Stumbling and Mumbling

The Deficit Myth: a review

One common objection to neoclassical economics is that it underweights the importance of history and class. It is therefore paradoxical that Stephanie Kelton's The Deficit Myth, which claims to challenge orthodox economics, should be guilty of just these vices.

Let's start by saying that I wholly agree with the main claims she makes - that a government which enjoys monetary sovereignty can always finance its borrowing. Asking how we will pay for public spending is therefore daft. Instead, the question, as Dr Kelton says, is: can the extra spending be resourced? The constraint on raising health spending for example - if there is one - is a lack of doctors and nurses, not a lack of finance. Where there are resources lying idle, governments should raise spending to employ them. Dr Kelton explain these ideas wonderfully clearly, so I recommend this book to all non-economists interested in government finances.

For this economist, though, it poses a problem. I remember writing a research note for Nomura back in the early 90s arguing that increased government borrowing would not increase gilt yields because the same increased private saving that was the counterpart of government borrowing would easily finance that borrowing. Nominal gilt yields, I said, were determined much more by inflation than by government borrowing. But nobody accused me of originality. And rightly so. I was simply channelling Kalecki, Beveridge, Lerner and Keynes, who famously said back in 1933:

Look after the unemployment, and the Budget will look after itself.

For me, Kelton is - albeit very lucidly - reinventing the wheel. Reading her, I felt like Mr Jourdain in Moliere's The Bourgeois Gentleman, who was surprised to discover that he had been speaking prose all his life.

Here, Dr Kelton is more ambiguous than I would like. At one stage she claims that MMT "didn't exist" before the late 90s. But whilst the phrase did not exist, the ideas certainly did. Randall Wray is right to say (pdf) that "the main principles of functional finance were relatively widely held in the immediate postwar period."

And indeed Kelton does occasionally see this. There is passing reference to Lerner and to Keynes' How to Pay for the War, though not to Kalecki. And she cites JFK agreeing with James Tobin saying that "the only limit [on government borrowing] really is inflation."

Which is why I say she underplays history. I agree with Gavin Jackson that MMT is not new, and with Hans Despain that she neglects the ontology of MMT. We must ask, as she doesn't: why did these old truths get forgotten*?

I'm not sure about Wray's explanation, that it was because of the inflation of the 1970s. In principle, we might have interpreted that as consistent with functional finance, except that the inflation constraint on borrowing had tightened since the 50s.

Instead, I suspect the answer lies in Kalecki's great paper (pdf), "Political Aspects of Full Employment", written in 1942. He starts by saying "we are all 'MMTers' now":

A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a Government spending programme, provided there is in existence adequate plant to employ all existing labour power, and provided adequate supplies of necessary foreign raw materials may be obtained in exchange for exports.

What's not to like, he asks? His answer lay in something else Kelton neglects: class.

Capitalists, he wrote, disliked what we now call MMT because it weakened their power. If governments can use fiscal policy to maintain full employment, they don't need to maintain business confidence and so "this powerful controlling device loses its effectiveness":

The social function of the doctrine of "sound finance" is to make the level of employment dependent on the "state of confidence...[Capitalists'] 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.

It is surely no accident that the backlash against functional finance came at a time when capitalists re-asserted their power over governments. Nor is it an accident that it's happened when capitalism has shifted away from mass-market Fordism to extractive finance capital: the former requires full employment and a mass market, the latter requires cheap money instead.

The analogy between government and household finances is of course a fiction - as we've known for almost a century - but it is a useful fiction for maintaining capitalists power.

Which is a big gap in Kelton's analysis. In treating public finances as merely a technocratic matter, she is ignoring the fact that capitalist power sometimes precludes good policy. She is making the error Kalecki warned us against:

The assumption that a government will maintain full employment in a capitalist economy if it only knows how to do it is fallacious.

Kelton is right. To implement her ideas (and those of Kalecki, Keynes, Lerner, Beveridge and Minskly!) however requires more than an intellectual (counter-)revolution. It requires a dismantling of capitalist power. And that's a tougher job.

* She neglects another historical question: if monetary sovereignty is as good as she claims, why were European nations (with the support of both public and economists) so keen to abandon it in the 1990s? One answer, I suspect, is that countries lacking the US's "exorbitant privilege" had less effective sovereignty. Whereas demand for Treasuries and dollars is so great as to give the US room to borrow, demand for drachmas, escudos and lira was not so great - and the dumping of such currencies meant their governments faced a tighter inflation constraint than the US.

Reclaiming freedom

We might be seeing a significant political change, with the left reclaiming freedom and anti-statism from the right.

I'm prompted to say this by the Black Lives Matter slogan, "defund the police" which invites us to see the state as an oppressor. As Grace Blakeley recently tweeted:

People know that the state is fucking them over just as much as their boss or landlord - in fact, it’s helping their boss and landlord fuck them over even more...Rather than saying ‘just give more state power to the goodies (us)’ we need to start saying ‘put power where it belongs - in the hands of working people’.

If we read this alongside the disappearance of right-libertarians (some of whom discovered that they like racism and inequality more than small government) and emergence of big government Toryism, we see a big change from a few years ago. Back then, it was the right who called for a smaller state and much of the left that wanted a bigger one. Now it is, if anything, the opposite*.

In one sense this is a return to normality. Historically, advocates of freedom were opponents of the existing order, such as Tom Paine, John Stuart Mill and - yes - Adam Smith**. And, of course, Marxists have long regarded the state as "a committee for managing the common affairs of the whole bourgeoisie" and looked forward to it withering away.

Which poses the question: why are things now changing (back)?

One reason is that the left has learned that states are indeed often repressive. I'm thinking here not just of police killings but of the social murder that is austerity and tough benefit sanctions, and the forced deportations of black Britons (something still going on).

Secondly, they've learned that, as Grace says, it is not good enough to "give more state power to the goodies". Yes, New Labour did make significant achievements in tax credits, Sure Start and better funding of schools and the NHS. But many of these have been reversed by the Tories in the subsequent decade. The left cannot pin its hopes merely on winning temporary (and partial) control of the state.

Thirdly, changes within capitalism have changed the state. Of course, capital (pdf) has always wielded power over governments. But there was a time when this was relatively benign. In the post-war war mass production Fordist capitalists needed a mass market and hence an affluent working class. Extractive finance capital, though, doesn't. It needs cheap and plentiful money which fiscal austerity helps provide. General Motors needed a large well-paid working class; Goldman Sachs, not so much. This means there is now more tension between the needs of working people and the function of the state than there used to be.

All of which poses the question. What would anti-statist leftism look like?

Many of you might think the slogan "defund the police" goes too far. No matter: we don't know what's right unless we know what's too much. And what is right - as Elinor Ostrom showed - is that the police should be small and locally accountable. Also, there's a strong case for decriminalizing drugs, in part because it removes a pretext for the police to harass black people.

A high universal basic income would also expand freedom, not just by removing the harsh conditionality of Universal Credit, but also by giving us the freedom to reject exploitative labour or to drop out of the labour market to care for others or to train for better work. As Guy Standing says (pdf), "basic Income’s emancipatory value exceeds its monetary value."

Also, left-libertarianism must empower local communities, and embrace the community wealth-building advocated by Martin O'Neil and Joe Guinan and pioneered by Preston council. In weakening the power of central government, localization mitigates the damage done by Tory austerity. And it also gives local people more republican freedom - the freedom to collectively control more of their own lives.

There's something else, which the Black Lives Matter movement is also highlighting. It's that slavery teaches us something about economics. As Peter Doyle shows in a brilliant paper (pdf), markets produce incentives to undermine others' agency. Although slavery is the most extreme example of this we also see it in everyday capitalist labour markets. As Marx said, when we they start work workers leave behind the realm of equality and freedom and become mere factors of production. Left-libertarianism would put in place institutions to resist this and expand the realm of genuine agency. This would comprise worker coops and more local say over public services.

I say all this not to offer detailed blueprints: Marx was right to be sceptical of these. Instead, the point is that the left can and should pick up the cause of freedom now that the right has abandoned it.

* We mustn't be misled by the right's loud assertion of a right to free speech. What they are really proclaiming is the "right" to spout rubbish without any comeback, which is an altogether different matter.

** If you think the Adam Smith Institute is a representative guide to Smith's thinking, the wallet inspectors would like to meet you.

Profits before jobs

We live in a capitalist economy. It's this trivial fact that must determine how we view the Chancellor's so-called plan for jobs.

The point is that much of what he's doing is a lot like corporate welfare. For example:

 - The Job Retention Bonus - £1000 to an employer for every employee who remains continuously employed to January - will hand out cash to firms that would have retained staff anyway. At the margin, it will encourage firms to retain employees insofar as it reduces the cost of doing so. But the margin might not be very extensive.

 - The Kickstart scheme pays bosses the cost of hiring onto a minimum wage job a young worker who is currently on Universal Credit. This risks encouraging firms to hire such workers, at the expense of those who are not on UC - such as those leaving school or college. And again, it give money to firms who would have done this anyway. Again, it's a handout.

 - Paying employers to take on apprenticeships and trainees encourages them to do so at the margin, but again also pays some for doing what they would have done anyway.

 - Some people are objecting that the VAT cut for the hospitality trade will not be passed onto customers. But this is the point: it will raise profit margins instead.

 - The Eat Out to Help Out scheme will boost demand for restaurants. Yes, insofar as it does so it will encourage diners and staff to take risks with their health. But as Marx wrote, "Capital is reckless of the health or length of life of the labourer."

The point here is that capitalists only hire or retain workers if it is profitable to do so. Wage subsidies increase those profits. In this sense, the fact that so much of today's plan is corporate welfare is a feature, not a bug.

From this perspective, complaining about the deadweight cost of the plan - that it will pay firms to do what they'd have done anyway - misses the point. For one thing, there's a knowledge problem here: the government cannot distinguish between firms that need incentivizing to retain or workers and those who don't. Given that fine targeting is impossible, some deadweight cost is inevitable.

And, in fact, desirable. Whereas those of us who have kept our jobs have seen our finances improve - the Bank of England reports a £41bn rise in households bank deposits in the last two months - the lockdown has been terrible for many firms' cashflow.

Sure, in normal times it would be reasonable to complain that such costs distort allocative efficiency. Right now, though, a big Okun gap is more important than a lot of Harberger triangles. These are not normal times, and Sunak woudn't be introducing such measures if they were.

As it is, Sunak at least has the wit to see that in a capitalist economy it is imperative to maintain profits. This outweighs any consideration of allocative efficiency.

This also helps explain why support for freelancers - and indeed the arts until very recently - has been so patchy and late. A loss of freelancers is not an existential threat to capitalism but a slump in profitability is.

In theory, there is an alternative here. A Job Guarantee would protect and create jobs without corporate welfare. And it could, in theory, do so by providing jobs that are socially useful but not highly valued by capital, such as care work or improving local environments. This, though,was not an option for Sunak. We lack the policy infrastructure to identify good jobs; this task can only be done locally, and yet local government has been almost destroyed.

In the real world of capitalism, then, corporate welfare and cronyism are the only options - for now.

Limits of evidence-based policy

There is something paradoxical about Michael Gove's recent speech calling for government to be "rigorous and fearless in its evaluation of policy and projects." It's that his praise for evidence-based policy has come in a year when we've seen that policy should sometimes not be based on rigorous evidence.

The best time to have imposed the lockdown was as soon as possible after a few cases had been discovered. But this would have been a hard sell. Not just the grifter media but the public would have asked: why are we losing our freedoms to forestall so small a threat? But of course, by the time there was strong evidence that a lockdown was necessary, it was too late.

Tens of thousands of us face the problem of having to act on insufficient evidence. The equity investor who waits for strong evidence that a share is under-priced will buy when it no longer is. Loads of hedge funds exemplify Gove's ideal: they employ lots of data scientists working with strong incentives and clear metrics. But their results are generally mediocre. Similarly, the entrepreneur who waits for proof that there's a market for a product will find that his rivals have captured it. The factory manager who waits for good evidence that a machine needs replacing will see it blow up. And so on.

The same applies to macroeconomic policy. The Bank of England did not cut Bank rate to 05% and introduce Qe until March 2009 - 12 months after the recession had begun. Waiting for strong evidence of a recession before loosening policy means loosening too late. This is why I favour strong automatic stabilizers.

In these cases, the demand for rigorous evidence is an example of what Jon Elster has called hyper-rationality:

Sometimes people ignore the costs of decision-making. They search for the solution that would have been best if found instantaneously and costlessly, ignoring the fact that the search itself has costs that may detract from optimality. (Solomonic Judgements, p260)

There are other problems. It's sometimes hard to extrapolate the results of the RCTs lauded by Gove. They "prove", for example, that parachutes don't save lives. As Cartwright and Deaton say:

Demonstrating that a treatment works in one situation is exceedingly weak evidence that it will work in the same way elsewhere; this is the ‘transportation’ problem.

And where they do yield results, these can be hard to interpret. The average treatment effect hides important heterogeneity of effects on individuals, for example.

There's also the problem that past evidence is no guide to the future. We have evidence from the 50s and 60s that very high top tax rates are entirely consistent with strong GDP growth. But is this evidence useful? Mr Gove and his friends would probably say not. And perhaps for a good reason: high taxes are sustainable if those paying them regard them as a price worth paying to live in a civilized society, but resist them if they regard them as infringements of their rights. Policies effects depend upon beliefs. And these change.

Indeed, they sometimes change because of policy. One effect of the expansion of universities in the 90s has been to create a large cohort of metropolitan liberals. How do we factor this into cost-benefit analyses?

There are two very important categories of cases where past evidence doesn't help us predict the future.

One is the problem of radical uncertainty: we can never be 100% confident that past statistical relationships will continue to hold. The other is that of reflexivity. Beliefs can change the world. For example, McLean and Pontiff and Cotter & McGeever have shown that when strong evidence emerges of stock market anomalies, these get competed away. In economic policy, the counterpart to this is Goodhart's law: "any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes." You can't solve these problems with big data: the datasets used to find stock market anomalies are huge, but their findings less so .

All of which leads us to three paradoxes.

Paradox one is that, as Abby Innes points out, there is a precedent for Gove's belief that data science will deliver better government. The old Soviet Union had a "fantasy of ‘optimal government'" in which "cyberneticians would depict the governmental system as an object of technical control, with inputs, outputs, and feedback loops: the language of machines." This is evoked in Francis Spufford's wonderful Red Plenty. In this sense, Gove's role model is not so much FDR as Leonid Kantorovich. This project, however, failed in part for the reason Hayek pointed out - that governments just cannot know enough about complex systems.

Paradox two, as Phil points out, is that Gove's vision is unconservative. It is one in which:

the centrality of government is overweening and checks on the executive's remit - other state institutions, watchdog quangos, parliamentary scrutiny and media accountability - are brushed aside by authoritarian, action-oriented government.

Which leads to paradox three. One the question: is data-driven effective government likely, it is the conservative Gove here who is taking the side of the old USSR and this Marxist who is one the side of Hayek. 

What football teaches us

I was a little perplexed by Tom Chivers' nice defence of his love of football. For me, any defence can only be a rationalization: my love of the game long preceded the acquisition of whatever feeble reason I possess.

Nevertheless, there is a lot that Tom has left out. Albert Camus famously said that "what I know most surely about morality and the duty of man I owe to sport and learned it in the Racing Universitaire Algerios." He might have added, though, that it teaches us so much about society too.

One thing it teaches us is the importance of emergence and complexity. Danny Murphy exaggerates when he says that Man City's guard of honour for Liverpool will leave Kevin De Bruyne "clapping for some players who can’t even lace his boots." But there's a point there. A great team does not necessarily comprise the best players, but rather ones that function best as a collective. The Leicester City team of 2016 had few stars, but it won the title. And the legendary Arsenal back four comprised players who (Adams apart) were somewhat limited.

Conversely, great players don't make great teams. A few years ago, England fielded a "golden generation" - Lampard, Scholes, Rooney, Cole, Gerrard etc - but to no great success.

You can't read the properties of a collective simply from its components. The same applies to societies. Marx wrote that the unhappy condition of workers “does not, indeed, depend on the good or ill will of the individual capitalist” but was rather the product of impersonal forces. The same is true of gender and racial inequalities. Injustice is not only a matter of bad people doing bad things.

One feature of complex systems is that history matters: they are as they are because of what happened in the past. The same is true of football. There is a type of player that England does not produce: the player such as Xavi, Pirlo or Modric who can control the pace of the game by retaining possession. The nearest we've had in recent decades is Paul Scholes, but putting him into an England team was like giving a computer to a monkey.

The problem here is history. Working class Englishmen have for decades been expected to work hard, know their place and do as they were told. That's an environment which crushes the intelligence that a type of footballer needs. (We might add that there are countless great foreign players which have no equivalent in England: Cantona, Bergkamp, Zola, Ozil and so on.)

Another implication of emergence is that matches matter. Success isn't a matter of finding the best people, but the right people. Olivier Giroud is widely criticized, but he made Arsenal a better team than they are now, and helped France win a world cup. He's not the best striker, but for two different teams he was the right one. And football is full of managers who did well at one club but failed at another - because they were sometimes a good match for the club, sometimes not. The same is true in business: whether a manager succeeds or fails depends not just on his individual ability but upon how good a match (pdf) he is for the job.

Which helps explain something else. Football exemplifies William Goldman's saying: nobody knows anything. Claudio Ranieri's appointment as Leicester manager was greeted with derision, and Arsene Wenger's at Arsenal with "Arsene who?". Both were great successes. Conversely, much-lauded signings often fail - such as many expensive Chelsea strikers.

Complexity produces unpredictability. Which is why football pundits are like the men who told Elvis to go back to truck-driving or the Beatles that they had no future in showbiz: "you win nothing with kids."

It's not just complexity that so often causes pundits and fans to go wrong. Something else does - cognitive biases. Radio 5 Live's 6-0-6 is the strongest corroboration of Daniel Kahneman you'll ever hear. There are gazillions of these: the hot-hand fallacy (pdf) ("he's on form"): the consistency illusion ("I always knew he was rubbish"): over-reaction ("sack the manager"):hindsight bias ("he should have passed it instead"); misperceiving randomness (across ten cupties in which a team has a 10% chance of winning, the chance of giant-killing in one will be 2-1 on): the outcome bias (if a team wins, however flukily, we infer that it played OK); and so on.

These might seem harmless mistakes when confined to talking about football. But they have analogues in expensive mistakes. The hot-hand fallacy leads investors to pile into unit trusts with good recent performance (pdf) - which costs them money as the performance proves unsustainable. Over-reaction leads them to buy stocks at the top of the market and sell at the bottom. Failing to see that low probabilities compound to give us a high one helps explain why so many projects run over time and budget. And so on.

In all these ways, football really is more than just a game. It teaches us how societies and businesses operate, and how to think clearly about them. You can learn much more from the back pages of a newspaper than you'll learn from the front pages.

The economic base of realignment

One finding of Labour's review of its election defeat is that politics is "organised more around cultural values than an economic 'left-right' divide."

This is the theme of Stephen Davies new book, The Economics and Politics of Brexit, in which he argues that we've seen a realignment of politics: "the main division in society has switched from being primarily about economics to being about culture and identity" - between cosmopolitans and nationalists. The Tories won December's general election, he says, because they were quicker than Labour to see this division, and succeeded in uniting the nationalists whilst the cosmopolitans were divided. We can read Sir Keir's "friends of the forces" plan as an attempt to appeal to the nationalists*.

Which in turn echoes a point made by Matthew Goodwin and colleagues:

2019 is not a critical election but a continuation of longer‐term trends of dealignment and realignment in British politics...Class realignment and Brexit realignment...go hand in hand and appear to have implanted a new, potent cultural divide at the heart of British politics.

All this poses a big question, however: why now?

There's nothing new about a mix of social conservatism and anti-EU feeling, as anybody who remembers trash newspapers in the 80s will recall. The Sun's headline "Up Yours Delors" appeared in 1990. But in the 1997, 2001 and 2005 elections voters decisively rejected the party obsessed with Europe in favour of a socially liberalish cosmopolitan technocrat party, and it was only after the they stopped "banging on about Europe" that the Tories returned to power.

So what changed? The question here isn't merely about what people believe. It's about why social conservatism and anti-EU feelings have become more salient and mobilized.

It could be that less has changed than we might imagine. Lewis Baston argues that many "red wall" seats (a phrase unheard before 2019) are "in fact nothing more than traditional marginal seats."

But there's something else - the years of economic stagnation caused by the financial crisis and austerity. As Stephen says, political divisions "reflect and derive from real conflicts of interest and material circumstance and everyday lived experience". We have abundant evidence - such as from Thiemo Fetzmer and Nick Crafts - that austerity led to Brexit. The Resolution Foundation has shown that "Blue Wall" seats have suffered even worse economic conditions than the rest of the country since 2010.

There are at least two mechanisms here. One is simply that hard economic times create a sense of decline and hence a nostalgia for better times: the Churchill myth, and celebrations of VE day are probably stronger now than in the 90s. The other is that - as Ben Friedman has demonstrated - they generate intolerance and fear of outsiders.

On top of this, there is the fact that the right (and centre) have no answer to capitalist stagnation. In the 80s, Thatcherites could plausibly tell a large client base "vote for us and you'll get rich". Today's Tories can't say that. As Dave Cohen says, "culture wars are all they’ve got." It's a cliche to complain that the BBC gave Farage the oxygen of publicity, but less often remarked that he was filling a vacuum. Marx predicted that falling profits would lead to "credit frauds and stock swindles". It's also led to analogues of these in politics - the rise of cranks and grifters promoting culture wars.

All this gives me a beef on two fronts. On the one hand, I'm unhappy that too many polscis are committing an error that neoclassical economists also make: they take preferences as data without inquiring of their origin. But on the other hand, it refutes the optimism of some earlier Marxists who thought that class consciousness would grow endogenously. It doesn't. It needs cultivating. And we can't do this merely by calling for more anger.

It also gives me two worries. One is that this new alignment is hostile for both socialists and free marketers, as it gives us big government without the changes we need in economic institutions. Worse still, having profited so much from the new political alignment, the Tories will open up new fronts in the culture wars. And too many leftists will play into their hands.

* He's not trying to appeal to actual servicemen (who'd like better pay, no stupid wars and a leader who doesn't support the IRA) but those who fantasise that they were in the forces. 

Ideology vs the triple lock

Centrists want to scrap the pensions triple lock. Matthew Parris says it is now "impossible to defend" and that the old should pay the costs of the lockdown. Also in the Times, Oliver Kamm writes:

People of working age in their 30s, 40s and even 50s are disadvantaged by the way our economy favours pensioners. The cause of intergenerational equity demands some redress for this imbalance.

And Polly Toynbee says it is "rational and inevitable" that the triple lock should go.

I disagree. As I've said before, the triple lock is a thoroughly good idea.

For one thing, its main beneficiaries are NOT today's pensioners but today's young people. An 80-something will get only a few years of real-terms pension increases. But younger people can look forward to decades of such rises. Because your wealth is the present value of future incomes, this benefits them now. Scrapping the triple lock will therefore impoverish young people more than old ones.

If we do this, young people will have to make more provision for their own retirement. But this is both difficult and expensive. Difficult, because we face radical uncertainty about future investment returns, and so we don't know how much to save - and as Janan Ganesh wisely points out, it is as dangerous to save too much as too little. And expensive, because fund managers charge a fortune for the privilege of mismanaging our money. It's more efficient for the state to provide pensions. Not only are the administration costs smaller, but - more importantly - the state is better at bearing risk than the individual.

All this should be obvious. Why, then, do so many people not get it?

I'll concede that there is an issue here: if, as the OBR predicts, average earnings will rise 18% next year as hours return to normal, a rigid adherence to the triple lock would require a huge increase in pensions. But this only tells us that blindly following simple rules can sometimes be silly. It doesn't undermine the principle of the triple lock.

Instead, hostility to it is, I suspect, founded upon some ideological biases: when intelligent people are obviously wrong, I look to ideology*.

One bias here is what I've called the cost bias - the tendency to describe as costs what are in fact only transfers. Oliver says the triple lock "will add £15bn a year to the cost of the state pension by 2060-61". But it's not just a cost, but a benefit. And who'll be getting it? People who are today only around 30 years old.

In some quarters, this bias is magnified by a childish error - the tendency to regard the government's finances as akin to a household's. We don't, however, need MMT to see this is nonsense in this case.

For one thing, the size of this transfer will not be especially large. The OBR estimates that by then state pensions will be equivalent to just under 8% of GDP. That's less than many European countries devote to pensions now.

And for another, people will have to get pensions somehow. Any pension, state or private, must be paid for by working people - if not by taxes to pay the state pension, then by dividends to pay private pensions**. If future workers cannot afford to pay taxes, they'll be unable to pay dividends either. If you're worried by the burden future pensions will impose upon future workers. the solution is to raise productivity, not to scrap the triple lock.

Secondly, there's a tendency to overlook the inefficiencies of the private sector, to fail to see that it does some jobs more expensively than the public sector. Yes Polly Toynbee is well aware of the inequalities generated by the private sector, but I fear she under-appreciates its brute inefficiency.

Thirdly, there's hostility to the principle of universal benefits. Polly says the triple lock is "an extravagant way to steer more towards the better off." But if pensioners' total incomes are too high, the solution is income tax rather than use means-testing with its large deadweight costs.

I fear, though, there there might be another error at work - then tendency to see people merely as members of demographic groups rather than as individuals. Thinking in terms of "young" and "old" pits one generation against another. But this is silly. Young people are individuals with hopes and expectations. The state pension is one of these hopes. In raising it in real terms over time, it thus benefits the young. And because people under-estimate the power of compounding in so many contexts, they under-estimate the benefit to the young of real-terms pension increases - just as they under-estimate just how expensive pension fund charges compound to become. 

So who, then, would benefit from scrapping the triple lock? The answer is pension fund managers. who'll get higher fees as young people have to make more private provision for their old age. What we have here, then, is an example of how centrists - maybe inadvertently at least in this case - help to sustain extractive capitalism.

Equally inadvertently, in doing so they are in fact punishing young people. In this sense, Larkin was right: "They fuck you up, your mum and dad. They may not mean to, but they do."

* I'm not attributing all these biases to all of Kamm, Toynbee and Parris - merely noting that they are common ones.

** There is a caveat here. Private pension providers can invest overseas, and so extract dividends from foreign workers. In principle, though, the state can do this too with a sovereign wealth fund.

Lockdown threats to capital

Many economists agree that a premature lifting of the lockdown will not necessarily boost the economy greatly. As both Simon and Jo say, if people fear catching the virus they'll avoid shops and restaurants even if they are open.

Which poses the question. Why, then, are so many on the right so keen to lift the lockdown? In part, the answer might lie in a useful concept of Michal Kalecki's (pdf) - their "class instinct." This tells them that a prolonged lockdown - especially combined with inadequate protection for workers and businesses - threatens the longer-term health of capital. The sooner it is lifted the smaller these threats are.

I'm thinking here of several mechanisms, each of which might well be stronger the longer the lockdown goes on.

First, the experience of huge economic change as a result of the lockdown reduces some of the barriers to other types of change:the status quo bias ain't what it used to be. Prince Charles thus has a point when he says the pandemic gives us an opportunity to reset the economy onto a greener path.

It's a point some capitalists have heeded. BP recently cut its long-term forecasts for oil prices because "the aftermath of the pandemic will accelerate the pace of transition to a lower carbon economy."

Such a transition isn't just a problem for BP, however. Companies embody what Peter Rousseau and Boyan Jovanovic have called vintages of organizational capital. Which mean it is often hard to teach old dogs new tricks. Instead, new economies are often founded upon new firms, The green revolution, therefore, might well see new firms supplant existing ones just as the IT revolution did. This might be good for "the economy" but it's not for many of today's capitalists.

Worse still, from their point of view, is that such a transformation might also restrict the role of capital. Michael Roberts says it requires more spending on public health and education - which means a less commodified economy.

There's another way in which the lockdown might accelerate decommodification. Many of us have learned that we can be as happy sitting outside with friends as we are shopping or going to restaurants. If we retain these habits, there'll be fewer ways for capital to make a profit.

And then there's the fact that insofar as the lockdown represents a huge increase in state intervention, it shifts the Overton window in favour of further interventions. Of course, many such interventions work to the benefit of capital. But not all. As Martin Wolf says:

My guess is that Facebook, Google, Amazon and the like will be brought under political control: states do not like such concentrations of private power.

There's a further legacy of the lockdown for capitalism. To see it, remember a basic national accounts identity. GDP is equal to the sum of consumer spending (C), investment (I), government spending (G) and net exports (NX). It is also equal to the sum of wages (W), profits (P), taxes on production (T) and other incomes such as those of the self-employed and rent (O). Rearranging these gives us an identity for profits:

P = (C-W) + (I-O) + (G-T) + NX.

This equation tells us that we could see profits surge (from a low base) in the next few months as high government borrowing coexists with high C - W as pent-up demand is released by shops reopening; those queues outside Primark and Selfridges were good news for capital.

But what about the longer-term? Here there are huge dangers for capital. One is that governments might want to cut G - T, perhaps by raising taxes rather than cutting spending: the deficit myth dies hard. A second is that investment might stay low because the lockdown has not just created spare capacity but also had a scarring effect upon animal spirits.

And then there's C - W. Those workers who are now borrowing to see themselves through a loss of jobs and hours will eventually have to pay down that debt. That will reduce C relative to W. If others of us have gotten into the habit of spending less, the hit to profits will be even greater.

Now, there is a big caveat here. A prolonged lockdown - especially when combined with the government's inadequate protections for jobs and businesses - could cause a wave of capital scrapping which would boost aggregate profit rates over the longer time not only by reducing the denominator but by increasing the monopoly and monopsony power of the surviving firms.

Many capitalists, though. don't want to bet on being among the survivors. Hence their hostility to a lockdown.

Of course, this tension between the lockdown and the loner-term health of capitalism could be mitigated by sensible policy, such as greater support for jobs and business (which would mitigate the scarring effects and private debt overhang) and a rejection of post-lockdown austerity.

But we live in the real world of bad policy. Capitalists have therefore understandable reasons for wanting the lockdown lifted soon. Yes, this risks public health. But as the man said, "capital is reckless of the health or length of life of the labourer, unless under compulsion from society."

Why so little anger?

Richard Murphy asks why there is not more anger at the government's mishandling of the pandemic and predicts increased anger as unemployment rises.

I agree that people should be angry: the UK's excess deaths per million exceed those of comparable countries and the government has not done enough to protect workers. But as recent history teaches us, the fact that something should happen doesn't mean it will. There are reasons for the lack of anger.

One, I suspect, is that in crises people tend to want to pull together and not to rock the boat.

There are two other things that come from my day job that might be relevant here, however.

The first is suggested by research by Christoph Merkle. He found that UK shareholders just after the 2008 financial crisis were much less upset by their losses than they expected to be. One reason for this was that they realized they were all in the same boat - and a troubled shared is a trouble halved. Another, though, is that we quickly become accustomed to bad times. We adapt. That lessens anger.

Secondly, a common failing of retail investors is to hold onto losing stocks too long in the hope they'll come good: this is called the disposition effect.This is part of a wider habit, known as choice-supportive bias or post-purchase rationalization. We hate admitting that we were wrong. To avoid this, we invent reasons why the dud stock we bought will come good, or why the car we bought is in fact a great one.

Likewise, voters don't like admitting, even to themselves that they were wrong. And if we don't want to believe something, we easily find reasons not to. As Leon Festinger showed, people can stick to their beliefs even after they have been falsified.

In a sense, though, Tory voters have not been proved wrong. Nobody ever seriously pretended Johnson was competent or diligent. Voters didn't want a technocrat, and they haven't got one. People voted for him merely because he'd Get Brexit Done and was not an anti-semite. And he's fulfilled expectations. He's the Ronseal Prime Minister, doing exactly what it said on the tin.

We typically feel anger not so much as mere incompetence but at injustice or treachery: there's a reason why the hatemonger Farage wants to depict any slight concession to reality as "betrayal". From the point of view of his supporters, however, Johnson has not betrayed anyone. So there's less reason for anger.

And then there's simple tribalism. I might moan endlessly about the Arsenal. But when confronted with a Sp*d abusing them, I leap to their defence. Similarly, Tories faced with "woke" lefties attacking Johnson will support him. In this context, Starmer might well be wise to soft-pedal his criticisms of Johnson. Doing so provides space for the Tories and media to peel off from him. It deters them from circling the wagons.

There are, then, good reasons why much of the public has been passive in the face of the government's incompetence.

Whether this will continue, however, is impossible to say. The recent surge in protests by the Black Lives Matter movement shows us that anger can simmer beneath the surface largely unnoticed by the media and politicians until a trigger causes it to explode. Threshold models of the sort described (pdf) by Mark Granovetter might be relevant here. Some things can be explained but not predicted.

How the world really is, and how we react to it, are two very different matters.

Origins of a disaster

The FT reports that Johnson " is now convinced that the economy is facing a cliff-edge unless it starts to reopen." But as Simon says:

[This] is a tragic error, not just because it will lead to yet more deaths but also because it will delay any economic recovery...The idea that there is a trade-off between protecting the economy and protecting people’s health is not only wrong, it is also dangerous.

But why do so many ministers and their supporters believe otherwise? I suspect it's because of several errors.

One is the failure to sufficiently protect jobs and incomes. Yes, the furlough scheme is good. But it doesn't go far enough. As Eric says, the government could have returned last year's tax payments to companies and households - which would have done a lot to support the self-employed many of whom are suffering a lot. It could also have suspended loan repayments and rents.

Sure, the government could not prevent unemployment rising, if only because the lockdown is inhibiting job creation and hence preventing new entrants to the labour market from finding work. But it could have done much more to support incomes and hence given people greater security.

Of course, the lockdown means output must fall and hence incomes must fall. But in principle, all of this hit should have fallen upon the public finances rather than people. Or, to put it another way, the income hit should be smoothed out over decades and spread over all of us and future generations rather than be suffered by millions today.

In this sense, there has been a policy failure. Yes, the media would have us believe that Rishi Sunak is having a good crisis. But this is because it focuses far too much upon presentation and not enough upon policy. The standards for Tory politicians have fallen so low that being able to read a speech fluently suffices to make one a future PM.

But why was the policy response inadequate? Partly, it's because, as Eric says, "the failure of contingency-planning for a recession is unacceptable." This, I suspect, is a symptom of a widespread error - the neglect of tail risk, and failure to prepare for it.

It also reflects a continued fetishization of the public finances and aversion to borrowing. Of course, you don't need to be a modern monetary theorist to believe this is silly. With demand for gilts strong even at negative real yields, the government can borrow a lot and lock in low borrowing costs by borrowing long-term. What Keynes said in 1933 still holds true: "Look after the unemployment, and the Budget will look after itself."

I fear there's something else going on - the protestant work ethic. Protecting the economy from the lockdown means paying people not to work. Many people - not just Tories - are instinctively averse to this. Which is why unemployment benefits have been so mean for years.

Granted, there's an issue of horizontal equity here: is it fair to pay some people not to work whilst NHS workers are working flat out and risking their lives for low pay? But this can be solved later - for example by paying the latter a bonus.If your house is on fire, you put it out quickly and worry about tidying up the mess later.

But there's another mistake. The idea that lifting the lockdown will cause a strong rebound in economic activity assumes that we'll all return to pubs, shops and restaurants as normal once we are told to do so. But this is deeply doubtful. If the virus is still widespread people will stay at home out of fear. As Simon says, "nearly all academic economists understand that you cannot restart the economy without getting the virus under control."

The government's belief to the contrary arises from an error identified by Adam Smith in 1759:

The man of system... seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. (Theory of Moral Sentiments part six, section II ch 2)

It was this error that led New Labour to exaggerate the efficacy of targets because it under-estimated the extent to which these would be gamed. And it led Brexiters to think that leaving the EU would be easy - that as Michael Gove said, "the day after we vote to leave, we hold all the cards and we can choose the path we want." They under-estimated the extent to which the EU and Remainers in the Tory party, had principles of motion of their own and were not mere chess-pieces.

It is, of course, true that the government has mishandled this crisis from the start and is still mishandling it. Such mistakes, however, are not mere accidental, contingent quirks. Instead, they arise from a systematic ideology - and in some respects, one not confined only to Tories.

Tail risk in policing

One of the key things you learn in finance - often the hard way - is that averages and majorities are not sufficient statistics. What also matters - and matters a lot - is the distribution and in particular the extreme of the distribution. Making a profit in 99 days out of 100 is little use if the hundredth day wipes you out.

This tail risk comes in many forms: bonds can default; liquid assets can suddenly become illiquid; uncorrelated assets can fall together; and the rare event such as a crash that you've sold insurance against can materialize. And we've known since October 19 1987 that the risk is higher than a normal distribution predicts.

Intelligent risk managers and retail investor should know all this and guard against it - although many do not. 

Which is why I was disappointed in this dispute between Tom Chivers and others. Tom is absolutely right that we over-estimate the prevalence of things that are salient: there's a phrase for this - the availability heuristic. But I'm not sure he's relevant. Risk is probability multiplied by impact. Even if there are very few murderous policemen, the damage they do is huge - not just the deaths they case, but the loss of trust in the police and the millions of pounds of damage done by the riots they provoke. One bad copper can do more harm than dozens of good ones do good. There's tail risk in policing as in finance.

In this sense, Chris Rock is dead right. Policemen are like airline pilots: being relaxed about about a few "bad apples" is horribly complacent. It's committing a basic error - the neglect of tail risk.

Here, Mr Rock's analogy with pilots is illuminating. The thing is that - as Matthew Syed points out - the airline industry goes to great lengths to minimize tail risk:

When there is a crash, [black] boxes are recovered and analysed so that enlightened changes can be enacted. This means that the same mistake never happens again. It is this constant willingness to learn from failure that means aviation has become one of the world’s safest forms of transportation.

Why doesn't a similar thing happen in policing? Why do we shrug off acts of brutality as the acts of bad apples?

It isn't just because the costs of such brutality are smaller and - being borne by blacks and working class people - more tolerable.

Another reason, I suspect, is the tendency to see more variation on our side than on the other: "we are all different; they are all the same." If you're on the side of the police a bad copper is atypical and tolerable: as Dar Williams sang, "when our people torture you that's a few random cases." If you're not on the side of the police, on the other hand, then ACAB. Both errors are the flipside of each other: the ingroup heterogeneity bias is the counterpart of outgroup homogeneity.

There's more. David Correia and Tyler Wall say:

Encroachment on private property is a threat to capitalist order, and it is police who manage this threat...The elite fear the destruction of their property, yes, but even more they fear the destruction of the social relations that make private property possible. And so they fear a world without police.

They are also loath to rock the boat by rooting out bad coppers: you don't bite the hand that feeds you.The role of the police is not merely to uphold the law, but to uphold law and order. This earns them the gratitude of the ruling class, and hence its tolerance.

We see a counterpart to this in finance. Experiments by Elise Payzan-LeNestour and James Doran have shown that people become addicted to small gains even when these are accompanied by large downside risk. As Charles Prince, then-CEO of Citi, famously said in 2007: “as long as the music is playing, you’ve got to get up and dance”. Whilst a strategy works for you, you overlook its downside.

You might find it odd that I'm drawing analogies between finance and attitudes to policing. You shouldn't. There's a common theme here - cognitive biases.These have given us the field of behavioural finance, but also a deeper understanding of how capitalism reproduces itself by generating ideas that sustain the existing order. The link between my day job and my Marxism is tighter than some of you like to think.

Racism as emergence

Instinctively, I have solidarity with those taking a knee to protest at racism. But I have a problem here. We cannot eliminate racism merely by being nice to each other, any more than we can prevent recessions by wanting to be richer.

I say this because racial disparities aren't just the product of racist attitudes - important though these are. They can also arise from human action but not human design: they are also an emergent process.

Such a possibility shouldn't surprise anybody. When Adam Smith said that "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest" he expressed an important point. Aggregate outcomes are not merely individual intentions writ large. Sometimes, selfish people do nice things. Conversely, good people can do bad ones, as Marx saw:

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.

Smith and Marx both saw the importance of emergent processes. Some racial inequalities are just these. I'm not thinking here so much of blacks being killed by the police as economic inequalities. In the UK, as in the US, blacks earn less than whites even where they have the same qualifications; are more likely to live in poverty; and much less likely to be in top jobs.

One way in which these emerge without much overt racism was pointed out by Thomas Schelling back in 1971. He showed (pdf) how blacks and whites could come to live in entirely separate areas even even if people were no more racist than wanting to avoid being in a minority.

When they are segregated in housing, however, other inequalities follow. Black people will suffer worse job opportunities if only to the extent that they'll not benefit so much from hearing of vacancies from the word-of-mouth of neighbours. Their children will go to worse schools and so have worse qualifications and hence be more likely to become unemployed. And that - via the incentives beloved of Econ101 - will tip some into crime. That in turn will give younger people worse role models and peer pressures, and expose "black areas" to harsher policing. In this way, racial inequalities will reinforce and amplify each other, as Barbara Reskin says:

Even if discrimination's only direct effect were on where people lived, it would indirectly contribute to black-white disparities in schooling, health care, the cost of insurance, the opportunity to accrue wealth, etc. In sum, direct discrimination within subsystems exacerbates disparities in other subsystems in part by creating emergent (über) discrimination.

There's more. Historic racism has lasting effects. One mechanism here is simply that we are all creatures of history. As Avidit Acharya, Matthew Blackwell and Maya Sen have shown:

Whites who currently live in Southern counties that had high shares of slaves in 1860 are more likely to identify as a Republican, oppose affirmative action, and express racial resentment and colder feelings toward blacks.

What's more, if an inequality has persisted for a long time, we become accustomed to it: as Kris=Stella Trump has shown our ideas of what inequalities are fair are strongly influenced by existing inequalities. Similarly, if it's normal for white people to be in better jobs, hirers will be predisposed to continue to employ them, on the principle that nobody got fired for buying IBM: Gary Becker had a point when he said that competition could eliminate racism but the problem is, in practice, it doesn't grind so finely as to do so.

And because we've become accustomed to police brutality, we tolerate it as being the work of a few bad apples - oblivious to Chris Rock's point that in other professions such as airline pilots we have zero tolerance for bad apples.

This habituation effect explains why people who have been silent for years about racial inequality are now taking a knee, and why universities who have tolerated racism for years now side with Black Lives Matter. They've taken such inequalities for granted, but a grotesque murders shocks them.

None of this is to deny a self-evident fact, that outright racism exists.My point is that this is only part of the story. Racial inequality isn't merely the product of overt racism. Some of it is instead an emergent product of mild or even no bias (the same is true for sexism, but that's another story).

This fits with a Big Fact - that racial inequalities have persisted for decades despite legal changes, a decline in overt racial hostility and rise of "wokeness". Emergent systems can be resilient - which is why we need radical action and not just gestures to change them.

Hoist by his own petard

There is genuine anger at the behaviour of Dominic Cummings not just among the usual suspects but among some Tory MPs such as Roger Gale and Douglas Ross. It's worth exploring why this should be the case.

It's because of cultural evolution. Early humans worked out (or stumbled upon) an important fact, that we often thrive best when we cooperate. As Axelrod and Hamilton showed in a classic paper (pdf):

Cooperation based on reciprocity can get started in a predominantly noncooperative world, can thrive in a variegated environment, and can defend itself once fully established.

Or as Ken Binmore put it in Natural Justice:

We don't need to pretend that we are all Dr Jekylls in order to explain how we manage to get on with each other fairly well most of the time. Even a society of Mr Hydes can eventually learn to coordinate on an efficient equilibrium in an indefinitely repeated game.

This cooperation takes the form of the Golden Rule, or do as you would be done by. As Binmore shows, pretty much all societies have some version of this principle. I agree to obey rules - even at a cost to myself - because I expect you to do so.

But how are such norms enforced? By punishing defectors, that's how. In Axelrod and Hamilton's formal scheme, this takes the form of tit-for-tat strategies. Less formally, we use mockery, ostracism and even violence: "snitches get stitches."

Most of us have internalized these norms. We know this from experiments with the ultimatum game, wherein one player is given some money and can split it with another, with the other choosing to accept or reject the offer. Purely selfish offerers would offer the lowest amount possible, and purely selfish receivers would accept. But this is not what happens. Offers of less than 30-40% are only occasionally made, and often rejected when they are.

This shows that we have a norm of fairness. Offerers don't make unfair offers even if they'd benefit from doing so, and receivers reject such offers even if they'd be financially better off accepting. Both sides do so because the norm of fairness over-rides short-term financial gains.

It's for a similar reason that people leave tips even in restaurants they'll not return to. We feel bad not tipping; we don't want to be thought badly of; and we want to uphold incentives for good service because we'd expect visitors to our regular restaurants to do the same for us.

This, I think explains the anger towards Cummings. It's because people think he has broken one of the oldest social norms, of thinking the rules that apply to us don't apply to him. Millennial of cultural evolution mean this norm is now viscerally internalized. Hence the power of the charge "one rule for them, one for us".

In this context, it is pointless to wiggle about claiming that Cummings observed the letter of the rules. Such legalistic pedantry misses the point - that it is the spirit of the rules that matter.

This also explains Conservatives' disquiet. Some of them genuinely believe in the rule of law - the principle that laws apply to us all, which is part of the Golden Rule. For them, Cummings has broken a core moral principle.

One irony here is that Cummings should have been aware of all this. As he himself wrote:

Most of our politics is still conducted with the morality and the language of the simple primitive hunter-gatherer tribe...Our ‘chimp politics’ has an evolutionary logic: our powerful evolved instinct to conform to a group view is a flip-side of our evolved in-group solidarity.

Binmore points out that it was in tough times that norms of conformity were most strongly enforced, because it's then that survival requires them. Or as Marshall Sahlins put it:

During lean food seasons the incidence of generalized exchange should rise above average...Survival depends now upon a double-barrelled quickening of social solidarity and economic cooperation. The social and economic consolidation could conceivably progress to the maximum: normal reciprocal relations between households are suspended in favour of pooling of resources for the duration of emergency. (Stone Age Economics, p213-4)

Stone Age man's greater emphasis upon community and solidarity in hard times has a strong echo today. Because we're all suffering from the lockdown, we even more than usual expect everyone to muck in together and so are hostile to defectors.

But it has for decades had another echo. As Ben Friedman showed, in recessions we become more intolerant of outsiders, as solidarity with our tribe increases.

Which leads to an exquisite irony. Having exploited that atavistic sense of heightened solidarity so well during the Brexit campaign, Mr Cummings is now a victim of it. He is being hoist by his own petard. It takes a heart of stone not to laugh.

Austerity, power & BBC bias

George Osborne gave a revealing interview (1'52" in) to Radio 4 yesterday - revealing, not untypically for the BBC, for what it did not say.

Osborne said that sometime in the "next two or three years":

Markets, and indeed the country, will look to governments to set out plans for how they are going to eventually bring balance back to the public finances.

The first thing that was not said here - and certainly not by his fawning interviewer - is that the more educated parts of the country will be looking for no such thing. Intelligent economists (as well as me) agree that fiscal austerity will be counterproductive. With demand for gilts strong - even at negative yields - government borrowing is sustainable for now. And the best way to get it down is simply to ensure a strong economy. As Maynard Keynes said in 1933: "Look after the unemployment, and the Budget will look after itself."

Which poses the question. Why, then, would anybody prate about the need for austerity?

Which brings us to something else that was unsaid - that whilst austerity might not be technically necessary as a tool of macroeconomic management, it suits the interests of financial capital, a section of which pays Mr Osborne handsomely (another fact unsaid in the interview).

The reason for this is simple. For a given inflation target (the inflation target shouldn't be given but let that pass) monetary and fiscal policy are substitutes: tighter fiscal policy means looser monetary policy and vice versa. And this combination - what Osborne called fiscal conservatism and monetary activism - disproportionately benefits the finance sector for several reasons:

 - Many trading strategies carry very low returns even when they pay off; various carry trades, arbitrage or near-arbitrage, or picking up pennies in front of steamrollers. To make them pay well requires leverage. Which needs cheap and easy money.

 - Low interest rates and QE raise asset prices. And guess who benefits from these.

 - As Costas Lapavitsas & Ivan Mendieta- Muñoz show, bank profits depend a lot on the net interest margin. And this is often higher when banks' financing costs are lower. As Thomas Philippon and Guillaume Bazot have shown, the finance sector is oligopolistic, so lower costs don't get passed onto customers.

 - Low interest rates encourage people to take on more debt, to the benefit of banks. They also encourage savers to "reach for yield" and thus entrust their money to high-charging fund managers. If annuity and savings rates were high, savers would be less inclined to buy expensive funds.

Whilst fiscal austerity doesn't serve the interests of the country as a whole, therefore, it does suit the finance sector.

And it has disproportionate influence over policy. We don't need conspiracy theories to appreciate this. Nor is it because the sector pays Mr Osborne's wages: he served its interests long before he entered its employ. Nor is it even because of direct lobbying, important as that is.

It's also because of what James Kwak calls "cognitive capture". Finance professionals enjoy undue influence because they are perceived to have high status and expertise and network with politicians and journalists. They thus benefit from both the mere exposure effect and from the fact that, as Adam Smith said, the "respectful attentions of the world [are] more strongly directed towards the rich and the great, than towards the wise and the virtuous.

Yet another mechanism of influence has been described by Timo Walter and Leon Wansleben. Policy-makers, they say, have been drawn into "a kind of ‘ontological complicity’ with the dynamics of financialized capitalism" because large liquid markets give central banks more means of influencing the economy and hence greater power.

In these ways, financialization is self-reinforcing: a bigger financial sector gives finance greater pwoer.

Which is why I say that interview with Osborne was so inadvertently revealing. The (one-sided) discussion was framed in terms of what seems best for the country as a whole. But this of course is a fiction. Policy-making is not a technocratic exercise in what is best for the country but rather a matter of the extent to which policy is constrained by the influence of capital.

But how does that influence operate? How strong is it? Whose interests therefore does policy serve? These are questions which BBC usually overlooks. Which means that it is systematically and dangerously biased.

What we don't see

Daniel Hannan recently tweeted:

Around 80% of us say we support the lockdown. But, looking around me, I’d say that no more than 20% are still observing it rigorously. Is this a case of what economists call “revealed preference” - or do people want everyone else to apply stricter rules than they do themselves?

It might well be neither. Instead, it’s an example of the sampling bias. The people we see are, by definition, those who are outdoors and thus who are disproportionately likely to be breaching the lockdown. What Mr Hannan isn’t seeing are the countless thousands of us staying indoors and observing the lockdown. He’s failing to appreciate that what he sees is a biased sample of what there is.

In fairness to him, this is a common error, as experiments by Benjamin Enke have demonstrated. Here are a few other disparate examples of a similar mistake.

Benefit fraud. People greatly over-estimate the extent of this. A survey by the TUC a few years ago found that “people think that 27 per cent of the welfare budget is claimed fraudulently, while the government's own figure is 0.7 per cent.” One reason they do this is that they can see fraudsters whereas they don’t see the millions trapped indoors by disability or depression.

Opportunity cost. As Frederic Bastiat pointed out, we see the shopkeeper spending money to replace his broken window but don’t see that he would have spent money elsewhere had his window not been broken. We thus wrongly infer that some activities – be it breaking windows or going to war – boost economic activity when in fact they often don’t.

The unseen counterfactual. Because we don’t see the road not taken, we don’t benefit from the Jim Bowen effect: “here’s what you could have won.” We don’t therefore blame governments sufficiently for policies which impoverish us relative to a plausible counterfactual – such as austerity or Brexit.

Social transmission bias. In a recent paper David Hirshleifer describes how people’s savings and investment decisions are distorted by the biased signals they get from others. Because people are more likely to discuss their successes than their failures, they talk more about low-return but high-risk strategies that happened to get lucky. This leads listeners to believe that stock-picking works better than tracker funds and that speculative shares pay off better than defensive ones when in fact (pdf) they generally don’t.

Survivorship bias. The shares that are listed on the stock market are by definition those that have not gone bust. They are therefore a biased sample of all stocks. Because investors don’t fully appreciate this bias, they under-estimate the chances of corporate failure, especially over the long-run, and so over-estimate their chances of picking good stocks. In fact, as Hendrik Bessembinder shows, most stocks actually lose money over their lifetime, and stock market rises are due to great performance by a tiny minority of shares.

Biased news. As the ancient saying goes, “’dog bites man’ is not a story but ‘man bites dog’ is”. What we see reported on the TV are, therefore, unusual events. But by definition these do not describe reality. It’s partly for this reason that the fear of crime has not fallen as much as actual crime has. Also, in reporting salient events, the news understates slow-moving but world-changing trends – be it the decline in global poverty, stagnation in productivity or long-term decline in government borrowing costs. In this sense, the news – even if presented wholly honestly – distorts our perceptions of reality.

Immigration. People see what they think to be an adverse effect of immigration: “some immigrants arrived a few years ago and I’ve lost my job since.” What they don’t see, however, are the many mechanisms which counteract this apparent effect.

And herein lies the point. The social sciences are, as Jon Elster said, fundamentally a collection of mechanisms. But many of these are unseen. It is the role of social science to expose these mechanisms, and to show us that what we see is not all there is. As Marx said: "If there were no difference between essence and appearance, there would be no need for science." Or as Marvin Gaye, another great social thinker, famously put it: “believe half of what you see and none of what you hear.” Mr Hannan could learn something from him.