Stumbling and Mumbling

Cummings on complexity

One of the more interesting errors people sometimes make is to have a useful insight but draw incorrect inferences from it. So it is with this tweet from Dominic Cummings:

I get all sorts wrong all the time. And i don't *know* if Brexit is good or bad. Unlike remain twitter I think the world is highly complex & rapid error-correction of inevitable constant errors is almost the ultimate value.

It is wholly correct to stress that the world is complex and that errors of planning and policy are therefore inevitable. Politicians and journalists should be more aware of this.

I suspect, however, that Mr Cummings might not have drawn the right inferences from it..

Our reaction to complexity should not be to blunder around with a sledgehammer and then try to absolve ourselves by saying: “who knows what would have happened? Things might have got broken anyway.”

In fact, there’s a longstanding principle which recommends the exact opposite. I’m thinking of Brainard conservatism (pdf). It says that in making policy central bankers should do less than models recommend. Think of adjusting the thermostat in a strange hotel room. You don’t turn it up a lot only then to boil and turn it down a lot: you’ll never get comfortable that way. Instead, you gently tweak the thing and wait and see what happens. Alan Blinder says this idea “was never far from my mind” when he was vice-chair of the Fed in the mid-90s.

As with most general principles, Brainard conservatism isn’t always correct: there are circumstances (pdf) where over-reaction is reasonable. It is, however, a specific application of an idea that surrounds us in business and everyday life – that uncertainty and complexity makes us do less than we otherwise would. We know, for example, that businesses respond to uncertainty (pdf) by reducing capital spending. In a complex world, irreversible investments are risky.

But of course, the Brexit referendum was like an irreversible investment. Whereas voters in general elections can correct their errors by changing their vote a few years later, they cannot do the same with a referendum.

Somebody who truly acknowledged complexity would not, therefore, have wanted a referendum in the first place.

And if they had, they wouldn’t have voted Leave. The effect of doing so was to introduce more complexity into the environment and so depress business investment.

Which is why I say Cummings might have drawn the wrong inference. For me, the existence of complexity was precisely a reason to oppose Brexit. As I wrote at the time:

Brexit is “a very messy prospect, with years and years of negotiation lying ahead in a climate of uncertainty over the outcome”. Such uncertainty could dampen capital spending and investment in exporting activity.

There’s something else. Acknowledging complexity does not mean we should throw our hands up and say we know nothing. Of course, we cannot foretell the future. But we do know a few mechanisms. One of these is that trade frictions with the EU tend to reduce trade which in turn – via several channels - means less productivity. This tells us that Brexit will tend to make us poorer (pdf) over time, relative to what we would otherwise be.

Of course, in a complex world we can’t know how much poorer – and we’ll never know for sure even after the fact. But this poses the question: what plausible offsetting mechanisms are there through which Brexit will enrich us? Despite having years to answer this question, Leavers have so far come up with nothing but smoke.

For me, then, acknowledging complexity is a reason to oppose Brexit. Not, necessarily, in the sense of *knowing* for sure that it’s bad. But rather in the sense of seeing no advantage in adding more uncertainty to an already-complex world.

I suspect that Cummings’ incorrect inferences don’t stop here. It is correct, wise and important to say that “rapid error-correction” is valuable. But how do we achieve this?

It is not by relying upon smart people and superforecasters. Being clever is like having a wank – self-gratifying but of little use to anyone else. Instead, I’d suggest three other things.

First, avoid the obvious errors in the first place. We now have a long inventory of cognitive biases. Much of my day job consists of warning retail investors to be on guard against these. Policy-makers should also be vigilant. But I see little evidence that they are: the most important such bias, says Daniel Kahneman, is over-confidence. How much of this is there in politics?

Secondly (and relatedly) avoid judgment and stick to rules. The investment environment, for example, is tremendously complex. The solution is to stick to a few rules, such as holding tracker funds; avoiding high-fee funds; and reducing exposure when prices fall below a ten-month average. The analogue on politics is to rely upon a few things that you know for sure.

Thirdly, we need automatic feedback which corrects errors: this is the great virtue of the market mechanism when it operates properly. Such feedback loops can be imported into policy-making. We know – thanks to the work of Prakash Loungani – that economists cannot forecast recessions: that’s consistent with complexity. Even the best monetary and fiscal policies, therefore, can only repair the damage after the event. What we need instead are powerful automatic stabilisers which include progressive taxes and a strong welfare state.

In the same way, labour market regulations and complicated welfare policies entail all sorts of trade-offs and uncertainties. One answer to such complexity is to pursue a simple alternative. As Dan Davies says: “whatever your favourite social policy might be, full employment is probably the best way to achieve it.”

So, I suspect Cummings has drawn entirely wrong inferences from his premise. But I cannot be harsh on him, because in acknowledging complexity he has made a leap which most of the rest of the political-media class has not. And until they make that leap, the important question of how we cope with complexity will not get the attention it deserves.

Honesty vs electability

How dishonest should politicians be? I ask because of an encounter between some ex-Labour voters* and Sir Keir Starmer.

Some gammon claims (2'10" in) that “there’s a lot of people under the age of 25 who just don’t want to work” to which Starmer replies initially: “you’re always going to get some people who maybe don’t want to work.”

What he might have said, of course, is: “you’re just a bigot, and a mug for believing Tory lies”. My chart shows the point. It shows that until 2007 a higher proportion of 18-24 year-olds were in work than were 50-64 year olds. Isn’t it an amazing coincidence that the number of young people who didn’t want to work increased during the financial crisis, fell during the subsequent recovery, and rose again during the 2020 recession? Isn’t it incredible that people’s idleness should increase and decrease just as external events cause recessions and recoveries?

Too incredible, of course. The truth is that young people’s unemployment (pdf) is tremendously cyclical. Anybody who thinks it’s a matter of youngsters’ idleness is just blaming the victim, and falling for myths which exonerate the government and capitalism.

But Starmer didn’t say this, just as Gordon Brown famously didn’t properly confront Gillian Duffy’s ignorant bigotry.

And this wasn’t the only example of him copping out. Another ex-Labour voter told him that “trust is invaluable”. To which he should have replied: “then why did you vote for the most dishonest government in living memory?”

We should not, however, be too harsh on Starmer or Brown. Such encounters merely show Stephen Bush’s point, that politicians – or at least honest ones – need “phenomenal reserves of self-control.” Telling the truth to an electorate that is systematically misinformed about almost everything might not get you far.

There’s a trade-off between truth and electability.

Here are some examples of what I mean:

Truth: there is no such thing as the “taxpayers’ money”.

Electability: the trope can be used to claim that government cronyism is ripping off voters.

Truth: governments do not control how much they borrow. It is in fact is the product of private sector decisions to save and invest.

Electability: an opposition minister must show that they are credible custodians of the public finances.

Truth: most socio-economic phenomena are complex emergent processes that are very hard to control.

Electability: politicians must pretend there are policies with simple, predictable benefits.

Truth: migrants have very little effect upon the wages of native workers.

Electability: voters want politicians who are tough on migrants.

Truth: everybody has limited knowledge and rationality, and large organizations cannot be run effectively from the top down. Diversity and decentralization are crucial.

Electability: we need a strong leader.

Truth: Brexit is tricky because leaving the single market requires a hard border either between Northern Ireland and the Republic or between Northern Ireland and Great Britain.

Electability: “Get Brexit Done”.

My point here is merely to point out that politicians – especially perhaps leftist ones – face a trade-off in at least some respects between telling the truth and winning support. As Isaiah Berlin said (pdf), “values may easily clash within the breast of a single individual.”

What can be done about this? Here, I suspect, we need a division of labour. Some of us – economists, activists and a few journalists – must face down such myths: Yanis Varoufakis gave a fine example of this. This is trickier than it seems, especially in a post-truth world: people are rarely persuaded by being told they are idiots even when they are.

Whether it is the job of a Labour leader to do this is, however, less clear: doing so risks putting oneself outside the Overton window and alienating a lot of voters. Perhaps they must to some extent operate in a climate created by others.

There is, however, one common reaction to the trade-off between honesty and electability that just won’t do.

When faced with dissonant ideas, people sometimes resort to self-deception. On the left, this can take the form of believing that the only barriers to electoral success are insufficient ideological purity and the evil media. On the right (and perhaps among polprofs and journos too), it can take the form of internalizing the bigotry and economic illiteracy of much of the electorate.

In these ways, however, the basic trade-off is just avoided. But this is the easy, and perhaps unproductive, response.  

* Most of those ex-Labour voters hadn’t voted Labour in a long time. It’s odd that the BBC couldn’t find people who’d voted Labour in 2017 but not 2019 – especially as there were 2.6m of the buggers.

On professional deformation

Phil recently tweeted that one problem with Starmer is that he doesn’t realize that “politics isn't the same as running the DPP.” This hints at a problem many of us have.

Phil’s right. Leading the Labour party isn’t like running the DPP. For one thing, the party isn’t as hierarchical as the DPP: people don’t simply do as they are told. And for another, a Labour leader needs to be a salesman, whereas the boss of the DPP does not. Moving from the DPP to the Labour leadership is like a boss moving from a monopoly utility to a growth company needing to catch customers’ attention in a competitive environment. The two jobs require different skill sets.

What’s more, the forensic skills Starmer acquired as a lawyer aren’t necessarily very useful to him now. He needs to intuit what voters will want in 2024. There’s not much hard evidence here, so an ability to handle a mountain of it isn’t much value.

Starmer’s failure to fully appreciate these shortcomings are, though, forgiveable because it’s a widespread error. The French call it deformation professionelle. Our professional training and experience don’t just give us particular skills. They also inculcate into us a mindset that whilst useful in some contexts is a menace in others. If your only tool is a hammer, everything looks like a nail.

We see the same thing in Johnson. A newspaper columnist must tell his readers what they want to hear and be superficially persuasive, but need not bother with detail, implementation or administration. He expresses a view and moves on without suffering any penalty for being wrong. Johnson is merely importing the characteristics he displayed at the Telegraph into Downing Street. He is proof of the fact that sometimes the skills you need to get a job aren’t the same as those you need to do it well.

Some lawyers are prone to professional deformation in that they are inclined to over-estimate the role of the law in social change. The “commitment” to spend 0.7% of GDP was an act of parliament. But as David Allen Green (a lawyer too smart to fall into this trap) says, this was “useless, useless, useless.” Useless it might have been, but unprecedented it was not. The 2010 Child Poverty Act tried to legislate away child poverty. But of course it failed. Abolishing poverty requires much more than posh people’s words.

Some engineers make the same error. They are apt to see design where there is in reality emergence and to seek more control than is possible. Diego Gambetta and Steffen Hertog show (pdf) that engineers tend to “take more extreme conservative and religious positions” – even to the point of being disproportionately Islamist terrorists:

Engineering as a degree might be relatively more attractive to individuals seeking cognitive ‘‘closure’’ and clear-cut answers as opposed to more open-ended sciences – a disposition which has been empirically linked to conservative political attitudes…Engineering is a subject in which individuals with a dislike for ambiguity might feel comfortable.

Similarly, doctors (like other professionals) can over-estimate their own expertise and be arrogant and patronizing towards laypeople.

And of course even good journalists are prone to biases such as overweighting individual agency to the neglect of emergence, focusing on salient events rather than slow-moving change, prioritizing scoops over improving public understanding or being too deferential to the (wrong?) experts. Such biases are important as they colour public attitudes to politics. 

Now, when I write about cognitive biases it is usually a memo to myself. And this is true here. Economists are also prone to professional deformation. Our fancy models which told us that globalization was a net good led us to under-estimate the prevalence and anger of losers from the process. Our emphasis on incentives can blind us to the fact that people’s motivations are often more complex. And my education and formative years led me to think that politics should be about economic policy which leaves me befuddled now that this is no longer the case.

None of this is to say that engineers, lawyers, doctors or economists have no place in policy-making. They emphatically do: heck, if we stretch the point there might even be a place for journalists. Instead, we must recognize that the perspectives of even the smartest of us are partial and biased.

What matters, therefore, is cognitive diversity. The lack of it can be dangerous. It’s possible perhaps that if Blair and Bush had been more influenced by good military minds the Iraq war wouldn’t have been so disastrous. And one reason why Brexit has been such a mess is that the decline of trades unions meant that the Tory party had lost people who had experience of tough negotiations and bargaining, to be replaced by those who thought that shouting like a toddler could get you want you wanted.

It’s too much to ask of anyone that they overcome the biases and partialities inculcated by years of training. We should, however, ask of decision-making processes in any organization that they harness diversity as a counterweight to professional deformation. It’s not obvious, however, that our political institutions do this.

(Not) reading Marx

How well-read should we expect politicians to be? This is the question posed by Rachel Reeves’ recent boast (33'50" in) that she hasn’t read Marx’s Capital*.

She, of course, is by no means the worst offender. It’s become fashionable on the right to betray a complete ignorance of Marxism – as for example when they decry taking the knee as Marxist: some Tories think it’s impossible to be a decent person without being a Marxist, which is further than I would go. As the great John Spiers tweeted:

The number of people on this platform using the word Marxist without even having a rudimentary understanding of what it means is hilarious. Like teaching a dog to say sausages and claiming the dog knows what it means!

Such ignorance is in one sense inevitable. It is impossible to have read everything. And one can be a perfectly good economist without having opened the pages of Capital. We are all ill-read and ill-informed about many things: much of poetry, science and ancient history and culture for example are closed books to me. But you know what? I keep quiet about such matters. Similarly, for most people there is nothing wrong with not having read Marx and keeping quiet about Marxism. What is wrong is spouting off on things you know nothing about.

There are however some things that some people should have read. For me, it is regrettable that politicians – especially Labour ones – have not read the greatest book of left-wing economics, for three reasons.

First, it betokens a lack of curiosity. Ms Reeves will have spent long hours (and it would have felt even longer) listening to gobby fellow PPEists and Labour activists talking about Marx. Not to have asked: “what did this fellow actually say?” is a sign of a lack of inquisitiveness and of interest in the intellectual history that shaped our world. And if you are incurious about Marx, what other things – maybe more important things – might you be incurious about?

It’s also a sign of a lack of interest in the issues that Marx explored such as unfreedom, stagnation, exploitation and capitalism’s proneness to crisis. Whilst I’d expect Tories to have no interest in these, it is surely deplorable in a Labour politician. A potential Chancellor must be concerned with more than merely balancing the books and shifting a few crumbs from rich to poor.

Thirdly, not having read Capital disqualifies you – or at least should disqualify you - from entering important debates. If you don’t know what Marx said, you cannot claim that his ideas have nothing to tell us today. You cannot be an intelligent anti-Marxist without having read the man. As Sun Tzu said:

If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.

On this point, American generals are more clued up than British politicians.

Here, you might object that you don’t need to have read Capital to be well-informed about Marx, any more than one need have read Newton’s Principia to be a physicist. True, Marx has inspired a fine secondary literature such as Paul Sweezy, David Harvey, Jon Elster, Ben Fine (pdf), Michael Heinrich and William Clare Roberts to name but a few. If Ms Reeves and Tories have done such reading – though I doubt it – then my charge loses some of its force.

But not all. These commentators would, I suspect, urge you to also read the original. To not do so is to take on trust their readings. Such credulousness is not a property I look for in politicians who are faced with biased and partial advice from all corners.

Also, in not reading the original Capital, you risk missing some important features of Marx – several of which would surprise his critics. One – stressed by Roberts – is just how literate Marx was. Which is reflected in the fact that much of volume one of Capital is a good read – especially once you get past the early chapters: you should start Capital with chapter 10. Yes, volumes two and three are less so, but that’s because Marx never finished them in his lifetime.

A second is that Marx was highly empirical. Much of volume one especially describes prices, wages, working and living conditions in some detail.

A third is that Marx wasn’t much concerned with income inequality – and why should he be as this had long pre-dated capitalism and so was not a distinctive feature of it? His beefs with capitalism were about exploitation, alienation and its proneness to crisis.

Yet another is that Marx was pretty much silent in Capital about what he thought a post-capitalist society should be. He was much more an analyst of capitalism than an advocate for socialism.

Also – though this is evident in most commentaries – is that Marx attacked capitalism at its strong points. Joe Biden recently tweeted:

Let me be clear: capitalism without competition isn’t capitalism. It’s exploitation.

This, though, is emphatically not the Marxian view. Although he saw that capitalism tended to generate monopoly, his analysis assumed competitive markets and that “all commodities, including labour-power, are bought and sold at their full value.” It was competitive forces, he thought, that drove exploitation:  

Capital is reckless of the health or length of life of the labourer, unless under compulsion from society…But looking at things as a whole, all this does not, indeed, depend on the good or ill will of the individual capitalist. Free competition brings out the inherent laws of capitalist production, in the shape of external coercive laws having power over every individual capitalist.

The notion of greedy or evil capitalists is not a Marxist one. For Marx capitalists, like workers, are victims of the forces of competition. One of his beefs with capitalism is that it strips us all of agency: in many ways, Marx as a libertarian. And the flaws of capitalism aren’t accidental ameliorable things like monopoly or rent-seeking but are inherent in the system. That’s a critique which is in danger of being lost.

So, if you are interested in capitalism you should at least acquaint yourself with Capital. I don’t mean you should take it as gospel, obvs, nor that you must pore over every sentence: much of volume two repays skimming. And, of course, I don’t confine this advice to Marx. I would urge all leftists to read Smith’s Wealth of Nations** and at least some of Hayek, such as his essay “The use of knowledge in society”. Some things are essential reading.

There’s one other thing. Some people have suggested that Ms Reeves was lying when she denied having read Marx. I have no problem with lying: the truth is a precious thing, and precious things shouldn’t be wasted on idiots. If this is true, however, it poses the question of why she felt the need to do so. Of course, our political culture is degraded, anti-intellectual and philistine. But I would hope that the Labour party would challenge this fact rather than kow-tow to it.

Don’t call it “Das Kapital”, unless you are in the habit of referring to every foreign-language book by its original name.

Not the Theory of Moral Sentiments, though, as it would merely reinforce their prejudices.  

Dehistoricizing identity

Talking rubbish about the pensions triple lock is a booming industry. Rachel Cunliffe says the likelihood of a big rise in the state pension “is an act of generational apartheid: socialism for the old, austerity for the young.” And Polly Toynbee says “one generation is destined for a mighty windfall from the government while the other gets nothing.”

Such claims are flat wrong. The triple lock, if it persists, actually benefits the young more than the old simply because young people can look forward to decades of rises in the pension and hence to a comfortable old age whereas the old will fall off their perch after only a few increases. The power of compound growth is a wonderful thing. To put this another way, a mean state pension hurts workers today because it means they’ll have to contribute more to expensive and risky private pensions to achieve a decent income in their dotage.

The issue of the state pension is not one of welfare policy, but of how to provide for our futures – whether to do so via private schemes or the state. And there’s a strong case for the latter.

Which poses the question: why do people not see this and prefer to frame pensions policy as a clash of generations?

Part of the answer, I suspect, is that they dehistoricize identity, regarding it as something fixed in the moment. Which is of course not the case. We all have memories, hopes, expectations and changing circumstances. Edmund Burke famously described society as “a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born.” Similarly, we are coalitions of our present selves, past selves and future selves. The triple lock benefits our future selves and hence is good for this coalition. Talk of pensions as a transfer from young to old ignores the fact that we exist in time.

And it is a common error. Here are some other examples of it.

 - “The unemployed” and “benefit claimants.” These are not, in most cases, identities but rather phases millions of us go through. ONS data show that between 2015 and 2019 an average of 301,000 people a quarter moved from work into unemployment – equivalent to over one per cent of those in work – and 439,000 moved from unemployment into work. Stigmatizing benefit claimants as scroungers rather people suffering temporary misfortune is just empirically wrong.

 - “Motorists”. Of course, this too is just something most of us are for only a short while. Traffic calming measures which might annoy us whilst we drive also help us when we walk or cycle. Constructing identities around this trivial fact is as sensible as dividing us between bath tub users and dry people.

 - “Leavers” and “Remainers”. Nobody knew what these were before 2015. Failing to ask how they emerged as such strong identities effaces important questions, such as: what went so wrong with the economy as to create a large mass of people discontent with the status quo? And how did this content come to be exploited by a handful of cranks?

 - Black and minority ethnic people are disproportionately likely to vote Labour – Ipsos Mori estimates that they split 64%-20% to Labour versus the Tories in 2019 – despite many having wealth and socially conservative views. Why? A big reason is that they remember – if only by word of mouth – the vicious historic racism of the Tory party. Yes, the Tories are more diverse now, but it’s not just the present that matters. So does the past. It’s for this same reason that I’m a Marxist even though I am now bourgeois in that I own enough capital not to need to work. Like all of us, I am shaped by my past: there’s a reason why they are called formative years.

 - Why statues matter. As Simukai Chigudu says, “statues are always about the present and not the past”:  

In modern Britain, colonialism has transcended its historical epoch. It exists in the present as a kind of nostalgia for the country’s hegemony on the world stage, while fuelling nationalism, buttressing white supremacy and generating anxieties about immigration and cultural change.

Our identities are formed by time. They are shaped by both distant and recent history as well as our changing personal circumstances. Memories matter. And by the same token, so do our expectations.

Which poses the question: how, then, can anybody ignore such an obvious fact?

I suspect that what we have here is the bastard child of the retarded parent that is retail politics. Segmenting the political “marketplace” into particular “demographics” gives us ahistorical abstractions. In this way “young” and “old” cease to be real people and become mere reifications such as Mondeo man or Worcester woman (remember those?) or the “red wall voter”. The art of bourgeois politics is to divide us along any line other than ownership of capital.

Now, you might object here that real youngsters do have a genuine grievance, in that they do not expect the state pension to continue to outstrip inflation and so anticipate an impoverished old age.

Such as expectation, however, has no economic foundation even if we consider the matter in the narrowest of fiscal terms. The OBR estimates that even if the triple lock stays in place the UK government will spend only 7% on pensions in 2064. Which is less than many European governments spend today. A generous state pension is as affordable as we want it to be. The threat to future state pensions doesn’t come from the public finances but from people talking rot about them. The solution to this is for young people to organize and resist attempts to divide them against older people.

Inflation, markets & the right

In the debate about whether inflation will rise significantly, there’s one point which seems to me to be under-rated – that it is those who have most confidence in a market economy who should be most relaxed.

What I mean is that, so far, the threat of rising prices in the UK is a localized one, confined to a few pockets. The NIESR estimates that trimmed mean inflation (which excludes 5% of the highest and lowest price changes) is still lower than it was in October 2020 and is much lower than it was in 2017. And labour shortages are so far confined to a few sectors such as fruit-picking, lorry driving, construction and hospitality. Lloyds Bank says that almost a fifth of firms have difficulties hiring the right staff – which mean that four-fifths have not.

Yes, annual wage inflation is high. But this is partly because hours worked were unusually low a year ago (which dragged down weekly earnings then) and partly because of a compositional effect: it is the low-paid who have disproportionately lost their jobs, which has raised the average earnings of those in work in the same way that shooting the wounded raises the average health of an army. Both these effects will fade over time.

In fact, the big picture is that the labour market, as the Resolution Foundation reports, “is very far from tight.” Total hours worked, for example, are still 7.6% below their peak and the official unemployment rate is 4.7%. Though much less than feared, this is above its 2017-2019 level – a period when CPI inflation trended down.

Which poses the question: how can a few shortages lead to generalized inflation? In his valedictory speech at the Bank of England, Andy Haldane claimed:

The laws of economic gravity mean the prices of goods, services and assets tend to rise, at first in a localised and seemingly temporary fashion, but increasingly in a generalised and persistent fashion.

But he doesn’t spell out the mechanism of this gravity, nor provide evidence for this.

And in fact, there is a countervailing mechanism which free marketeers in particular should be celebrating.

Quite simply, localised shortages and price rises should lead both to increases in supply - Bank Governor Andrew Bailey points to the example of US lumber prices which have halved since May as supply has risen – and to efforts to economize. Firms facing recruitment difficulties and rising wages could respond by using existing staff more efficiently; or by training unqualified workers; or by trying to recruit from other than their usual places; or changing shift patterns to make jobs more attractive; or (less likely perhaps) by substituting capital for labour. Failing all of that, they could push up prices, in which case customers will do the economizing for them.

The price mechanism, somehow, solves the problem of localized price rises. That’s the point of free markets. It’s not that they lead to Pareto-optimal equilibria – that’s just a lie we tell the kids – but that they are decentralized problem-solving technologies.

Of course, we outsiders don’t know exactly how each particular employer or customer will solve their particular problem. But that’s the point. As Hayek rightly said, the beauty of markets is that they deploy decentralized knowledge which the central planner (or economic forecaster) does not have.

These solutions aren’t instant of course: it takes time to find them. During this lag, average inflation might rise due to mismatches between the pattern of supply and demand. Eventually, though, the market should find some sort of answer.

If you have faith in market mechanisms, therefore, you shouldn’t be much worried by inflation generated by localized shortages.

From this perspective, it is leftists who should have higher inflation expectations than the right, as it is they generally who have less confidence in market forces.

But this, I sense, is the opposite of what we actually see. Why?

We can, at least for now, discount the possibility that a little temporary inflation will lead to more inflation by raising inflation expectations. This hasn’t happened yet: as Bailey says “inflation expectations currently remain well anchored”. And it hasn’t happened since the Bank was made independent in 1997: when inflation has risen, inflation expectations have tended to rise by less. Which is what you’d expect if people expect the Bank to do its job of targeting 2% inflation.

Instead, the obvious possibility is that inflation will be pushed up not by market failures but by policy failures.

The issue here is not fiscal policy. In the UK at least, this is set to tighten. The OBR foresees cyclically-adjusted net borrowing falling from 16.5% of GDP in 2020-21 to 2.7% by 2025-26, taking it back to 2019’s level.

Instead, one issue is the Bank of England’s money printing, thanks to which the M4 measure of the money stock has risen by 16.8% since the start of the pandemic.

But what’s the mechanism through which an increased money stock leads to higher inflation? It’s that people can as a result find themselves holding excess cash. And if they spend enough of this on goods and services, then demand will eventually outstrip supply and so we’ll see rises in the general price level.

My chart, however, shows that whilst this is true to some extent, it is only weakly so. Yes, stronger money growth does lead to higher inflation but it takes big rises in it to generate moderate rises in inflation.

Which draws attention to the problem. Increases in M4 won’t lead to inflation if people are happy to hold the extra cash. What happened during the pandemic is that that the closure of shops, restaurants, pubs and hotels forced us to save more, much of which we held in our bank balances: QE was, in effect, the Bank accommodating this increased demand for money. The question is: to what extent will we spend this cash as the economy reopens?

Obviously, we will to some degree and have begun to do so. But on the other hand, we might have fallen into more frugal habits and so will maintain higher-than-normal cash balances: the dip in retail sales in May is consistent with this possibility. One’s view on this question must be lightly held (because we have no precedent) and largely independent of your opinions on other issues. It’s not good enough, therefore, to point to monetary growth and shriek “inflation”. You need to spell out the connections, from money to demand and from demand to inflation.

The latter draws our attention to where there might well have been a policy failure – on the supply-side. A lack of support for the self-employed has encouraged some to leave their industries, which could intensify shortages as demand picks up, whilst the hostile attitude to migrants will mean that fewer will come into the country to fill vacancies. In this sense, economic policy has perhaps been inflationary. Oddly, though, few on the right are keen to point this out.

I suspect, though, that there might be other reasons why the right fears inflation more than the left.

One is that if the Bank expects higher inflation to persist it will raise interest rates – and real interest rates. Although this would be good for savers, it would be bad for house prices. A lot of landlords would suffer.

Also, what bothers them is not so much general inflation as the possibility that some workers somewhere might get a better deal – not just higher wages but the chance to reject the worst jobs. In my formative years, the right were keen on market forces because they helped to put workers in their place. When those same forces threaten to improve workers’ conditions, free market ideas become less attractive. As Corey Robin has said, the one consistent theme on the right is “a desire to resist the liberation of marginal or powerless people.” Which is why even local and temporary labour shortages are so scary.

Symptoms of stagnation

This morning, I got a call about my recent road accident, which of course I never had. Which highlights an important fact – that capitalist stagnation is not merely about arid aggregate data on flatlining productivity, real wages and business investment but about everyday life.

If the cold calls aren’t about non-existent accidents, they’re about my computer viruses, unpaid tax, my pension, or the impending disconnection of my broadband. Fraud and mis-selling are on the rise.

Why? Because in a world of secular stagnation there are fewer legitimate business opportunities – which diverts some entrepreneurs towards crime. Of course, some people are wrong’uns who’ll be fraudsters anyway, and some are moral paragons who never will be. At the margin, however, costs and benefits determine behaviour and so stagnation promotes fraud.

This is by no means the only manifestation of stagnation. We see another in financial markets.

Historically, high asset prices have been a sign of optimism and of confidence in economic growth: investors piled into railways stocks in the 1840s or internet shares in the 1990s because they wanted part of a bright new future. The bubble of the 1920s, wrote J.K. Galbraith, was fuelled by “boundless hope and optimism”. High prices today, by contrast, are a sign of pessimism. The valuations of US big tech betoken a belief that monopoly power – that enemy of economic growth – is here to stay. And the (now-deflating) boom in crypto-currencies was (is) founded in part on the view that people would lose faith in fiat money – something only likely in a severe economic and political crisis.

The housing crisis is another pessimism-driven boom. The lack of alternative profit opportunities is diverting activity to property speculation, and the low interest rates caused by stagnation are the main reason for soaring prices. This leads to a vicious circle. Because housing is so expensive, youngsters have less to spend on other things, which further entrenches stagnation. And not just economic stagnation, but cultural stagnation too. Musicians and artists used to be able to live rent-free and so had the leisure to cultivate their craft. Now, they can’t. As I’ve said:  

Cheap housing gave us Blondie and Philip Glass. Expensive housing gives us Mumford and Sons.

Which isn’t the only way in which stagnation breeds a turn away from meritocracy. When industries expand rapidly, they create opportunities for people from humble backgrounds. The post-Big Bang boom in finance meant that an oik like me could get a decent job. Similarly, the growth in journalism in the 50s and 60s sucked in working class people, as did the booming tech sector in the 90s. When industries stagnate, however, opportunities are fewer so employers can be fussier about whom they hire – and that means excluding bright people from poor backgrounds. The careers of Dido Harding, George Osborne and Gavin Williamson are the tip of an anti-meritocratic iceberg.

Stagnation of course also has political effects. If the overall economy is stagnating, then for every area that’s improving, others are declining. Justin Webb (1’32” in) says towns like Batley and Hartlepool are “hankering after past glories.” Which echoes Will Davies’ point that voters are on an “unhappy, angry quest for something that had been mislaid.” Hence the disillusionment with mainstream politicians. One of Webb’s interviewees says:

Mill towns are all dying…there’s no real industry here…you could spend billions here and there’d still be no jobs…Politicians talk a good game but deliver nowt.

Traditionally, this has been fertile ground for the far-right. Markus Brueckner and Hans Peter Gruener conclude that, across Europe, “lower [economic] growth rates are associated with a significant increase in right-wing extremism.” Which of course vindicates Ben Friedman’s finding:

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 Moral Consequences of Economic Growth, p8-9)

The symptoms of this aren’t all as innocuous as Churchill-worship and flag-waving. They include the manufactured attacks upon “wokesters” and support for a government which is attacking basic rights to protest and even vote. And of course Brexit. As Thiemo Fetzer has written:

Leave supporting areas (and leave voters) clearly stand out by being more deprived, having lower levels of income and life satisfaction, less access to high status-jobs, and living in areas with overall weaker economic structure…the critical mass of voters that tipped the referendum in favour of Leave did not do so out of an ideological opposition to the UK’s EU membership, but as a protest against the status quo.

All of which vindicates our old friend:

The mode of production of material life conditions the general process of social, political and intellectual life. 

Which is why I can’t support the de-growth movement. Shifting from (say) 2% to zero trend growth isn’t merely a small difference in degree. It has all manner of cultural and political effects, many of them unpleasant. And of course, there is a constituency which supports this – not just financial and political grifters, but social conservatives, (some) home-owners and parts of financial capital which profit from the ultra-low interest rates caused by stagnation.

What we need is an alternative to this – one which sees that the cause of many of our social and political problems is capitalist stagnation, and which offers an alternative to this. This need not be a very leftist programme: it should reprise Blairite themes of modernity, hope and optimism. Such a project, however, requires an opposition – which we do not have.

The right's intellectual decline

It is sometimes through small windows that we can see a big picture. So it is with the Times’ recent attempt to compare how other songwriters match up to Bob Dylan as a poet.

The thing here is that if I were looking for rivals to Dylan on this point, I’d not look to David Bowie or Joni Mitchell, much as I love them, but to Dar Williams, Jolie Holland, John Prine, Josh Ritter or the incomparable Townes Van Zandt.

That the Times didn’t do so, preferring more famous names, is an insight into a bigger feature of the latter-day right – that it has a very narrow cultural and intellectual palette.

I don’t mean by this that they are uncultured and ill-read: many are far from it - although Nigel Farage has boasted of not listening to music or reading books. Culture, however, is not merely a consumer good. It is something that creates us. Even a big diet of political biography or second-rate literary fiction need not create very much.

What I do mean, though, is that there seems to have been a decline on the right in its intellectual referents.

Thatcher, for example, would often pepper her speeches with talk of Hayek, Popper or Friedman. And that wasn’t mere showboating: such men formed her worldview. It is not at all clear that Johnson has any equivalents (at least not since Juvenal) or even that he and his colleagues are interested in acquiring any*. 

We see this too in the right’s attitude to Marxism. It uses this merely as a boo-word, oblivious to Marxism’s intellectual content. Contrast that to my formative years, when the right could call upon thinkers who had seriously engaged with Marx such as Kolakowski, Berlin or Hollander**.

A lack of interest in Marx is part of the right’s indifference to economics generally. As Stian Westlake has said, “Tories, both in government and more generally, seem to have stopped talking and thinking about economics.” That’s an astounding change since my formative years when think-tanks like the IEA or Adam Smith Institute provided at least intellectual energy***.

Which is part of a wider philistinism: yes, dear reader, economics, done properly, is a cultured science. One example of this was the government’s advice that ballet dancers take up careers “in cyber.” I suspect very few government ministers know how to code, but they know that it is Not Art and therefore a Good Thing. The crassness of that advert was not, however, the nadir: new depths have been reached by the “strong Britain, great nation” song and the ahistorical motive behind it.

Such philistinism is also evident in the government’s taking a “wrecking ball” to the music industry by failing to support technicians though Covid and by putting barriers in the way of touring.

And it’s evident in the attempt to suppress academic freedom. Thatcher disliked universities because they were part of the public sector. This government dislikes them because of the sneaking feeling that they might contain intellectuals.

Which is one reason, I suspect, why it is so keen on culture wars. The problem with debates about economics, welfare policy, foreign affair and so on is that you need some knowledge to participate in them. Culture wars, however, have no such barriers to entry. Hence the endless parade of gobshites on LBC, TalkRadio and GB News: yes, the latter has had an expert guest, but this greeted on Twitter in the same way that people share videos of a dog doing a cute trick.

Now, you might object here that I’m being unfair in singling out the Tories. To some extent, I am. The intellectual decline of the Tory party is part of a general decay of intellectual standards in public life. Where, for example, is the Labour equivalent of Tony Crosland today?

What’s notable, however, is that the Tories’ philistinism is electorally successful. Their appeal now is largely confined to the uneducated. YouGov estimate that in the 2019 General Election voters with degrees or higher qualifications split 43-29 per cent in favour of Labour over the Tories, whereas among those with GCSEs or less, the Tories led Labour 58-25 per cent. And today, satisfaction with Johnson’s performance as PM is far higher among the uneducated than among graduates. Dominic Grieve has a point when he says that “sophisticated” voters can see that Johnson is a charlatan.

Of course, this difference is partly a function of the fact that the Tories appeal is to the old who tend to have fewer qualifications. But the scale of this age difference is also a new phenomenon. In the 1987 general election, for example, The Tory lead among over-65s, at 14 percentage points, was only a little above its six-point lead among 25-34 year-olds. And of course back then, the Tories had big support among graduates, not least because having a degree was associated with higher income.

The issue here is not that John Stuart Mill was right to claim that “stupid people are generally Conservative.” Intellectual ability is an over-rated virtue in politics. If we listen to them properly – that is, not through phone-ins or focus groups - lay people have important and useful things to say. And of course, being educated in one field is no protection against being an idiot in others.

Instead, the point is that the Tories’ appeal to the uneducated whilst alienating graduates puts them on the wrong side of history, given the trend towards increase educational qualifications. A party which, in Will Davies words, “refuses to see any value in the next generation of employees and citizens” doesn’t deserve a future, and it might not have one.

* I exempt Jesse Norman from this charge, although the link between his intellectual work and his political career is not wholly obvious.

** Although when I read The Open Society and its Enemies, I was actually struck by how little animosity Popper displayed towards Marx.

*** Though not perhaps from the days of Alec Douglas Home.

"Heterodox" economics as rediscovery

One of the perils of growing old is that you get that jaded “seen-it-all-before” feeling. Which is the reaction I have to so-called heterodox economics. What you youngsters call ”heterodox economics” is what I call “stuff I remember learning in the 1980s”.

Which is not to denigrate it. Quite the opposite. It is the rediscovery of old truths which were forgotten after the late 80s.

Here are some examples of what I mean.

First, Lance Taylor and Nelson Henrique Barbosa Filho complain that standard inflation theory “leaves out social conflict”. But the account of inflation I learned in the 80s put class conflict centre stage. “Conflict over the distribution of income affects the general level of prices in advanced capitalist economies” wrote Bob Rowthorn in his 1977 paper Conflict, Inflation and Money which as good as introduced the Nairu. And in the Layard-Nickell model, the Nairu is the unemployment rate necessary to bring peace in “the battle of the mark-ups.”

One implication of this is that controlling inflation needs more than technocratic monetary policy tightenings, which only cut inflation by raising unemployment. It also requires changes in property rights to overcome class conflict. James Meade and Martin Weitzman, for example, proposed capital-labour partnerships which would give workers significant shares of profits and so mitigate wage militancy. This was hinted at by William Beveridge in 1944:

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

It’s no accident that this view was totally forgotten when capitalists triumphed in the battle of the mark-ups.

Beveridge’s Full Employment in a Free Society saw something else that was subsequently forgotten and is only now being rediscovered – that the purpose of fiscal policy was not to balance the books but to ensure full employment:

It must be a function of the State in future to ensure adequate total outlay and by consequence to protect its citizens against mass unemployment.

Which illustrates Randall Wray’s point (pdf):

The main principles of functional finance were relatively widely held in the immediate postwar period. However, with the rise of the Phillips curve, the return of the Quantity Theory, the development of the notion of a government budget constraint, and accelerating inflation at the end of the 1960s, functional finance fell out of favour.

MMT is largely a rediscovery and repackaging of functional finance.

These are not the only examples of the Great Forgetting. Back in the 80s, macroeconomic modelling was about building structural models based upon econometric estimation of relations between macro variables. This was supplanted by dynamic stochastic general equilibrium models based upon microfoundations - usually, where the foundations were mythical rational representative agents rather than anybody you’d meet in the real world.

But these models have failed – either to predict the economy or to explain it, as Servaas Storm points out in a brilliant essay. Sure, later generations of such models have added real-world features, but Joe Stiglitz says these are like adjustments to Ptolemaic epicycles – attempts to fix a faulty theory with increasingly awkward patches.

Which means there is a place for structural models we had in the 80s. Yes, these have wonky microfoundations and it’s not obvious that they have a great predictive record. But as Simon says, they can do a better job of highlighting important relationships and mechanisms. Perhaps this is an example of something Robyn Dawes said – that improper (pdf), rough and ready models can do a decent job. Maybe they are like old cars – prone to breakdown, but easier for a reasonably skilled person to fix.

I’ve another example of the Great Forgetting – the Cambridge capital controversies. These showed that there were grave problems with the ideas of an aggregate production function and a marginal product of capital. One problem is that you can only aggregate different capital goods by adding up their prices, but these prices are a function of how much they could produce, so we have circular reasoning*. A second problem was noted by Sraffa – that a marginal product can only be discovered if things change, which doesn’t happen in equilibrium:

The marginal approach requires attention to be focused on change, for without change either in the scale of an industry or in the ‘proportions of the factors of production’ there can be neither marginal product nor marginal cost. In a system in which, day after day, production continued unchanged in those respects, the marginal product of a factor (or alternatively the marginal cost of a product) would not merely be hard to find - it just would not be there to be found. (Production of Commodities by Means of Commodities, pv)

Herbert Scarf noted a further problem – that marginal products require there to be constant returns to scale, but:

If production really does obey constant returns to scale, there is nothing to be gained by organizing economic activity in large, durable and complex units; in short, there is no economic justification for the existence of firms.

All of which means that, as John McCombie and Marta Spreafico say (pdf):

the marginal productivity theory is deeply flawed empirically and cannot, as a matter of logic, be substantiated theoretically.

Casual empiricism tells us that wages don’t equal marginal product for individuals simply because they differ in their bargaining power. And given these problems with aggregate production functions, it’s hard to see that marginal product theory applies (pdf) to aggregates of people either.

All this however was largely forgotten after the 80s. As Geoff Harcourt has written:

When theories of endogenous growth and real business cycles took off in the 1980s using aggregate production functions, contributors usually wrote as if the [Cambridge capital] controversies had never occurred and the Cambridge, England contributors had never existed.

In the same vein, Greg Mankiw tried to defend (pdf) the high incomes of the 1% by invoking marginal product theory, oblivious to these issues.

Which is all the weirder because, as Robert Solow replied (pdf) to him: “economic rents are pervasive…it is too nonchalant to presume that all market incomes reflect true productivity.” Indeed, one development of recent years has exactly been growing interest in the importance of rent extraction – highlighted by the work of researchers such as Lindsey and Teles, Thomas Philippon, Brett Christophers, or Jan De Loecker (pdf) and Jan Eeckhout (pdf).  Which returns us to a theme of Joan Robinson – that the economy is dominated by imperfect competition and must be analysed (pdf) as such.

Of course, my account here is a little stylized. I don’t like talking about “mainstream” economics because it is often a straw man. But I think I’ve outlined a tendency for there to have been a Great Forgetting after the 80s, which a younger generation is reversing. But should this generation call themselves “heterodox”? On Twitter, Peter Doyle has suggested not. I agree. Perhaps we should regard the Great Forgetting as the aberration in economics, and the rediscovery of an economics as an empirical-based intellectual tradition as a restoration of normality.

* When Ian Steedman taught international trade theory at Manchester in the 80s, he refused to use the word “capital” in two-factor models, because he thought the notion of aggregate capital absurd.

Johnson's appeal

A few days ago on Twitter I asked why so many people are happily complicit in Boris Johnson’s dishonesty. Based on a small focus group – which is as scientific as any other such group – here are a few theories.

First, Johnson exudes a sunny optimism – in Tom McTague’s words, “an all-encompassing belief that things will be fine” – encapsulated by slogans such as “Get Brexit done”, “level up”, “Global Britain”, and “build back better”. This contrasts with the Guardian’s endless list of complaints about the country, and with the nay-saying fiscal conservatism of the May government: one Tory friend of mine describes Philip Hammond as a “ghoul”. Nobody likes a whiny little shit; they prefer the optimist.

You’ll object here that Johnson achieves this optimism by ignoring details such as the Irish border trilemma. True. But detail is for wonks – what Johnson calls fact-grubbers. Most people don’t pay enough attention to politics to fret about detail; their analysis goes no deeper than Laura Kuenssberg’s. So big-picture cheerfulness sells. What worked for Ronald Reagan works for Johnson.

Allied to this optimism is a form of liberality. Matthew Parris in the Times reminds us that the politician whom Johnson sees as his polar opposite is Hillary Clinton. What marks her out is her censoriousness, her desire to police the “racist, sexist, homophobic, xenophobic, Islamophobic” language of the “basket of deplorables”. By contrast, his supporters see Johnson’s serial political incorrectness not as a licence for racists and homophobes (which many of them are not) but as an endorsement of free speech against the “wokesters” who want to police our language. He gives us, says one friend, a “licence to relax.”

Of course, the idea that Johnson is striking a blow for freedom is a fiction. His government is restricting the rights to protest, to migrate and even to vote whilst empowering the security services to commit crimes. But remember, people pay little attention to detail. What they see is an image of somebody standing up for freedom.

What’s more, Johnson has assets that mitigate his serial dishonesty. One is that he doesn’t preach. In the 90s, Tories’ dishonesty and slightly rickety sex lives were a liability because they made them appear hypocritical in light of John Major’s “back to basics” campaign. Because Johnson has never pretended to be a moral paragon, he appears not as a hypocrite but as a loveable rogue. He is like your rugby club team-mate boasting about fiddling his expenses or tax return. Sure, he’s defrauding somebody. But it’s other people, so we laugh along. That contrasts to MPs’ expenses scandal, which took money from us. If you think all politicians are liars, Johnson’s transparent dishonesty is a breath of fresh air.

This is not the only way in which Johnson flouts the rules of normal politicians. He doesn’t pretend to be a man of the people by feigning an interest in football or popular music, as with Gordon Brown’s claim to like the Arctic Monkeys. He doesn’t wear the uniform of politicians, eschewing a well-fitting suit in favour of a Worzel Gummidge look. And he doesn’t pretend to have a command of the facts. He is comfortable in his own skin, in a way that some Labour leaders have not seemed to be.

And this is popular. Many people have had enough of technocratic politicians, whom they perceive as failures. Johnson is different. He provides a spectacle of grotesque chaos while laughing in the face of the normal order of things. He’s like punk rockers rebelling against the pompous prog rock that went before. And that leaves many of us feeling like Bob Harris*, befuddled by what seems to us to be an artless and charmless rejection of the rules we have become accustomed to.

In saying all this, I’m not claiming that Johnson is clever enough to have consciously capitalized on these sources of appeal. More likely, I suspect he is the lucky beneficiary of a political environment has selected for his schtick, just as the natural environment selects for accidental mutations or the business environment selects for strategies that entrepreneurs or investors have adopted without full knowledge of their consequences.

Nevertheless, the question arises: could the left emulate his success? In one sense, no. Whereas working class people can be lovable rogues – think of Jack Duckworth – only posh people can achieve wealth or power through this route. Johnson’s class is an asset: my mum thinks he is more educated than I am (which he’s not) simply because he talks proper. And of course the media would scrutinize leftist dishonesty much more carefully than Johnson’s lies. Life ain’t fair and the world is mean.

Also, we must guard against skating to where the puck has been. Just because the environment today selects for Johnson’s attributes does not mean it will continue to do so. 

Nevertheless, there are, I think, two things we should learn.

One is to not be priggish humourless moralistic whiners, but to present instead an image of fun-loving liberality. We must lighten up, drop the censoriousness and laugh more.

The other is the need for optimism. Remember that Barack Obama’s breakthough owed a lot to the slogan, “yes we can.” The left needs to show that it can somehow improve things: building on McDonnell’s economic agenda is one possibility here. And this requires not just policies, but the self-confidence to sell them. Johnson shows that politicians can succeed by not being scared of their own shadow. The left should learn from this.

* Harris actually coined the phrase “mock rock” in 1973, to describe the New York Dolls, a pre-punk band but my point holds.

On economic intuitions

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

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

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

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

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

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

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

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

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

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

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

Non-economists’ intuitions aren’t always terrible.

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

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

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

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

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

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

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

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

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

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

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

Full employment, capitalism - and beyond

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

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

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

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

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

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

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

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

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

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

P = (C – W) + I + (G – T) + NX.

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

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

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

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

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

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

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

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

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

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

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

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

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

Playing the victim

Here are four recent developments:

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

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

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

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

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

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

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

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

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

What’s going on here?

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

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

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

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

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

Starmer, skill and luck

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

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

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

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

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

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

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

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

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

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

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

Markets & the right

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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