Stumbling and Mumbling

Beyond tax rises

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

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

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

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

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

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

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

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

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

Higher taxes therefore are nasty.

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

But there are other possible responses to this dilemma.

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

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

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

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

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

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

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

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

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

Playing by the rules

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

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

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

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

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

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

1. Accept the media's framing of economics.

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

2. Don't challenge the power of capital.

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

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

3. Increase profits.

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

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

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

4. Don't engage with the left.

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

5. Let money talk.

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

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

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

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

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

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

Why is it doing this?

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

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

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

The Unaccountability Machine: a review

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The end of modernity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Government as household: if only!

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

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

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

And often they are bang right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Investment & growth: some problems

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

To see the issue, consider an aggregate production function:

Y = TK^aL^b

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

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

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

The answer is: not much.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Funding public services: A Bevanite approach

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

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

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

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

So, what is this radical solution?

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

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

Instead, Bevan's answer was nationalization.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Starmer's stability promise

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

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

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

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

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

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

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

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

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

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

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

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

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

But what?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Strong links vs weak links

The general election should rid us of one of the most vicious, corrupt and incompetent governments in our history, but it will probably not install a government able or willing to meet the huge challenges of a failing economy, wrecked public services and climate change.

With players of the quality of Saka, Foden, Rice and Bellingham, England have a great chance of winning the Euros this year, but with players like Maguire or Dunk they do not.

These two paragraphs seem very different. But they have something important in common. They illustrate the distinction between strong-link problems and weak-link ones.

A weak-link problem is where success depends upon the quality of the worst component, whereas a strong-link problem is where it depends upon the quality of the best. So, if you're looking at Foden and Saka, you're thinking in strong-link terms whereas if you're looking at Maguire and Dunk, you're seeing through a weak-link lens. Similarly, the election should solve the weak-link problem of ridding us of a terrible government, but it will not solve the strong-link one: it'll not give us the best possible government.

This distinction is ubiquitous.

If you're running an airline, oil rig or nuclear plant your focus must be on eliminating the weak-links that can cause catastrophes. Other businesses, though, have strong-link problems. It doesn't much matter if there's a lot of rubbish on Netflix as long as there's sufficient good stuff to attract customers. It has the strong-link problem of how to find good shows and can ignore the weak-link one of what to do about rubbish*.

Many growing companies face strong-link problems - how to stand out sufficiently to win new customers. Mature ones, by contrast, have weak-link problems: they must avoid doing anything which alienates existing customers.

The distinction also matters in investing. Many retired people have the weak-link problem of how not to lose money - a problem which is surprisingly easy to manage for sterling-based investors. Venture capitalists, however, have the strong-link problem: they must find one or two companies with massive payoffs to cover the inevitable losses of failing companies. This is why a state investment bank is a good idea economically speaking - because the state can better throw money around than the private sector - but a bad idea politically because the shitmedia will brand the inevitable failures as a waste of taxpayers' money.

By contrast, economic development can be a weak-link problem. Poor countries are poor often because important things are lacking - reliable electricity, roads, ports, property rights and so on. They can achieve growth therefore by improving these weaknesses. As Charles Jones puts it (pdf):

In any production process, there are many things that can go wrong that will sharply reduce the value of production. In rich countries, there are enough substitution possibilities that these things do not often go wrong. In poor countries, on the other hand, any one of several problems can doom a project. Obtaining the instruction manual (the “knowledge”) for how to produce socks is not especially useful if the import of knitting equipment is restricted, if replacement parts are not readily available, if the electricity supply is erratic, if cotton and polyester threads cannot be obtained, if legal and regulatory requirements cannot be met, if property rights are not secure, or if the market to which these socks will be sold is unknown.

It's not always the case, however, that rich countries do have enough substitution possibilities to prevent trouble when one element fails. As we saw in 2008, the collapse of banks led to big falls in GDP. The crisis taught us that when thinking about banks we have a weak-link problem: the priority is to avoid disaster.

What's true of one industry, however, isn't true of others. Whilst the collapse of NatWest triggered a crisis that of Wilko, Debenhams, Woolworths or Cazoo did not. Which tells us that in well-functioning markets we have strong-link problems: we needn't worry about the existence of bad companies because the market will - eventually - select for good ones.

This poses the question: is the impending collapse of Thames Water a weak-link problem like NatWest or a strong-link one like Wilko? I suspect the latter: it doesn't matter if Thames Water can't supply water as long as somebody can; the logo doesn't matter as long as the taps still run.

Yet another weak-link problem is monetary policy. For Milton Friedman good policy (pdf) was a weak-link problem: “a negative proposition: avoid major mistakes.” The strong-link problem - boosting economic growth - requires other policies.

By contrast, science and the arts are strong-link problems. It doesn't much matter if there's a lot of dross as long as people aren't daft enough to act upon bad research! What matters is that quality research is also done, as this is where progress occurs.

Strong-link and weak-link problems have very different solutions**. With weak links, we need risk-aversion and a focus on high minimum standards and safety. With strong-link problems, however, we need to embrace risk, diversity and competition.

This means that sometimes, solving a weak-link problem might exacerbate a strong-link problem. This is perhaps true of the US constitution. It has done a good job in solving the weak-link problem of protecting Americans from tyranny, but not perhaps so good in delivering effective active government. It might also be true in academia: managerialism has weeded out weak-links - academics who are idle drunks and sex pests - but has been less good at fostering strong-links; pressure to publish has given us shoddy research as academics have less time to focus on good work. Many free marketeers, such as Ryan Bourne in Economics in One Virus, add that regulation protects us from the weak-links of dangerous medicines (except OxyContin) but at the expense of slowing down the development of effective ones.

There are trade-offs here, and we must be aware of them.

Often, though, people are not. Sometimes, they have strong-link thinking where we need weak-link thinking.

Boris Groysberg has given some examples (pdf) of this. He's shown that when a good manager of growth companies takes over a mature business (or vice versa) the result is often poor performance; a growth manager has a strong-link mindset whereas mature businesses need weak-link thinking. What matters is not merely an individual's skills, but the match between them and the job requirement.

I saw other examples back in the day job: retail investors who claimed to be risk averse sometimes piled into (correlated!) spivvy Aim stocks.

We see it too in recruiting. Michael Housman and Dylan Minor have shown that companies spend too much time looking for "talent" when they should instead be screening out toxic workers such as the rogue traders who might lose billions, the sexual harrasser who attracts expensive compensation claims or the over-mighty CEO such as Fred Goodwin who could bring down the whole firm.

We also see it in academic publishing, where peer review selects for work that corroborates reviewers' prejudices and selects against heterodox ideas, thereby restricting the diversity upon which the development of strong links depends. Even papers that helped their authors win Nobel prizes have been rejected.

Politics gives us other examples. Sunak has recently spoken of how AI might quickly double productivity whilst Hunt has called for the creation of a "British Microsoft". These are examples of strong-link thinking. But in fact we can better improve our economic performance with weak-link thinking - by simply not doing stupid things such as having trade barriers with the EU or excessively complex taxes and planning rules. Governments should stop talking about being world leaders and instead set themselves the more challenging aspiration of rising to dull mediocrity.

Herein, however, lies a problem - incentives. Sometimes, bosses are incentivized to be strong-link thinkers when they should be weak-link ones. The more naive among you might think that they should ensure that their organizations solve a weak-link problem and eliminate egregious wrong-doing. But this did not happen with the Post Office. As long as the bonuses kept coming, Paula Vennells had no incentive to stop driving sub-postmasters to suicide. Similarly, you might think that police recruitment is a weak-link problem: because bad coppers can do huge harm it's important to weed them out. But because the costs of a Wayne Couzens or Cliff Mitchell and many others are borne by their victims much more than by Home Secretaries or Met Commissioners, such screening is inadequate.

We had the same problem in the run-up to the financial crisis. Banking should be a weak-link problem - stopping them cratering the economy by going bust. But bankers were incentivized to increase returns and take on risk - that is to chase strong links.

My story here is about selection mechanisms. All institutions - be they companies, markets, government departments, elections or whatever - are selection mechanisms: they select for some behaviours and against others. The questions are: what do we want our institutions to select for or against; how well do they do such selections? and; how might we improve them? Such questions are unlikely to be much discussed during this election campaign.

* This is why Disney's decision to withdraw some films from its platforms was so odd, and costly.

** Insofar as they have solutions at all which sometimes they don't: Gareth Southgate can't create top-quality central defenders.

Some defunct economist

"To understand the man you have to know what was happening in the world when he was twenty." Napoleon's claim helps explain one of the big problems with centre-left economic policy.

He was right. We now have strong evidence that economic conditions in our formative years shape (pdf) our outlook much later in life. People who experienced recessions when young are less likely to own risky assets when they become old and rich enough to do so. Chief executives who saw hard times in their youth run their companies more conservatively (pdf) than others; and central bankers who saw high inflation when young are likely (pdf) to be more hawkish when they are in office.

And here's the thing. For most of us over 40, our youth was characterized by mass unemployment or the threat thereof, something we know to be a cause of great misery (pdf): the jobless rate was over 11% when Starmer (and I!) turned 20, for example. This means the economic thinking of well-meaning people throughout their lives has been dominated by one question: how to create jobs. It's no surprise, therefore that despite scaling back the Green New Deal, Starmer is still promising to create tens of thousands of good new jobs.

But, but, but. The ideas of one era are not always well-suited to the next. As Maynard Keynes famously wrote:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

This is true today - and that "defunct economist" is Keynes himself, and in particular this:

I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use...When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.

This passage is pretty much wholly inapplicable today. The volume of employment is satisfactory: we are not quite at full employment, but close to it, especially for skilled workers.

In this context, creating good jobs would be inflationary. Yes, vacancies at decent pay for home insulators, housebuilders, care workers, solar panel manufacturers, nuclear weapons producers and so on would attract applicants. But they'd come not so much from dole queues and the economically inactive as from workers in other jobs. In an attempt to retain their staff their employers would raise pay. The result would be inflation.

Of course, macroeconomic policy can prevent this by either raising taxes or interest rates, both of which destroy jobs as a means of curbing inflation. At near-full employment, such destruction is the necessary counterpart of shifting labour towards a Labour government's higher priorities.

There's another reason why we need job destruction. It's a necessary part of raising productivity. As Jonathan Haskel and colleagues have shown (pdf), a lot of productivity growth comes not from existing firms improving their efficiency but from inefficient plants shutting down and better-performing ones opening. This is why more market competition must be part of any strategy to raise productivity: it encourages the entry of better firms and exit of worse ones.  

Which poses another problem: which jobs do we want to destroy? Higher interest rates hit hardest the construction sector - meaning you can say goodbye to Labour's hope of "getting Britain building again." Which suggests that, as Simon says, Labour should break its commitments and raise income taxes, thereby destroying jobs in consumer-facing industries such as retail and hospitality.

These jobs, however, might not be the only ones we want to cut. Keynes was flat wrong. The existing system does seriously misemploy factors of production.

In some cases, this is because of bad policy choices. An excessively complicated tax and benefit system has created unnecessary jobs for lawyers, accountants and DWP bureaucrats. The fact that policy is up for sale has created a big lobbying industry. And our regulatory agencies have been more effective in expanding bureaucracy than in reining in the industries they nominally oversee: Ofgem and Ofcom have over 2500 employees between them.

In other cases, it's because of standard market failures. Asymmetric information means that “genuinely unskilled” fund managers stay in work at the expense of their clients. Unpriced externalities mean that polluting industries are too big - be it the environmental pollution of carbon producers, the risk polluters of the financial system or the intellectual pollution of the legacy media. And agency failures and monopoly have led to the creation of bullshit jobs and excessive workplace surveillance. Friedman was right to say that "if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get" but he should have added that this problem isn't confined to the public sector.

None of these government or market failures will be solved by the standard macro policies of higher taxes or interest rates. They require microeconomic policies which few people other than some "degrowthers"* are thinking about. As Jason Hickel has written:

What industries are already big enough and shouldn't grow any larger? What industries could be usefully scaled down? What industries do we still need to expand? We have never asked these questions. (Less is More, p220)

In this context, we encounter some more defunct economics - the notion that a high wage equals a good job. This is not necessarily the case, even in those cases where wages are equal to marginal product. For one thing, it is the private marginal product that sets wages not the social product, and the two can differ: contract killers (pdf) often have high wages (pdf) but we wouldn't want to create these "good jobs". In the same way, we should aim to reduce, not increase, jobs in socially useless finance, in advising on tax avoidance or in producing pollution.

What we need, therefore, is job destruction. Not just the creative destruction that increases productivity in well-functioning markets, but also the destruction of some jobs to shift labour to higher priorities. Right now, we need less Keynes and more Schumpeter.

Here, however, we run into an unavoidable trade-off. Rachel Reeves has rightly spoken of economic insecurity being "corrosive of individuals’ physical and mental health": those of us who spent our formative years in such insecurity are well aware of this. But such insecurity is the flipside of much-needed job reallocation. A big policy question is how to ameliorate this trade-off. A more intelligent welfare state and active labour market policies are part of the answer. What's not part of the answer is the pretence that creating jobs is the whole of the story. It's not 1982 any more.

* A bad word for a possibly good thing.

On classical music

Classical music is in crisis. Those who should be promoting it seem embarrassed to do so; some universities are closing music departments; and Alexandra Wilson and Ian Pace fear that it is being sidelined because of concerns about elitism and its associations with colonialism.

The latter, however, puzzles me. Classical music can be seen not as the ally of imperialism and capitalism but as its antithesis. Marx himself regarded it as an example of free, unalienated labour. And in the 50s and 60s its devotees thought it a pure art form in contrast to commercialized and capitalistic pop music. Anthony Burgess (himself a composer as well as author) spoke for many when he said that pop songs were "foisted on [young people] by middle-aged entrepreneurs and exploiters who should know better."

Some of its supporters have also argued that classical music is democratic. Whereas a successful pop career often (but not always) requires the backing of a big record company, anyone can make their own classical music. In the liner notes to Bach Trios by Yo-Yo Ma, Chris Thile and Edgar Meyer, Timo Andres writes of Bach's music:

That everyone has access to this trove - and can, with a little experience, will these same creations into being - is one of the most profoundly democratic facts I know of, and stands as a great equalizer in an unequal world.

Of course, it is not often seen this way. One reason for this is that state schools do not inculcate that experience, preferring to be mere ideological state apparatuses preparing us for the world of drudgery. It is for this reason that pop music, like classical (pdf), has a problem with its performers coming from a narrow demographic : as the Sutton Trust points out, pop stars are disproportionately privately educated, as it is private schools where are more likely to provide a musical education. The fault here, though, is not with the music but with our class-scarred society.

In this context, it shouldn't be surprising that many leftists have loved classical music. One of the most interesting of these was Lenin. You would expect him of all people to be alert to music being tainted by capitalism and imperialism. For him, however, the problem was the exact opposite - not that it was associated with a brutal system but rather that it was too humanizing. Here's Georg Lukacs:

Gorky recorded Lenin’s very characteristic words spoken after he listened to Beethoven’s Appassionata sonata: “I know the Appassionata inside out and yet I am willing to listen to it every day. It is wonderful, ethereal music. On hearing it I proudly, maybe somewhat naively, think: See! people are able to produce such marvels!” He then winked, laughed and added sadly: “I’m often unable to listen to music, it gets on my nerves, I would like to stroke my fellow beings and whisper sweet nothings in their ears for being able to produce such beautiful things in spite of the abominable hell they are living in. However, today one shouldn’t caress anybody - for people will only bite off your hand; strike, without pity, although theoretically we are against any kind of violence. Umph, it is, in fact, an infernally difficult task!”

Lenin's fears have of course since been refuted. The fact that Nazis murdered millions whilst listening to Schumann and Mozart showed that classical music does not humanize people. That was Burgess's point in having Alex listen to "Ludwig Van" whilst fantasizing about murder.

It's unsurprising, then, that fans of classical music are often racists, sexists and snobs, as evidenced in the risible Michael Henderson's objection to any northerners appearing on Radio 3. Such bigotry is merely highlighted by the tendency of some listeners to use it to press for their own moral superiority: "Look at ME emoting to this. Don't I have such sophisticated sensibilities?"

What we say of football, however, is also true of classical music: it has a racism problem because society has a racist problem.

It's in this context that we should interpret the claim that classical music is associated with colonialism. It could not be otherwise. Some of it, most famously Rule Brittania, is an outright celebration of that. Others are part of that mindset, such as Saint-Saens use of African rhythms or Bartok and Vaughan Williams's "cultural appropriation" of folk music. And of course, music was disproportionately written and performed by affluent white men simply because it was they who had disproprtionate access to time and opportunities.

But, but, but. When Marx said "the mode of production of material life conditions the general process of social, political and intellectual life" he did not add "except for the stuff you like." Yes, a lot of classical music arose from imperialist societies, but so too does modern music arise from neoliberal ones. Quite a bit of it celebrates hyper-individualized consumer capitalism; Beyonce advertising Lexus is perhaps not the worst example of this. If we're going to find Beethoven guilty by association with capitalism, we must also find Nicki Minaj so. Or, of course, we could just lighten up.

This does, not, however, mean we should "cancel" (ugh) it. As Edward Said noted in Culture and Imperialism (pdf), recognising that culture is "manifestly and unconcealedly a part" of the imperial process does not mean we should reject its artefacts. Instead, he said, appreciating the connections "actually and truly enhances our reading and understanding of them." You can both deplore imperialism and at the same time celebrate the greater achievements of western culture, as indeed C.L.R. James did. And we can do this whilst recognizing that these achievements are not confined to dead white men. The better talk of "decolonizing music" is merely about recognising that classical music does not have a monopoly of great music - which is surely obviously true.

Here, I'll make a personal point. I came to classical music late in life. I didn't hear it at home and school was a Gradgrindian ideological state apparatus relieved only by the incompetence that caused it to employ one or two inspirational teachers. Instead, I discovered it after I started playing the guitar, and when, to improve that playing, I learned music theory. For me, the gateways to classical music were Barrios and Villa-Lobos. This means that I don't associate the music with nostalgia, and am left cold by a lot of emoting about it: for me, music is a technical process.

It also means that I can't see a clear distinction between classical and non-classical music: I'm not sure there's an iron curtain between Max Richter and Low or Brian Eno, for example. Better men than I share this view: Chris Thile plays Bach sonatas alongside bluegrass and Richard Thompson has played Henry Purcell and Britney Spears on the same album.

Which is why I'm saying all this - because it is not often said anywhere else. There are perspectives on classical music which are neither white liberal guilt nor facile snobbery.

A case for fiscal austerity

The Labour party's talk of maxxing out the country's credit card is an obnoxious lie. But this does not mean the party is wrong to want a tight fiscal policy. There is a good case for it to do so, and it's got nothing to do with arbitrary fiscal rules or the Tories having "spent all the money."

Labour itself isn't going to make this argument, and why should it given that politics is about power and not persuasion? So I'll try.

It starts from the brute fact that unemployment is close to a 50-year low, at just 3.8% of the workforce. Granted there are another 1.9 million people (equivalent to over 5% of the workforce) out of the labour market who say they'd like a job, but many of these are unwell or have caring commitments and so are available only for lighter or more flexible work. The question "where will the money come from?" is a stupid one. But "where will the workers come from?" is certainly not.

Yes, there are some answers: immigration; some early retirees could be tempted back to work by better working conditions; and cutting NHS waiting lists would also get some back to work.

Nevertheless, the fact is that the pool of available labour is small. Yes, there are some GPs out of work, but fewer builders and skilled workers than there were a few years ago.

Which means that any significant rise in public spending and hence demand for labour is likely to bid up wages. The Bank of England will see that as potentially inflationary and would raise interest rates. This wouldn't wholly be disastrous: higher rates would help bring down house prices and reduce some of the more egregiously socially useless financial activities. But it does mean you could kiss goodbye to big housebuilding, as this is the most interest-sensitive sector of the economy.

Yes, Labour could prevent this by raising the inflation target. But nobody in politics is arguing for this. And whilst there's a case for doing so, it doesn't solve the physical constraint, of there being just not enough doctors, housebuilders or skilled workers in the green economy.

You might object that there's an obvious solution to all this: to raise taxes. The need to do this is not to raise money: governments can do that anyway by printing or borrowing. Instead, it is to free up real resources. Higher taxes would cut consumer spending thereby depressing demand for labour in retailing and hospitality, thus releasing workers to go into social care, construction, decarbonizing and the other things we want to do.

There are, however, big problems with this.

One is political. There's been no preparing of the ideological ground - no campaign to say that taxes are the "price we pay for a civilized society" or even that they are an economic necessity if we're to have good public services. From this background, tax rises would look like Labour going back on its word, being duplicitous.

And even if taxes were to rise, there'd still be issues.

One is that the mega-rich don't spend much and so higher taxes on them would not free up many real resources. Justice requires that we tax the mega-rich more and help the worst-off. But this does little to achieve the economic aim of shifting resources towards the public sector and away from the private. That requires tax rises upon those who will cut their spending as a result. If we want better public services, we must pay for them ourselves.

But there are problems with this, even aside from the unpopularity.

One is that higher taxes will cut jobs in retail and hospitality but do little to destroy the many socially unproductive but often well-paid jobs: the bullshit jobs created by managers who expand their empire (or promote an image of "wokeness"!) at the expense of shareholders; the lawyers and tax advisors who exploit an overly complicated tax system; bureaucrats who administer a repressive benefits system; fund managers who rip off investors; and producers of various forms of pollution, be they carbon emissions, financial risk which taxpayers pay for; or the intellectual pollution of the media. To destroy jobs such as these requires microeconomic policies which nobody is even thinking about.

And then there's the fact that, quite simply, reallocating labour takes time.

My chart shows this by plotting a measure of labour reallocation. To see how this works, imagine an economy of five workers in each of two sectors. If employment in both sectors grows at the same rate then net labour reallocation is zero; for any worker shifting from one sector to the other another must go in the opposite direction. If, however, the sectors grow at different rates, labour is being reallocated. If employment in one sector falls from five to four and that in another grows from five to six, net reallocation is one. My chart measures this process across 16 main sectors, with net reallocation expressed as a percentage of the labour force.

This shows that reallocation is typically small - usually not much more than 1% of total employment, or less than 400,000 people per year.

The economy, then, is sticky and slow to change. Most people prefer to stay in jobs they know; employers prefer relevant experience; it takes time for people to discover opportunities in different industries; to decide to make a radical career change; and to retrain. It is only times of distress that force many people into such change; note that the highest reallocation rates were in bad times such as the 2009 recession and 2020 Covid outbreak.

We can't therefore merely flick a switch and move tens of thousands of workers quickly from retailing to healthcare, construction or the green economy. The world just doesn't work like that. Change has to be gradual. Reeves is right to say "we’re not going to be able to turn things around straight away."

There is, therefore, a case for Labour having a tight fiscal policy.

You might object that all this seems to contradict a great point made years ago by Dan Davies: good ideas don't need lots of lies told about them.

I think there's an answer here. Dan's point applies when the audience is intelligent and informed. Which is not the audience for Labour's drivel about the credit card being maxxed out. When Jones, Reeves and Starmer use such language they are speaking not to economists but to political reporters who are institutionally stupid. The arguments they use to other audiences would, I would hope, be a little like the one I've made.

And it is emphatically not a right-wing argument. Macroeconomic policy must not be a matter of ideology but of empirical fact: you should run a loose policy when there's spare capacity in the economy and a tight one when there isn't. Truss's unforgivable error was to not appreciate this.

What's more, a tight fiscal policy is entirely compatible with radical economic policies elsewhere: land value taxes, a basic income, a maximum wage, planning reform, economic democracy, proper regulation of monopolies and so on. And don't think such measures don't address the pressing need to improve public services. They do: anything that gets the economy growing will boost tax revenues.

One of the great failings of social democracy has been think of economic policy too much in terms of public spending and not enough about other policies to foster equality and efficiency. The big failing of Starmer's Labour is not that it is offering fiscal austerity, but that it is offering nothing else.

On lazy moralizing

Politicians prefer lazy moralizing to intellectual enquiry.

I say this because of Sunak's speech last week in which he condemned far-right extremists "who are hostile to our values and have no respect for our democratic traditions." What he did not do in that speech is ask: why has right-wing extremism increased from a nuisance to something more troubling?

His opponents were quick to point out that Sunak's Tory colleagues have been promoting it. But that's only part of the answer. Anderson and Braverman have been sowing their seeds in fertile ground. We now have abundant evidence corroborating Ben Friedman's 2006 finding that economic stagnation breeds illiberalism and hostility to democracy. Ana Sofia Pessoa and colleagues have shown that "fiscal consolidations lead to a significant increase in extreme parties' vote share." Markus Brueckner and Hans Peter Gruener have described how "lower growth rates are associated with a significant increase in right-wing extremism". And other researchers have shown how deaths of despair - which are symptoms of underlying social problems - are correlated with higher support for Brexit and Trump. 

Sunak, however, like Starmer, omitted to mention all this evidence. Public opinion is not an exogenous datum. It is shaped by socio-economic conditions and political activity. Intelligent politics wouldn't merely condemn some beliefs, but inquire into their origins.

This, however, is by no means the only sign that Westminster is divorced from social science.

Another example is the demand from many Tories for tax cuts and a smaller state. What this misses is that achieving this cannot be merely a matter of ideology and will-power. A smaller state requires particular socio-economic conditions, one of which is an economy healthy enough to provide decent public services with a lower tax take*.

Yet another example was Liz Kendall telling youngsters that there'll be "no option of a life on benefits". This is mere punching down which not only begs the question of how many people actually want such an option, but also deflects attention from much bigger economic issues, such as how to end our 15 years of stagnant productivity and real wages.

What we have in all these cases is vacuous moralizing where there should be serious thinking about the social sciences. Gary Younge is dead right to say that the commentariat is "more interested in denouncing what is happening than understanding why it is happening." And Phil Burton-Cartledge is right to say that political commentary is "superficial" with no grasp of the social relations, the articulations of interests". And what's true of commentators is true too of politicians. As Lewis Goodall recently tweeted:

The Westminster (and much of the internal Conservative) conversations continues to miss everything which is driving [the collapse in Tory support] - the quietly radicalising effect of a collapsed NHS, a broken housing market, near bankrupt local government, a still sclerotic economy.

In one respect, this ignorance is unusual. Thatcher and Blair both entered office with some ideas about society and the economy - Thatcher about how we needed to curb trades union power and bring down inflation and income tax rates down and Blair about how social democracy could be updated to tackle late 20th century social problems. Starmer's Labour, by contrast, shows no similar sign of engaging with social or economic analysis. There is, in media-speak, no "narrative."

Why is this?

Partly, it's part of a general decline in intellectual standards, which has seen the expunging of intellectuals from public prominence. It's always easy to prefer lazy moralizing to serious thinking: such moralizing, of course, has as much connection to serious moral philosophy as economicky talk has to proper economics.

One reason for this decline lies in the dominance of the worst sort** of journalist, the Westminster political correspondent who views everything through the single lens of what plays well to their own tiny minds. Starmer can get away with drivel about the Tories maxxing out the nation's credit card because it is a good "attack line". The truth? Well who gives a damn about that?

The dominance of that sort of journalism has another effect. Politicians' priority is to respond to 24-hour news, and news itself has a bias in favour of salient individual events and against slower-moving trends. This means that important emergent trends - those underlying forces shaping public opinion - are neglected: the rise of immaterial labour which has contributed to liberal attitudes among the young; the economic stagnation that's led to illiberal reaction among others; or the rise of an unpropertied graduate cohort that feels alienated from politics.

Such ignorance is of course reinforced by the media's class bias: although most journalists are poorly paid the most dominant media figures are not, and come from a privileged elite (pdf) which feels little need to understand society and economics.

Such insularity and incuriosity means that the political class has been systematically surprised by important developments such as Brexit, the popularity among the young of Corbynism or the sudden collapse in support for the Tories.

But there's something else. Labour and the Tories are scared to look at the economy for fear of what they might find. It's unlikely that productivity and real wages can be raised much by mere tweaks acceptable to the forces of conservatism and their gimps in the media. Instead, thinking people who are not especially leftist now realize that promoting growth requires changes in property rights: higher taxes on landlords; less power to nimbys to block new building; the break-up of big companies; less restrictive intellectual property law; and tax simplification. All of these measures would be opposed by powerful interest groups. And that's before we even consider the possibility that inequality and even capitalism itself might be barriers to growth.

Attacking benefits claimants or migrants is easy. Attacks upon the powerful - land-owners, financiers, rentiers and monopolists - are not.

Taking the easy line, of course, runs into the dilemma: either we see public services decline even further, or taxes have to increase still more. Either risks further enflaming hostility to the political class - a hostility which will not take an intelligent or enlightened form.

You might think there's a way out of this dilemma: politicians should show some intellect and courage. But then, to call for this in the absence of socioeconomic conditions that produce such people is itself another form of lazy moralizing.

* There are other pre-conditions. Marxists would point to an absence of class struggle, whilst the right might point to a society and culture of individual or community self-help. All agree that a smaller state is the product of social conditions, not merely a moral desideratum.

** There's stiff competition, from financial journalists who can't distinguish between expertise and vested interest or from music journalists who don't know an ostinato from off stump.

You're a Marxist!

Many of you are Marxists - even though you might not realize it.

To see what I mean, consider the following:

One reason for Britain’s high costs in construction may be the result of NIMBY power. We need therefore to reduce this power, perhaps by allowing home-owners to vote (pdf) on schemes that would enable higher-density building. We also need to reform the tax system by replacing business rates with a commercial land value tax, which would be payable by the landowner, not the business. We need also to rethink intellectual property laws as the present patent system restricts growth and innovation. We must break up inefficient monopolies such as Openreach to foster more competition. And we must enforce the end-to-end and right-to-exit principles in order to weaken big tech and so foster new tech start-ups and the development of the internet.

There's a common theme behind these proposals. It's a belief that we need to restructure property rights - reducing those of patent-holders, landlords and monopolists and big tech - because existing ones constrain growth. Which is just what Marx thought happened:

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

Those calling for these changes, however, don't think of themselves as Marxists: I've quoted Sam Dumitriu, Sam Bowman, Ben Southwood, Stian Westlake and Cory Doctorow*. But in claiming that property relations have become fetters on growth, they are thinking in terms consistent with Marx.

And not just on this point. They presume that their proposals are feasible. They believe therefore that when there is a mismatch between what economic growth requires and actually-existing property relations it is resolved by the latter changing rather than by us having to accept stagnation**. This is what G.A. Cohen, in his Karl Marx's Theory of History: A Defence, called the primacy thesis: "the nature of a set of production relations is explained by the level of development of the productive forces".

This is historical materialism. I therefore welcome our new Marxist colleagues.

In being Marxist in this sense without knowing it they have an illustrious predecessor - Mrs Thatcher. The defining feature of her government was the belief that production relations had become a fetter on growth, and that these had to (and could) change. Hence the cuts in income tax - increasing income-recipients' property rights - and reductions in trade union power, which shifted the balance of power within production relations in favour of capital.

Thatcher was a better Marxist (and more successful politician!) than most of her Labour critics. Except for a short-lived sign of intelligence under John McDonnell, the party has not had in recent years a well-worked theory of how property relations must change to facilitate growth. Marxists and Stian and colleagues know something that social democrats often miss - that fostering economic growth sometimes requires more than merely looser fiscal policy.

Of course, accepting one Marxian proposition does not make you a Marxist, any more than my accepting Burke or Hayek's points about bounded knowledge and rationality make me a Burkean or Hayekian***. You can accept Marx's historical materialism which rejecting some of his other ideas such as alienation and reification; ideology; the labour theory of value; tendency for the profit rate to fall (pdf); and the centrality of economic class. I suspect you'd be wrong to do so, however, but then I also suspect that many non-Marxists haven't so much considered these ideas and rejected them so much as they just haven't thought about them at all.

Equally, of course, we Marxists aren't so confident that the incompatibility between the development of the forces of production and current property relations can be solved merely by moderate tweaks to the latter. It's possible that low profit rates (and expected profits) are stifling innovation and investment; that the crisis-prone nature of capitalism is also doing so (we're still living with the legacy of 2008); and that capitalist hierarchies are also inefficient. If so, more radical changes are needed than Dumitriu, Bowman, Southwood and Westlake are calling for. My view on this is merely empirical: we should go down their road and then see if we need to go further.

The fact that so many people are historical materialists in a loose sense does not of course make the theory true. Many of us would resile from its teleological element - the idea that it must inevitably lead to socialism. Others have questioned Marx's idea that production relations will change to enable the forces of production to develop on the grounds that it invokes functional explanations which can sometimes be suspiciously like just-so stories****: Wright, Levine and Sober's Reconstructing Marxism is good on this debate. And yet others might question whether we need big organizing theories at all: what's wrong, they say, with small-scale granular ideas of history or economics?

These are open questions. My point here, though, is to emphasize something that's often forgotten. Marxism is not just a normative theory of what should happen and it's certainly not, as Tories want to claim, some sinister conspiracy of loons. Instead, it is part of the western intellectual tradition - a set of ideas (many derived from Marx's predecessor's) which can help organize our ideas today. Non-Marxists shouldn't be so squeamish about borrowing his ideas or acknowledging his influence upon them.

OK then: some people distinguish between Marxians (those influenced by Marx's ideas without subscribing to revolutionary socialism) and Marxists. If you like this distinction, the Sams and Stian are Marxian. But, hey, why spoil a good title?

* I suspect, however, that Cory Doctorow, who advocates breaking up big tech firms, wouldn't be so surprised or alarmed to be called Marxist.

** Yes, dear reader, I am eliding here the distinction between what should happen and what does happen. But then, I'm not sure Marx wasn't doing the same.

*** Perhaps the difference between me and some others is that I acknowledge the fact that I think within intellectual traditions and make no claim to originality.

**** It's possible that the process is a little like natural selection in biology. "Goodish" production relations do eventually get selected for because people with an interest in developing the productive forces sooner or later get the power to change them. Such a process is consistent with there being long periods of tension between the productive relations and productive forces, just as somewhat maladapted species can survive for a while.

On unequal sympathy

It's easy to see why so many people accuse the west of hypocrisy. Joe Biden's condemnation of the murder of Alexei Navalny whilst bombing Yemen, Syria and Iraq and condoning Israel's attacks on Gaza suggests that he - like many western politicians - regards some lives as more worthy than others.

This apparent inconsistency recalls Adam Smith's idea of sympathy. "The source of our fellow-feeling for the misery of others," he wrote, is our imagination; it arises "by changing places in fancy with the sufferer."

Our imagination, however, is limited. It is easier to put ourselves in the shoes of some people than others, and so our sympathy is spread unevenly.

One source of this difference is simply that it's easier to "change places in fancy" with people like ourselves. Politicians find it easier to imagine themselves in the place of another politician than in that of a young Muslim in a poor country - hence their greater sympathy for Navalny than for the victims of Israel's attacks or western bombing raids. This tendency isn't always malign: it can be a reason for class-consciousness.

This helps explain why opinion about the Israeli government's attack on Gaza is dividing Jews and Muslims even thousands of miles away: Jews are more able to sympathize with other Jews facing antisemitic attacks, whilst Muslims are more able to sympathize with Muslims. Yes, there might be antisemitism on one side and Islamophobia on the other, but even if there were not we would still see this division.

There's another source of unequal sympathy. It's what Thomas Schelling called the identifiable victim effect. The death of a known person, he wrote, invokes “anxiety and sentiment, guilt and awe, responsibility and religion" but, he added, "most of this awesomeness disappears when we deal with statistical death.” As Dan Ariely wrote, "once we have a face, a picture, and details about a person, we feel for them.” (The Upside of Irrationality, p 241).

We have scientific evidence for this. Deborah Small and George Loewenstein gave (pdf) people $10 and offered them the chance to pass some of it onto someone else. When they were told that other person would be drawn randomly from a list, they gave an average of $2.12. But when they were told that the person had already been chosen they gave an average of $3.42 - more than half as much again even though they knew nothing else about the person. Which shows how statistical people are morally discounted.

In similar experiments James Andreoni and Justin Rao found (pdf) that when potential recipients could speak to the potential donor, the donor gave an average of 24% of the money compared to only 15% when neither party spoke. "Communication dramatically influences altruistic behaviour, and appears to largely work by heightening empathy."

Stalin might not have actually said "if only one man dies of hunger, that is a tragedy. If millions die, that’s only statistics", but if he did he was uttering a truth. We knew Navalny as an identifiable person, and this alone generates sympathy for him. By contrast the 29,000+ killed in Gaza are statistical deaths. This is why opponents of Israel's attacks want to put names and faces to the victims - because it humanizes them and so generates sympathy.

This same thing helps explain why MPs who were so relaxed about deaths caused by austerity are so agitated by death threats (assuming this to be what they are) against their colleagues. Not only are their colleagues like them and therefore easy to sympathize with, but also they are identifiable victims, whereas the victims of austerity are mere statistics: this asymmetry is reinforced by the fact that our political system actually selects for psychopathic traits.

The victims of austerity, like those of the Israeli attacks, are poor and obscure. Which was Smith's point: the rich and powerful are more visible to us, he said, and better known and so we sympathize with them more:

When we consider the condition of the great, in those delusive colours in which the imagination is apt to paint it, it seems to be almost the abstract idea of a perfect and happy state. It is the very state which, in all our waking dreams and idle reveries, we had sketched out to ourselves as the final object of all our desires. We feel, therefore, a peculiar sympathy with the satisfaction of those who are in it...Every calamity that befals them, every injury that is done them, excites in the breast of the spectator ten times more compassion and resentment than he would have felt, had the same things happened to other men....All the innocent blood that was shed in the civil wars, provoked less indignation than the death of Charles I.

The corollary of this, he said, is that:

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

There is, therefore, a hierarchy of concern, with the rich, powerful and well-known at the top and the poor and obscure at the bottom. When John Donne wrote "Any man's death diminishes me Because I am involved in mankind" he might have added that some men's deaths diminish us more than others.

You might say all this is natural, even obvious. Maybe. But natural does not mean immutable. If there is an "expanding circle" of concern for others as Peter Singer has claimed, it's because we have learned to sympathize with more people than we did centuries ago. And our identities - and hence whom we sympathize with - vary with socioeconomic conditions and campaigning: much of bourgeois politics consists of an effort to reduce the salience of class by increasing that of anything else.

Herein lies a problem. D.D. Raphael writes that "Smith thinks of sympathy as the key to understanding moral judgment" (The Impartial Spectator, p 117). It is this that determines what and whom we condemn or condone. And yet sympathy arises from factors which, as he saw, are morally arbitrary: power and fame get more acclaim and sympathy than virtue or obscurity.

Which is why our moral judgments might seem absurd or hypocritical to outsiders.

To some extent, this is inevitable. All codes seem odd from the outside: try explaining to a non-fan why cricketers applaud a bowler aiming a 90mph projectile at a man's head but find it disgraceful if he scratches the ball.

Few people in politics, however, even try to step outside and question their own moral judgments. Moral claims often owes more to narcissistic self-righteousness than to detached thought. I've often criticized unthinking technocrats, but unthinking moralists are at least as detrimental to a healthy politics.