maxwell has promoted some sympathetic headlines. Both ABC and CBS write of her “fall from grace” and the BBC of her “downfall”. All of which reflects Rachel Johnson’s attitude, that “it’s hard not to pity” her.

What’s going on here?

In part, there’s an echo of a sentiment we’ve largely lost – a tendency to sympathize with the criminal. Vast amounts of country music express this: The Banks of the Ohio, San Quentin, Folsom Prison Blues or Pancho and Lefty to name but a few. Tom Jones version of Green Green Grass of Home, remember, was one of the best-selling hits of the 1960s.

And there’s a reason for this pity. We don’t become criminals merely because we are irredeemable wrong’uns: to believe that is to commit a crass form of the fundamental attribution error. Instead, incentives, weakness of will, or peer pressure are all important causes. As David Friedman wrote:

A mugger is a mugger for the same reason I am an economist—because it is the most attractive alternative available to him.

Or as Iris Dement sang:

And I traveled to a prison; I saw my share of shattered dreams.
Were the tables slightly tilted I could be bound, they could be free.

Why not extend such thoughts to Ms Maxwell? She was born into and lived in a criminogenic environment.

But, but, but. The sympathy of headline writers is tightly circumscribed. They rarely speak of a downfall or fall from grace after working class people are convicted. Ms Johnson’s pity does not extend to them, and the BBC’s “due impartiality” does not apply in matters of class.

What’s going on here was pointed out by Adam Smith:

We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent.

This, he wrote, is because the wealth and comfort of the rich elicits not envy but sympathy:

When we consider the condition of the great, in those delusive colours in which the imagination is apt to paint it. it seems to be almost the abstract idea of a perfect and happy state…We feel, therefore, a peculiar sympathy with the satisfaction of those who are in it. We favour all their inclinations, and forward all their wishes. What pity, we think, that anything should spoil and corrupt so agreeable a situation!... Every calamity that befals them, every injury that is done them, excites in the breast of the spectator ten times more compassion and resentment than he would have felt, had the same things happened to other men. 

Reactions to the conviction of Ms Maxwell fit this pattern.

But Smith’s reasoning helps explain something bigger and more powerful – of why there is more class solidarity among the rich than among the working class. We see this in several contexts. One minor but nevertheless revealing example is in the circle jerk of blue-tick columnists praising each other, as Justin Horton has documented. Another example is that right “libertarians” are relaxed about clampdowns upon migrants and protestors because these bear upon the poor and weak rather than the rich and the great.

More importantly, this helps explain the unity of the Tory party. Johnson has – at least until recently – retained support from erstwhile Thatcherites even though his “fuck business” attitude is the diametric opposite of hers. And the party has almost seamlessly shifted from a social liberalism that supported gay marriage to a confected war on wokesters.

Of course, such deference-based unity is imperfect. But it is much greater than we see on the left, where divisions are rife and where working class consciousness has never developed to the extent that early Marxists had hoped.

Those headlines about Ms Maxwell, then, are not trivial. They shed light upon one of the great strengths the ruling class has over the rest of us.

On purified identities

One of my favourite social thinkers of recent years is Richard Sennett. There’s one particular idea of his that deserves especial attention today – that of a purified identity.

Such an identity arises, he says, when:

The threat of being overwhelmed by difficult social interactions is dealt with by fixing a self-image in advance, by making oneself a fixed object rather than an open person liable to be touched by a social situation. (The Uses of Disorder, p6)

People with such identities “create an aura of invulnerable, unemotional competence for themselves” by screening out or devaluing evidence that conflicts with that self-image. For such people, wrote Sennett, dissonances are “interpreted as less real than the consonances with what is known.” There are numerous psychological mechanisms at work in this: the confirmation bias, strategic ignorance, Bayesian conservatism and so on.

This is what Janan Ganesh is getting at here:

It is, at bottom, an almost childlike craving for the world to have order and structure. It is an intolerance of ambiguity….Life must answer to a system of thought.

You might think that although Sennett wrote all this in 1970 it applies to “snowflakes” today who are “triggered” by microaggressions, and so want to “cancel” them.

Maybe. But the phenomenon is much wider than that. Sennett gave the examples of people who choose career paths early in life and stick to them, or who believe in “the one”, an idealized romantic partner who overshadows actual real imperfect lovers. We might add to this people whose musical tastes are fixed in their adolescence and never progress.

Such purified identities contrast with people who are more open to new experiences, more accepting of disorder and dissonance – who have, in Sennett’s words, “the courage to be self-doubting and confused.”

What’s more, said Sennett, we don’t just fix a self-identity for ourselves. We also create purified identities of societies:

The image of the community is purified of all that might convey a feeling of difference, let alone conflict, in who “we” are. In this way the myth of community solidarity is a purification ritual. (The Uses of Disorder, p36)

In this sense, “woke snowflakes” and opponents of migrants have more in common that either would like to admit. Both are trying to screen out dissonant elements in an attempt to preserve a static purified identity. All nations are imagined communities, but many on the right see Britain (or is it England?) as one in which migrants or Muslims or the poor are less than fully typical members. Which is why the left has a problem with patriotism.

Saying this shows that the distinction between the fixed purified identity and the more open personality is orthogonal to the left-right divide. The city planning debates between Robert Moses and Jane Jacobs, for example, are better seen as between purified and open personality types than a left-right issue. And James Scott’s Seeing Like a State is an analysis of how rulers with purified identities try to impose their fixed rationalist plans onto complex societies whilst ignoring dissonant feedback from those societies which would complicate their visions. Yes, those plans are sometimes leftist (for example the Soviet collectivization of farms), but they are sometimes not – for example shock therapy or the Chicago Boys plans for the Chilean economy in the 70s.

Those political and economic pundits who go from one wrong prediction to another without any interval of self-doubt are other examples of the purified identity: we should contrast them to those who take dissonance, error and uncertainty more seriously, and ask about the sources and limits of predictability.

It's in this context that I get irritated when Marxists are accused of having a dogma. Yes, some do: Marxism is one of the many forms that a purified identity can take. But others of us are erratic Marxists, being self-doubting and more open to dissonant evidence. A good example of this were the analytical (pdf) Marxists of the 70s and 80s, who tried to reconcile Marxism with conventional social science. They had the exact opposite of a fixed, purified identity – and in fact in retrospect their mistake was to be too open, too sceptical of conventional Marxism.

By the same token, many centrists do have purified identities, being so closed to new evidence that they don’t realize it is no longer 1997.

There’s a sharp distinction between extremism and fanaticism. You can be a cool-headed sceptical extremist (I don’t use the word “rational” because nobody is wholly rational) or a fanatical centrist. The person with a purified identity can be found across the political spectrum, as can more open-minded types.

Now, this isn't to say there's a sharp distinction between purified identities and open personalities: they are two ends of a spectrum. And we can have purified identities in some respects but not others: I think I'm more fixed and dogmatic in my political views than in my day job, for example. 

Purified identities are a mixed blessing. Zealotry and fanaticism – passion if you like – spur people to work long hours and thus succeed in their careers to a greater extent than can more open-minded people with a range of interests. This gives us great musicians, but it also gives us single-minded fanatical politicians: one reason I could never have gone into politics is that it takes too many evenings.

And even if such identities are good for our careers they might not be so great for our mental health. If you don’t embrace the dissonance between your conception of yourself and the world and reality – and accept imperfection - it can destroy you. This was brilliantly described in a great song by Dar Williams*. “Once upon a time I had control and reined my soul in tight” she sings, but this leads to suicidal thoughts until she abandons control:

Cause when you live in a world
Well it gets in to who you thought you'd be
And now I laugh at how the world changed me.

* Songs are sociological, psychological and philosophical documents, every bit as valid (if not more so) as academic research.   

The decline of the impartial spectator

That video of Allegra Stratton laughing about a Downing Street Christmas party last year shows that the government is taking for fools those who observed the law – even to the point that it meant leaving relatives to die alone. There is indeed “one law for us and another for them.”  

Naturally, this has aroused widespread anger. As Adam Smith wrote, “All men, even the most stupid and unthinking, abhor fraud, perfidy, and injustice, and delight to see them punished.”

This poses the question: what is the disease of which Stratton’s laughter is a symptom?

I ask because to someone formed in the 1980s the sight of a Tory showing contempt for the law is perplexing. Thatcher often and loudly proclaimed the importance of the rule of law; I can’t imagine her laughing about illegal parties in Downing Street. What we have here is another example of how today’s Tories are anti-Thatcherite.

Nor, I think, is it simply a matter of class difference. The Queen, famously, observed social distancing rules even during her husband’s funeral.

Instead, I want to suggest that this reflects something else, something found in Adam Smith.

We are, he wrote, naturally selfish: “we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men.” But, he said, this selfishness is restrained by an impartial spectator who lives within us – what others call conscience. It is this spectator who “shows us the propriety of generosity and the deformity of injustice”, and who reminds us that if we act unjustly we will “render ourselves the proper object of the contempt and indignation of our brethren.” The fear of such contempt keeps us honest, thought Smith. And even if our misdeeds go undetected by others, this “man within” will give us an “inward disgrace.”

D.D. Raphael summarized Smith’s theory thus:

The approval and disapproval of oneself that we call conscience is an effect of judgments made by spectators. Each of us judges others as a spectator. Each of us finds spectators judging him. We then come to judge our own conduct by imagining whether an impartial spectator would approve or disapprove of it (The Impartial Spectator p 34-5)

The fact that Stratton saw flagrant injustice as a matter for laughter rather than shame suggests that, within her, the impartial spectator is weak.

And not just in her. One purpose of the spectator, said Smith, was to remind us that “we value ourselves too much and other people too little.” But this over-valuation – what Smith called self-love – is evident in others: in Johnson attempting to place himself above the law;  in the Luckhurst’s contempt for their customers at Durham University*; in Rees-Mogg thinking the party was a laughing matter; or in Geoffrey Cox’s disregarding his constituents in favour of more lucrative employment. Indeed, we could see the cult of shareholder value and profit maximization as examples of capitalists generally acting in an anti-Smithian way, by “prefer[ring] the interest of one to that of many.”

And of course, if one’s peer group are pursuing self-love there is no shame in doing so oneself. What Smith considered to be a great restraint upon selfishness – fear of disgrace in the eyes of others – thus disappears.

But why is the impartial spectator so weak? I’d suggest three reasons.

One is the decline of religion. One difference between the Queen and Johnson is that she is religious, and has thereby acquired a greater sense of duty and (a Smithian word) propriety.

A second force is the rise of a perceived meritocracy. When he coined this word in 1958, Michael Young meant it as a warning:

If the rich and powerful were encouraged by the general culture to believe that they fully deserved all they had, how arrogant they could become, and, if they were convinced it was all for the common good, how ruthless in pursuing their own advantage. (The Rise of the Meritocracy, pxvi)

You might think that Stratton and her like have little merit. But that’s not the point. They think they have, and so become “insufferably smug” as Young predicted.

A third factor is that recent decades have seen an significant form of increased social distancing. For a long time, the ruling class was dominated by men who had done military service and so come into close contact with working class men – an experience which reminded them of their own good fortune and taught them respect for that class. For them, the “man within” at least occasionally spoke with the voice of a working-class soldier. The Times’ obituary of Lord Carrington wrote:

He found himself sleeping in a hole beneath his tank with his four crew who came from poor backgrounds and had suffered hardship during the pre-war years. The experience shaped his politics, he said later. “You could not have got a finer or better lot than they were. They deserved something better in the aftermath of the war.”

Something like this attitude persisted into my adult lifetime. In my first job most equity salesmen had army backgrounds and so were accustomed to working with the working class. It might be no accident that some of the Tories most critical of the government, such as Tobias Ellwood and Tom Tugendhat, are army men.

It’s not just the decline of military men that has weakened the impartial spectator, though. Perhaps the decline of manufacturing has had a similar effect. Factory bosses who encountered working class men on the shopfloor had some arrogance knocked out of them in a way that those who travel the private school-Oxbridge-professions escalator have not.

Of course, in saying all this I don’t mean to romanticize the past: exploitation and injustice have always been with us – although remember that inequality was lower in the post-war era than it is now. All I’m suggesting is that class arrogance and over-entitlement is more obvious and egregious now than it used to be.

Which is a counterweight to calls for Johnson to resign.

Maybe he should. But what we also need to be rid of is the mindset which he represents. And disposing of that is a much bigger task.

* Yes, customers. If you are charging £9250 a year you are in the customer experience business, not the vigorous debate business.

The end of evidence-based centrism

One of centrists’ great conceits is that they are rational and moderate whist the left are fanatical ideologues. New Labour for example championed “evidence-based policy-making”; Chris Leslie claimed (pdf) that they favour “evidence not ideology”: and Steven Pinker has a BBC radio show telling us how to think better. Two recent interventions remind us that all this is self-serving nonsense.

One came from David Blunkett, who told the Today programme (2"57' in) that if we let in a few refugees, “Nigel Farage might end up being Prime Minister”. That of course is mere speculation. What is evidence is that the UK does not get many asylum applications. There were only 29,456 in 2020, compared to 102,525 in Germany, 37,860 in Greece, 86,380 in Spain and 81,735 France. Lord Kerr is right: “we are not the preferred destination in Europe” for refugees. And given that the labour market impact of migration is tiny, we could easily accommodate more. The only “migrant crisis” is that of the migrants themselves: from the UK’s point of view, there is no crisis - only maladministration and cruel racism.

The other intervention came from Tony Blair. He claims that Labour “is seen as being for everyone other than the hard-working families who feel their taxes aren’t spent on their priorities.”

Seen by whom? Not by hard-working families themselves. As Ben Walker has pointed out, in the 2019 general election Labour out-polled the Tories among working-age voters living in households with annual incomes below £100,000. Labour’s problem is not with working people; it is with the retired.

Blair’s detachment from the evidence does not stop there. He goes on to claim that Labour must “push the far left back to the margins” and reject “the old-fashioned statist view of the left”. This misses the fact that the “far left” is rejecting old-fashioned statism. It is fighting against the Tories assault upon civil liberties. And the “defund the police” slogan of Black Lives Matters, whatever its merits or not, is a profoundly anti-statist sentiment.

Of course, there is an authoritarian statist tradition on the left. But it is one of which Blair himself was a big part: New Labour created over 3000 new criminal offences and greatly increased the prison population, trends which the “far left” deplore.

There’s another odd thing about Blair’s comments. In attributing statism to the left, he omits to point out that its is the Tories who are increasing the size of the state: the OBR forecasts the tax burden rising to its highest level since the early 50s.

This increase will happen because of weak GDP growth, so public services must be financed by taxes rather than economic growth.

Blair, however, makes no mention of this long-term economic stagnation. Which is no idiosyncratic omission, but rather a consistent theme of centrists. Leslie made little reference to the financial crisis and its aftermath in his Centre Ground pamphlet, and the Independent Group/CUK omitted mention of it in its launch statement.

This blindspot matters enormously. Economic stagnation is a major cause of the current state of our politics. As Ben Friedman showed in 2006, hard economic times fuel reactionary politics – hence Brexit and anti-migrant bigotry. If Blair is sincere in wanting “liberal, tolerant” politics, he needs some way of kickstarting growth.

Here, though, it is the left that is evidence-based whilst the centre is trapped by outmoded ideology. Blair says Labour needs “a new future-oriented policy agenda based on an understanding of how the world is changing.” But this is just what Corbynite economic policies offered. They were based upon the recognition that the world has changed since the 90s, being characterised by stagnant productivity, negative real interest rates and the concentration of wealth and power among the 1%. By all means, argue with their remedies, but I don’t think you can charge the left with not seeing that the world is changing.

Which brings me to a curious phenomenon. Mainstream economists acknowledge the need to kickstart productivity; the role of fiscal policy in fighting stagnation; and the fact that immigration in economically benign. Blunkett and Blair seem much less alive to these facts. The political centre is now very different from the economic centre. And it is the left, more than some centrists, that is evidence-based.

Frames, stories and political change

Sometimes, opinions change a lot even though the facts change only a little. So it seems to be with the case of MPs second jobs. Everybody knew for years that many MPs had them but most regarded it as acceptable. Until, suddenly, it is sleaze.

What’s happening here is not so unusual. We often see it in financial markets. In the mid-90s, for example, several Asian countries ran large external deficits. And for a long time, these were seen as healthy because fast-growing countries should suck in foreign investment – until, suddenly, they weren’t and we had a financial crisis. As Sushil Wadwani, a former MPC member said (pdf):

Countries with a current account deficit can have a currency that stays strong for a surprisingly long period, until, sometimes, there is an abrupt adjustment.

Similarly, in the late 90s high prices of tech stocks were seen as justified by the prospect of a new economy – until they suddenly were not. And the US housing market started to cool off in 2006, but for months nobody thought this was a problem – until suddenly it was.

A similar thing might be happening to Boris Johnson. Everybody has known for ages that he is a lightweight comic charlatan. He has not changed, nor done anything surprising. It’s just that the same person is now provoking different feelings amongst his erstwhile supporters.

To understand what’s going on here, we must remember that we rarely see things in isolation as bald facts. Instead, we select and interpret them. As MLJ Abercrombie wrote:

The information that a person gets…depends on the context, or total situation, and on his past experience, which is usefully thought of as being organized into schemata. Human relations play an important role in perception both in that they are often a significant part of the context, and in that they have contributed to the formation, testing and modifying of schemata (The Anatomy of Judgment, p18)

This is why we are so prone to mis-readings, typos and optical illusions: squares A and B in my picture are in fact the same shade.

Facts, then, come within frames (pdf). And as Daniel Kahneman wrote in Thinking Fast and Slow, “different ways of presenting the same information often evoke different emotions.” He gives the example of how even trained doctors react differently to the statement “the odds of survival are 90%” than to “the mortality rate is 10%” even though they are different frames of the same facts. And, he adds, “your moral feelings are attached to frames, to descriptions of reality rather than to reality itself.”

Even irrelevant changes – from a 90% survival rate to a 10% mortality rate – can elicit big changes in emotions. And if irrelevant changes can do so, so too can small ones. Owen Paterson’s corruption, for example, might not be much different from that of other MPs in the past. But it has changed the frame. In the same way, small changes have tipped investors from not worrying about current account imbalances, valuations or housing markets to panicking about them.

But there’s more. Frames are created by stories. And as Robert Shiller shows (pdf) in Narrative Economics, these are like viruses: some just die whilst others spread rapidly. And as they spread, so they change the frames in which we see things. Sir Keir Starmer is trying to achieve just such a change when he says of Johnson that “the joke isn’t funny any more.”

What I’m describing here is similar to but different from Timur Kuran’s account of preference falsification. He shows how oppressive regimes can survive for years because everybody believes that everybody else supports the regime and so keeps quiet. But when, suddenly, people realize their error they rise up and topple the government. In this way tyrants such as Harvey Weinstein or Nicolae Ceausescu saw their power disappear overnight.

My account differs from his because people aren’t misrepresenting their opinions. Sure, they are going along with the crowd – peer pressure being so powerful as Robert Frank has shown – but their expressed opinions are what they genuinely believe.

But it has something in common with it too. What we have in both cases is something described by Didier Sornette and Peter Cauwels; that social structures can seem stable only to suddenly change a lot.

And we cannot predict when or if this will happen or what will cause it; the triggers often seem innocuous. Which vindicates Jon Elster’s crucial observation – that we can sometimes explain without being able to predict. All of which means we must be much more humble about our ability to foresee political change.

The decline of economics

Edward Luce writes:

Bill Clinton’s 1992 campaign watch phrase was “it’s the economy, stupid”. Today it would be “it’s the culture, idiot”.

He’s right, but this poses the question: why did this change? The question of, course, applies to the UK as well as the US.

One fact deepens the puzzle. It’s that trend growth in GDP per capita has halved since the 90s*. This should have made economic issues more important, because it’s much less obvious now that the economy can thrive without policy intervention. Back in the 90s, politicians might reasonably have thought “the economy will take care of itself as long as we don’t do anything too stupid, so let’s focus on other matters.” Today, we cannot take growth for granted.

But in fact, the opposite has occurred. As economic performance has worsened, so the salience of economics in politics has declined – so much so that, as Stian Westlake has said, the Tories “seem to have stopped talking and thinking about economics.”

I stress that word salience. There have always been clashes between cultural liberals and conservatives. For decades, however, these were generally secondary to economic debates. Today they are not.

So what changed?

The cause of the increased salience of the culture wars should by now be well-known. Events have vindicated the point Ben Friedman made in 2006 – that slower economic growth promotes illiberalism and reaction, which triggers hostility from social liberals and egalitarians.

But why has the salience of economics declined?

I don’t think it’s because politicians have accepted the advice of Dietz Vollrath or John Landon-Lane and Peter Robertson, that national policies can do little to raise long-term growth** - any more than they have heeded green calls for degrowth.

Instead, one possibility is that people just don’t want economic growth. Philip Hammond (remember him?) once said that people “did not vote to become poorer”. But they did – in 2010, 2015, 2016, 2017 and 2019. This might not be a case of adaptive preferences, of people resigning themselves to not wanting what they can’t have. An ageing population means there’s a big constituency of retired or nearly-retired people who have little direct interest in increased prosperity. And the Easterlin paradox tells us that economic growth doesn’t make us much happier anyway. One reason for this is that it is a process of creative destruction – but this brings with it uncertainty and the disruption of jobs and communities. Why want that?

There’s another way in which economic growth is undesirable. Measures to increase it would almost certainly hurt powerful vested interests. Centrist policies to improve productivity would include toughening up competition policy and shifting the tax burden from incomes to land. And that’s not to mention more radical options such as increasing worker democracy or reducing inequality. Also, faster economic growth would lead to higher real interest rates, which could reduce asset prices and deter the leverage on which the “picking up pennies” strategies of investment banks and private equity depend. There’s a powerful coalition for whom all this is a nasty prospect.

You don’t have to be a Marxist to believe that we’ve reached a point where the relations of production have become a fetter upon the productive forces. Joel Mokyr has written:

Every society, when left on its own, will be technologically creative for only short periods. Sooner or later the forces of conservatism…take over and manage through a variety of legal and institutional channels to slow down and if possible stop technological creativity altogether.

To those of us formed in the 70s and 80s, all this seems weird. We were brought up to see Thatcherite Toryism as an economic project – albeit one with the aim of achieving cultural change. So isn’t the lack of interest in economics yet another way in which the Tories have become anti-Thatcherite?

Perhaps not. Maybe Tories were not really interested in economics at all, but something else.

Their concern about the UK’s relative economic decline in the 70s might have been motivated less by a desire to raise living standards and more because they feared the UK’s loss of power and prestige on the global stage. In this context, it was the Falklands war more than economic policy than transformed self-perceptions of the UK, just as Brexit now bolsters the self-image of the UK as a strong independent “nation”.

And perhaps Thatcher’s assertion of “managers’ right to manage” was not a means of increasing efficiency but rather a desire to impose traditional hierarchies. The crisis of the 70s was not so much an economic crisis – real GDP then grew better than they have in recent years – as a political one. Workers were getting uppity, and Tories hated that.

Maybe, therefore, the rise and decline of the salience of economics within the Tory party (and the media) isn’t so strange after all. Economics was only a tool for achieving a sense of national pride and preserving inequality, and the tool could be safely returned to the shed when the job was done.

* This isn't simply the result of the financial crisis. My chart shows that rend growth was declining before then. And anyway, the crisis was endogenous.

* Note the strong correlation in my chart between UK and US growth. It is consistent with Landon-Lane and Robertson’s point that medium-term growth is the result of mainly supra-national factors.

Working less

Many people believe we need to work less if we are to avoid catastrophic climate change. We must “dramatically reduce economic activity” says George Monbiot. “We should cut working hours to save the planet” agrees Simon Kuper.

In truth, though, there are other reasons to work less, as Martin Hagglund argued in his brilliant This Life. Our most fundamental possession, he says, is time, and we can only be truly free if we can choose what to do with this scarce asset. For many of us, though, having to work long hours or for many years deprives us of this freedom.

Which runs into the objection that working significantly less would be bad for the economy.

Hagglund’s solution to this is ingenious. What we need, he says, is a “revaluation of value”. We must judge economic success not by how much we produce, but rather by how much free time we have:

To be wealthy is to be able to engage the question of what to do on Monday morning, rather than being forced to go to work in order to survive.

He believes such wealth – such freedom – is impossible under capitalism. Yes, capitalism tries to economise on labour. But it does do erratically and inequitably, by creating unemployment (with the misery it causes) alongside others who work too much.

History suggests he has a point. Working hours increased markedly during the industrial revolution, as E.P. Thompson described (pdf). And whilst they’ve fallen since the late 19^th century, the average working week is longer now than it was in the 15^th century. (I'm using Bank of England data here.) What’s more, the pace of decline in working hours seems to have slowed. In the 30 years to 2019 they dropped less than 6%, compared to an 18% fall in the 1959-89 period: this fact might be connected to the weakening of trades unions in this time.

Of course, working hours are but one measure. By another, free time has increased hugely since the early 20^th century because many of us are enjoying long retirements now. But progress here has stalled. The state pension age has risen, and young people – unable to save because of high rents - expect to work until they drop.

Which suggests Hagglund is right to say we need some radical economic changes if we are to increase free time.

Two other facts suggest as much.

One is that the smaller is the economy, the larger will be the share of government spending therein. If the economy shrinks spending on health and social care will not, so these will take up a bigger share of activity. Jason Hickel says that degrowth is compatible with increasing “people’s access to the resources they need to live long, healthy, flourishing lives.” But that means a big increase in the share of social spending in economic activity. Degrowth – for environmental or Hagglundian reasons – requires decommodification*.

The other is that whilst we wealthy people could easily work less and consume less, those who are working long hours just to get by cannot. One solution to this would be a cultural revalorization of work, to recognize the low-paid as being the skilled workers they in fact often are. But another would be greater redistribution, as Monbiot acknowledges.

In fact, we’ll need redistribution in another sense – from landlords to tenants. Hagglund’s democratic socialism would reduce capitalist exploitation, the fact that we work longer than necessary for the benefit of capitalists. But if we are to work less we also need to reduce rentier exploitation, the fact that we work longer than necessary to pay landlords. Otherwise, working less would mean handing over an even bigger share of one’s wages to landlords.

The inference is clear: cutting working hours and output cannot be an isolated change. It requires other big cultural and economic changes.

Which runs into a problem: how would such changes affect productivity?

You might think this irrelevant for green degrowthers. I’m not sure. Even if we are shrinking GDP we need to improve energy efficiency. And Hagglund’s vision of more time increasing our freedom requires that productivity be high. The sooner we can get our work done the sooner we can knock off, and some of us will want to spend our freer time on some activities that consume resources.

But raising productivity is a massive task even in the best of times. It requires that we overcome not just vested interests but also Baumol’s law (it’s hard to raise productivity in many services), diminishing returns, and a lack of big innovations. Indeed, it might be that it’s impossible to do so, as productivity is determined by global factors rather than those under the influence of national governments.

And shrinking output and working hours would add to these obstacles.

For one thing, it would put us on the wrong side of Verdoorn’s law, the correlation between aggregate demand growth and productivity growth. If companies are to invest in energy or labour-saving technologies they need confidence that future demand will be sufficient to cover the cost of doing so. Degrowth reduces that confidence.

And for another, technical progress and innovation require competition: a lot of productivity growth comes not from incumbents upping their game, but from new entrants and exits (pdf). But degrowth increases the share of the social sector in GDP and shrinks the share of markets.

We mustn’t be wholly pessimistic, however. We’ve decent evidence (pdf) that cutting working hours – at least moderately – can raise productivity (pdf). And socialism could remove the barriers to productivity created by inequality and managerialism, not least by encouraging worker coops.

Nevertheless, all this leaves us with a big question: how to reconcile socialism with the competition necessary (but not sufficient!) to raise efficiency? This is made all the more difficult because nobody in British politics seems to be thinking about it*.

But there’s another issue here. Working significantly less is not a change in degree but one of kind. And it’s one many of us will struggle to adjust to. As Maynard Keynes wrote in a famous essay (pdf):

There is no country and no people, I think, who can look forward to the age of leisure and of abundance without a dread. For we have been trained too long to strive and not to enjoy.

Being free from work can mean being free from roles, from meaning: think of the ennui endured by the women in Jane Austen novels or housewives such as Betty Draper in the mid-20^th century. I’ve a sense of this myself. I’m planning on retiring next year, but I approach this as my teenage self regarded beautiful girls – with desire mixed with fear.

I fear there’s a bigger danger. Recent years have confirmed what Benjamin Friedman wrote in 2006:

The history of each of the large Western democracies – America, Britain, France and Germany – is replete with instances in which [a] turn away from openness and tolerance, and often the weakening of democratic political institutions, followed in the wake of economic stagnation that diminished people’s confidence in a better future.

The biggest support for the Green party, remember, came in 1989 – at the peak of a boom.

Which provides another challenge for degrowthers: how to prevent lower GDP leading to reactionary politics?

If all this reads like a critique of degrowth, it shouldn’t. Rather, my scepticism is directed towards a particular type of politics – very often found among centrists as much as on the left - which I’ll call the “if I were king” conception. We should not think of policies as standalone interventions imposed from the top down. Instead, they are embedded in, and arise from, particular cultures and configurations of class interests. Policy is endogenous.

I don’t think this is a counsel of despair. It is to say that the left and greens must campaign for the cultural change without which degrowth is impossible. The precedent here is perhaps free market ideas in the 50s and 60s. These were marginalized, but years of often-neglected work by campaigners and thinktanks eventually led to them becoming accepted in the 80s. You can do a lot of important political work without having power.

* The papers cited in this sentence are paywalled – hence the links to scihub. Yes, there is irony in this fact.

** I am perhaps unique in believing that the decline in interest in market socialism is one of many intellectual wrong turns we have made in recent years.

Government spending, profits & capitalism

Simon Clarke, Chief Secretary to the Treasury, says there has been “something of a philosophical shift” in Tory attitudes to public spending. Which poses the question: why?

I’m not sure it is the result of high-falutin and rigorous debate. Instead, I’d suggest something else. To see it, let’s start from the perspective that philosophy follows interests and that the Tory party is emergently intelligent: whilst any individual seems cognitively limited, the party itself has a formidable genius.

If these premises are correct, we have a ready explanation for this “philosophical shift”. It’s that the health of capitalism, for now at least, requires big government. This is true in several ways. I’ll focus on just one – that big government spending is necessary to support profits.

To see my point, recall basic national accounts identities. These tell us that GDP is the sum of consumer spending (C), government spending (G), investment (I) and net exports (NX). It’s also the sum of incomes: profits (P), wages (W), other incomes such as those of the self-employed (O), and taxes on production (T). Rearranging these gives us an expression for profits:

P = (C – W) + (I – O) + (G – T) + NX

This just tells us about the circular flow of income. It says that higher wages don’t necessarily cut profits if workers spend those wages. And it tells us that capital spending is good for aggregate profits, as one firm’s outlays are another’s orders. And so on.

This Is an identity, but it helps organize our thinking.

The lockdown of shops and pubs last year forced us to spend less and save more; the household savings rate, which had for years wobbled between 5 and 10% shot above 20%. And even now it’s above 10%. C – W has therefore nosedived (as indeed has investment as projects have been put on hold). Our identity tells us that, on its own, this would have caused a massive drop in corporate profits.

But we saw no such fall, because the government acted. Increased public spending supported the economy and hence profits. We credit such spending with protecting jobs. Which it did: in the absence of such spending, firms would have slashed employment in an effort to protect profits. The point is that capitalism required higher government spending. The “philosophical shift” to big government was therefore necessary to sustain profits.

My chart summarizes this, by showing the counterparts in my equation. You can see that in 2020 the C – W element collapsed and G – T rose, the net effect of which was to actually slightly raise the share of profits in GDP.

And here’s the problem: will we return to the pre-pandemic world in which C – W supported profits?

The OBR forecasts (shown in my chart) suggest that we will to a large extent. If foresees the savings ratio falling below 5% by 2024. That would mean a rise in C – W which would tend to support profits even if G – T falls.

This, however, is far from certain. The fact that retail sales have fallen since their post-lockdown bounce in April suggests we’re a long way from our old spendthrift ways. Some of us have fallen into more frugal habits. Others might need to rebuild the savings they ran down last year as their hours and jobs were cut.

Hence the need to avoid large cuts in public spending. Imposing these at a time when the prospects for consumer spending are still uncertain (and capital spending too) would jeopardize profits. Instinctively – emergently – the Tories grasp this. Hence their “philosophical shift.”

But note something else about my chart. It shows that the government sector has for years been a big counterpart to profits, even more so during recessions. In fact, apart from a brief spell in the late 80s, it has far outweighed investment counterpart. This was not always the case. In fact, in the 60s the investment counterpart was bigger.

Now, I stress I’m only talking identities here. Perhaps if the government were to shrink significantly, capital spending would surge and so we’d see sustained profits and a small state. This did not, however, occur during the austerity of the 2010s, perhaps because of what Ben Bernanke way back in 2005 called the “dearth of domestic investment opportunities.” The Tories can be forgiven for not wanting to take this risk. There’s a good reason why there are so few libertarians among business lobbyists.

There is, therefore, perhaps a simple and powerful reason (or certainly justification) for the Tories’ conversion to bigger government: it is what capitalism requires.

Markets and freedom

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Productivity in late capitalism

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

All of which suggests that Marx might have been right:

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

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

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

The house price puzzle

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Skill as a social construct

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There are several elements of the social construction of skill:

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

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

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

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

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

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

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

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

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