Stumbling and Mumbling

Capitalism and the state

Greg Smith and Dehenna Davison write:

For many in left behind parts of the country, the reality is that the private sector is stifled by a bloated public sector that is almost Soviet-sized in some areas of the North.

This seems to me to be a case of confusing correlation and causality. The reason why the public sector accounts for such a big share of economic activity in some areas is that the private sector in those places is so weak.

In fact, I’d suggest that – for the economy as a whole – a bigger state can work to the benefit of capitalism.

My story here is not about the several mechanisms through which the rich (pdf) disproportionately influence government policy, nor about crony capitalism, corporate welfare, bank bailouts and implicit subsidies, important as all these are.

Instead, let’s start in a less likely place - with a paper (pdf) written by Robert Merton in 1969. He showed that the proportion of wealth an investor should devote to risky assets rather than safe ones such as cash or bonds could be described by a simple equation. This says the proportion should be equal to the expected annual return on risky assets over safe ones, divided by the product of the variance of risky returns and a coefficient of risk aversion.

Let’s put some numbers into this. One bit of standard theory (p20 of this pdf) predicts that the expected risk premium should be only two percentage points or even less. The standard deviation of a well-diversified equity portfolio is around 15% giving us a variance of 0.0225. And a reasonable estimate of the coefficient of risk aversion is around three. This give us a solution to Merton’s equation of 0.02/(0.0225x3) = 0.296. Less than a third of one’s wealth should therefore be in risky assets.

For many people, the weighting of equities should be even less. If you could lose your job in a recession, equities are especially risky for you because they too would fall when your earnings disappear. And if you regard housing as an asset (say because you are planning on trading down) it too could fall in a recession, when shares fall. Both risks point to a low equity weight.

What’s more, for many people the opportunity cost of holding equities is not cash or bond yields but rather paying off the mortgage or credit card bills, the interest rate on which is higher than that on cash. Yulia Merkoulova and Chris Veld point out that, for these people, the personal equity risk premium is very low or even negative. That can justify holding no equities at all.

Some standard economics therefore predicts that demand for equities should be very low indeed. Which suggests that stock market capitalization should be paltry.

So why isn’t it?

Enter the welfare state. The wealth in Merton’s equation means your total wealth. Wealth is merely capitalized income*. And income includes pension income. The state pension is therefore a big part of your wealth. At current annuity rates, the basic state pension is worth over £170,000 for a 70-year-old. This means that, following the maths above, somebody with £100,000 of other wealth should have not £30,000 in equities but £80,000.

The state pension thus boosts demand for equities. In giving us a safe income, it allows us to take financial risks we otherwise would not.

Of course, this is not the only way the welfare state supports the stock market. It acts as an automatic stabilizer, helping to mitigate recessions; this is especially important as policy-makers cannot predict recessions and so cannot always use monetary and fiscal policy to stabilize the economy. Such stabilization policy reduces the cyclicality of corporate earnings and also our background risks such as the cyclicality of or jobs and small businesses. On both counts, it raises demand for equities.

We often talk of tax incidence, the fact that taxes aren’t necessarily paid by the people they directly fall upon. But there is also benefit incidence: welfare benefits don’t benefit only those who receive them, but also those who own the businesses where those benefits get spent.

In fact, there’s a third historic benefit of the welfare state. In buying off discontent, it has reduced the threat of revolution which has also supported shares.

All of this explains a big fact – that stock markets in developed economies did best whilst the role of government in the economy was expanding. The UK market made no capital gains on average during the free market era of the 19^th and early 20^th century, but soared in the post-war era.

One reason for the famous equity premium puzzle (pdf) of Mehra and Prescott is that the riskiness of equities fell in the latter part of the 20^th century and so share prices rose – as the threat of depression and political unrest fell. The larger welfare state is a big part of that story.

What Marx said in 1848 is therefore still valid: “the executive of the modern state is nothing but a committee for managing the common affairs of the whole bourgeoisie.” The state functions to support capitalism.

Of course, this is not to say that the current boundaries of the state are exactly those which are optimum for capitalism. Reasonable people can disagree on what these are: they might include a lot of social democracy.

Instead, my point is merely that there are many channels through which a big state can – and should! – sustain capitalism. Which is why few intelligent capitalists are minimal state purists, and perhaps why so many rightists have very comfortably abandoned the small state thinking of the 1980s.

* This is why wealth taxes should be redundant. If we’re measuring income properly (which the tax system does not), wealth taxes are just capitalised income taxes.

Cancel culture, & the death of classical liberalism

Most of us by now are bored with rightists complaining about cancel culture. But we shouldn’t be, because they show that the left has won an important battle about the meaning of liberty.

What I mean is that such complaints show that the right has abandoned a classical liberal conception of the term.

Let’s take Friedrich Hayek’s discussion of liberty. He defined this in negative terms, as the absence of coercion, where coercion is something which “occurs when one man’s actions are made to serve another man’s will, not for his own but for the other’s purpose.”

But what exactly is and is not coercion? Here’s Hayek:

Coercion should be carefully distinguished from the conditions or terms on which our fellow men are willing to render us specific services or benefits…in a free society these mutual services are voluntary, and each can determine to whom he wants to render services and on what terms…If a hostess will invite me to her parties only if I conform to certain standards of conduct and dress, or my neighbour converse with me only if I observe conventional manners, this is certainly not coercion. (The Constitution of Liberty, p135-6).

In this sense, “cancel culture” is not coercion and not therefore a violation of freedom. If hostesses withdraw your invitation to speak to a student union because you don’t conform to their standards you are not being coerced. Nor are you if the Guardian withdraws the benefit of its employment from you - because in free society that is its choice.

Of course, the student hostesses and Guardian might be unwise or silly to “cancel” you. But on Hayek’s view of freedom they are not depriving you of your liberty. It is stupid of the Daily Telegraph to deny their readers the benefit of my wit and brilliance by not employing me as a columnist, but in doing so, it is not denying me freedom in Hayek’s sense.

But isn’t such no-platforming an example of what Mill called the tyranny of the majority?

Not for Hayek. For him, Mill’s complaint “overstated the case for liberty”. Instead, for him social pressures could be a good thing:

There can be little question that these moral rules and conventions that possess less binding power than the law have an important role to perform and probably do as much to facilitate life in society as do the strict rules of law…Conventions and norms of social intercourse and individual conduct do not constitute a serious infringement of individual liberty but secure a certain minimum of uniformity of conduct that assists individual efforts more than it impedes them. (The Constitution of Liberty, p144-7)

This gives us a defence of “woke” social norms which forbid racism, homophobia or transphobia. Such norms “facilitate life in society” for people of colour, gays and trans folk by reducing the overt prejudice they used to suffer.

If the marketplace of ideas is to work properly, some thoughts must be cancelled. Just as a well-functioning market drives out shoddy goods, so it should also drive out bad ideas. “Cancel culture” is therefore an essential part of a market.

David Aaronovitch in the Times complains about self-censorship that arises from the fear “of losing our livelihoods, disadvantaging our families or of not succeeding”. On a Hayekian view, however, such extra-legal penalties are not coercion and not “a serious infringement of individual liberty”. They even serve a useful function: we want holocaust deniers, vax-opposers, racists and fruitloops to bite their tongue. If we didn’t self-censor, there would be a Hobbesian war of all against all. Do you really want to know my unself-censored opinions?

Again, you might object that our social norms are wrong. Fair enough. On a Hayekian reading, however, you cannot complain that they violate your liberty.

You might reply here, though, that Hayek’s conception of liberty was, as Martin Hagglund says in his superb This Life, merely “formal” and “utterly impoverished” as it is insufficient to provide substantive freedom.

Precisely.

Hayek had a reason for defining freedom this way. He wanted to show that coercion was something imposed by the state whilst the market and private sector were (except in circumstances he considered exceptional) “a very Eden of the innate rights of man*.” His idea of freedom was a way of promoting the market and a small state.

Those who complain about cancel culture being a threat to freedom, however, reject this project. If a few dippy students can violate your rights, mightn’t other private sector actors do so too in other ways? If employers limit your freedom by insisting you have particular political beliefs, don’t they also do so by insisting upon erratic or unsociable hours or low pay or bad working conditions? And if denying you a job for political reasons violates your freedom, isn’t your freedom also violated if the government, for political reasons, creates unemployment?

Once you think that “cancel culture” is anti-freedom, you are conceding the left’s claims that the private sector and employment relations are sources of unfreedom and that people should have not just political rights but substantive economic ones too, such as the right to well-paid work without oppressive employers.

We have, therefore, a lovely paradox – that classical liberalism in the Hayekian sense has been defeated not by the left but by the right itself.

So why did the right make this move? One possibility is that Hayek’s philosophy was only ever a cover for the pursuit of their material interests. In the 70s and 80s they regarded a smaller state and market forces as a means of asserting capital’s power over workers. Today, though, their concern is with protecting another type of inequality – the ability of old white men to spout off without challenge from hitherto marginalized people such as ethnic minorities, youngsters, or LGBTQI people. Conservatives’ main priority, as Corey Robin has argued, is to defend private sector hierarchies, and philosophy is subordinate to this end.

* That line is of course Marx’s.

The politics of abstraction

“Migrants will be turned back to France” cheers the Daily Express – alongside a picture celebrating Emma Raducanu who is herself a migrant, the Canadian-born daughter of Chinese and Romanian parents.

Of course, an Express front page should normally be beneath our notice. This one, however, is significant as I suspect it embodies a widespread phenomenon in mainstream politics – the prioritizing of abstractions over real people.

The Express’s doublethink has happened because, for much of the right, “migrants” are not real people such as Ms Raducanu, or the parents of most of the England team which did so well in the summer’s Euros, or the perfectly nice people you meet at work and in shops. They are instead an abstraction, a phantom invoking a vague sense of the nation (another abstraction) losing control of its borders. This is why hostility to immigration has often been stronger in areas with fewer migrants rather than in cities with many of them. And it is why Priti Patel is threatening to turn back boats carrying migrants. So what if they drown? It’s not as if they are real people.

It’s not just in attitudes to immigration that we see this abstraction. The same has happened with Brexit. This was never about improving the living standards of real people but rather an appeal to abstractions such as national sovereignty and taking back control*.

This isn’t to say that the prioritizing of abstraction over ground truth is confined to the right. It’s not. In all its reports on the state of the public finances the BBC has not, as far as I know, ever interviewed a real person who has described convincingly how high government borrowing has worsened their own personal life. Fretting about the public finances is elevating an abstraction over the real lives of real people as it means devaluing the truth that austerity probably caused thousands of deaths.

Centrists are guilty of the same thing in another way. The ground truth is that the financial crisis taught us that capitalism is more unstable and less capable of generating growth in real wages than New Labour believed. This should have led to a rethinking of how to best achieve stability and rising living standards. But it didn’t. All the political centre has to offer is abstract waffle about electability. Hence (for example) Sir Keir Starmer’s inability to answer the simple question of how to pay for increased public spending on health and social care.

Older readers will detect a puzzle here. Back in the 90s New Labour spoke a lot about evidence-based policy-making. A generation later, however, what we have is abstraction-based policy-making. The story of how one gave way to the other needs to be told – and it will be one with no heroes but many villains.

* You might object here that in causing shortages of lorry drivers and hospitality workers Brexit is driving up wages. But this is true only of a minority of workers. And the price rises that are the counterpart of their pay rises mean cuts in real incomes for others – which is inevitable if higher pay isn’t accompanied by higher productivity. Sure enough, the ONS reports that real wages have actually fallen so far this year.

What's the mechanism?

The late great Andrew Glyn always asked: “what’s the mechanism?” The west’s abject failure in Afghanistan highlights both the importance of this question and the fact that too many policy-makers and influencers fail to give it sufficient attention.

President Biden says “we did not go to Afghanistan to nation-build.” Which poses Andrew’s question: what, then, was the mechanism through which the Taliban would be defeated? We know for certain that it was not the ones actually operating: western military strategy as it was implemented failed.  

Exactly why this was the case is another matter, and one not relevant for my purpose*. Instead, my point is that the failure to satisfactorily ask and answer Andrew’s question was not confined to those supporting the military adventure in Afghanistan (or Iraq, or Libya). In fact, the failure is widespread.

For example, Anna Soubry still defends Tory-Lib Dem fiscal austerity, even though it caused (at the margin) the Brexit she detests. She is, even now, in denial of the mechanism that led to Brexit.

And then there are those centrists and Tories who now deplore Johnson’s corruption and incompetence but who failed to prevent it in 2019 by the only means possible – supporting Labour. In the 2019 election supporting Corbyn was the only means of preventing a Johnson premiership. Not doing so was to fail to ask: what’s the mechanism?

Much of the Labour right always fails to ask: through what mechanism can Labour win power if not (as a necessary but not sufficient condition) having a mass party to combat the effect of the mass media?

This failure, though, is not confined to airhead MPs and columnists. Even Nobel laureates are guilty of it. In Deaths of Despair Angus Deaton and Anne Case, having documented how American capitalism has been a force for mass social murder, write:

Capitalism needs to be better monitored and regulated.

They omit to ask: what’s the mechanism whereby this will be accomplished? There are many obstacles to it – one of which they themselves document: the fortunes spent on lobbying by big business. Humane, well-regulated capitalism requires a particular conjunction of class forces – one in which capitalists perceive that what’s good for workers is also good for them, and in which there is countervailing power (such as strong trades unions) to the tendency for capitalism to degenerate into cronyism. This conjunction existed in the post-war decades, but no longer does so. In its absence, the better-regulated capitalism urged by Deaton is as fantastically utopian as he believes socialism to be.

What we have here, then, is a widespread error. In not asking “what’s the mechanism?” we neglect the crucial importance of ground truth and implementation – the conditions of policy success or failure. Without these, however, policy-making is mere wishful thinking. This error of course is fuelled by a media bias: windbag opinion-mongers and Westminster gossips distract policy-makers and voters from facts on the ground, mechanisms and levers of power.

Which gives us a descent into crude identity politics. If you are not asking “what is the mechanism by which we defeat the Taliban, or Johnson, or Brexit?” you are left merely asserting your moral superiority without doing the hard work of thinking, discovering ground truth and – yes - making compromises. Which leaves you with little more than narcissism.

* I know nothing at all about foreign affairs, which it seems puts me on a par with the State Department and Foreign Office.

Ambition in capitalist society

Ambition, writes Lucy Kellaway, is both necessary and corrosive. She omits an important aspect here, which adds to its corrosiveness – class.

Class influences the level of ambition through two channels. One is that it distorts your awareness of opportunity. In Michael Apted’s superb TV series Up, the privately-educated Andrew knew (16'21" in) at the age of seven that he would go to Cambridge and become a lawyer. For the rest of us, our path to even modest success is not so pre-determined. I never thought about Oxford University until a teacher told me I could get in, and I never met anyone with a degree who wasn’t a teacher until I was in my 20s. If you’re not aware of the possibilities, you are less likely to be ambitious.

Another mechanism is that class sets the reference level of our income. When I realized that I would not have to worry about the leccy bill or becoming homeless, my ambition drained away. I was once one of those men brilliantly described by Adam Smith – a “poor man's son, whom heaven in its anger has visited with ambition”. But I was lucky enough to have learned before my deathbed that “wealth and greatness are mere trinkets of frivolous utility.” If you’ve nobody you want to impress, money soon loses its point.

By contrast, those from posher backgrounds can feel failures if they don’t emulate their father’s success. For many of them, wealth and greatness are not of frivolous utility but are instead the benchmarks by which they compare themselves to their parents and contemporaries.

Both these mechanisms help explain the fact that people who have experienced poverty as children earn less as adults even controlling for education.

But they also tell us something else. What seems to be ambition is in fact fear – whether it be the fear of poverty or the fear of falling short of parental expectations.

In this context, Lucy’s advice that we must sometimes slough off ambition is a counsel of perfection. It’s fine for those of us who have paid off the mortgage and so no longer fear homelessness. Younger people facing high rents or mortgage payments cannot afford a lack of ambition, even if they are consumed by anger when it is thwarted.

Again, class matters. It limits your options.

Here, though, we must ask: ambitious for what? Alasdair MacIntyre distinguished between goods of excellence such as mastery of a craft and goods of effectiveness such as wealth and power. Sometimes, pursuit of one brings the other: achieving the good of excellence in football will bring with it wealth, fame and at least some influence: Marcus Rashford’s campaign against child poverty would have been less successful if he’d played for Stockport County.

In other cases, however, the two conflict. I doubt that the country’s most excellent journalists are the best-paid. Being an excellent academic won’t necessarily bring you the big money that comes from being university vice-chancellor. Prime Ministers aren’t always drawn from the most excellent MPs or ministers. And bosses aren’t necessarily the people who were best at the jobs their underlings do.

One component of that slippery term “neoliberalism” is, I suspect, the valorization of wealth, power and hierarchy over goods of excellence such as professional standards and craft skills.

Ambition for the goods of effectiveness can, though, be corrosive not just for individuals but for the economy. The man who is hungry for power and income will seek advancement even where he is not equipped for the job. And because employers (and voters) don’t always know (pdf) what they are doing they will sometimes hire that man. Hence the Dilbert principle, of which Gavin Williamson is perhaps only the most prominent of many examples.

Here, incentives matter. Where there are disproportionate rewards in terms of income, power and status for advancement, people will seek promotion even when they are unsuited for it. You might prefer to be a first-rate coder than a third rate boss, but if being that boss means a big pay rise you will go for it. And so talent will be misallocated. What we have here therefore is yet another way (of many) in which big inequalities are bad for the economy.

To see my point, imagine an egalitarian socialistic society in which inequalities of power and income are small; there is less social distance between rich and poor families; and whose culture celebrates the goods of excellence in professional and craft work more than those of effectiveness: it would be a MacIntyrean or Walzerian-type utopia.

In this society, there’d be less incentive to be Dilberts like Gavin Williamson because you could earn a decent living as a first-rate coder (or third-rate fireplace salesman) and so have less need to “get on”. What John Stuart Mill called “the trampling, crushing, elbowing, and treading on each other’s heels” would diminish. And those who did “get on” would find their new roles, and the people they surround themselves with, less alien. So their ambition would not be the curse Smith thought it was. In these ways ambition would be less damaging to individuals and society.

You might think it hard to imagine such an environment. But then, as someone said, it is easier to imagine the end of the world than the end of capitalism.

Embracing Blair's legacy

Sir Keir Starmer wants Labour to “embrace Tony Blair’s political legacy.” Which poses the question: what is that legacy?

The usual response is merely an exchange of tribal grunts: “Iraq” versus “won three elections”. The truth is more interesting.

Blair’s (and Brown’s) great genius was to see that social democracy had to adapt to new times. So, for example, his expansion of universities was a response to the increased wage inequality between graduates and non-graduates; tax credits were an attempt to tackle the prevalence of low pay caused in part by the weakness of trades unions and globalization; fiscal rules were a reaction to high real interest rates; and the granting of independence to the Bank of England represented the awareness that policy uncertainty had contributed to economic instability.

This was serious, sensible economics. And it contributed to some genuine achievements. New Labour cut child and pensioner poverty – it’s easy to forget that the latter was a big problem in the 90s – improved the NHS, and the expansion of universities helped to create a large progressive-liberal constituency.

But he also had grave faults. The biggest of these, I suspect, was his managerialism, his faith in the ability of bosses and governments to impose order from the top down. It was this that underpinned the target culture that demoralized public sector workers; the excessive deference to bosses and tolerance of the increased power and wealth of the 1%; the clampdown on migrants and benefit recipients; and the illiberalism that spawned thousands of new criminal offences.

I would argue that the Iraq war was a consequence of this. It arose from what James C. Scott has called “high modernist ideology” - too much confidence in the possibility of centralized knowledge (and the wisdom of leaders) which led to an under-valuing of ground truth.

Which brings me to why Starmer is dead right. Labour must embrace Blair’s legacy, in the sense that it must do what he did and adapt to new conditions. For example:

 - In contrast to the 90s, real interest rates are now negative. This means tight fiscal policy is neither necessary nor – given the zero lower bound – desirable.

 - In the 90s, Labour, like most economists, thought that a stable macroeconomic policy framework was sufficient to achieve stable economic growth. The financial crisis and subsequent productivity stagnation has shown this to be too optimistic. To promote growth, government must be more activist.

 - Peter Mandelson was famously “intensely relaxed” about the very rich getting richer – a view consonant with Blair and Brown’s deference to business leaders. This can no longer be the case. It is very possible that the wealth- and power-grab of the top 1% is a cause of our poor economic performance.

 - New Labour thought that education was the route to prosperity. Given the degradation of erstwhile “middle class” jobs and the unaffordability of housing, this is now doubtful.

 - We have learned that there are limits what bosses and top-down management can do. New Labour’s excessive faith in these contributed to stagnant (pdf) public sector productivity and the financial crisis: bosses, it turned out, could stop banks going bust.  

My personal view is that answers to these issues should entail more democratisation of economic life. But that's not my main point. It is instead that we should embrace Blair’s legacy by addressing the question he asked and answered: “what does a modern social democracy look like?” He rejected the idea that Labour could live in the world as it was twenty years previously. We should follow him in that rejection. In this sense, Blair had a wisdom which is wholly missing in his epigones.

The social mobility con

Strange as it might seem, we owe some thanks to Digby Jones – because he has reminded us that social mobility is a con.

Over the weekend he tweeted:

Enough! I can’t stand it anymore! Alex Scott spoils a good presentational job on the BBC Olympics Team with her very noticeable inability to pronounce her ‘g’s at the end of a word. Competitors are NOT taking part, Alex, in the fencin, rowin, boxin, kayakin, weightliftin & swimmin.

Now, Ms Scott epitomizes the meritocratic ideal of someone coming from a poor background and succeeding through personal ability. She is a child of Thatcher:

 it doesn't matter what your background is. I believe in merit, I belong to meritocracy, and I don't care two hoots what your background is. What I am concerned with is whatever your background, you have a chance to climb to the top.

Jones by contrast is telling us that background does matter. However brilliant a working class person might be, he will find a way of hating them.

Of course, not all of those in the establishment blurt out their hatred as crassly as Jones did. Just as many racists avoid using the N-word, so class haters are rarely so explicit. Nevertheless, his attitude is widespread. Here for example is Sajid Javid: 

He describes going for an early interview at Rothschild and being confronted by a row of white men in pin-striped suits who asked him what his father did and where he went to school. “The British merchant banks in those days would always go to the old school tie. If you didn’t go to the right country parties and spend the weekends in the right place you had got no connection,” he says. “I thought even if they offer me a job I’m never going to fit in.” 

Everybody of obviously working class origin has experienced a degree of froideur in our encounters with posher colleagues, clients or bosses. With better men than Jones – and you can carve a better man than him from a turd – this will be subtle: those Rothschilds men were no doubt impeccably charming. But there is always a sense of being othered, a mutual awareness of difference – which, if you point it out, invites the accusation of chippiness. There is always, always, an undertow.

The best relationship the upwardly mobile can expect with posher colleagues is that of a trusted NCO with a good commissioned officer: it might be friendly and effective, but both sides always know there’s a difference.

One effect of all this is to depress social mobility. Sure, some people like Javid and myself can find well-paid jobs outside Rothschilds. But there are fewer places for us than there are for the posh boy.

And this can happen without overt class hatred of the sort displayed by Jones. It’s wholly reasonable for employers to want people they can trust or who look like they are safer bets. Like hires like – which diminishes the chances of people from working class backgrounds, or women, or ethnic minorities, or the disabled.

And those who overcome these barriers face another problem. We can never fully transcend the class of our birth. People from working-class backgrounds earn less than those from posh ones even when they have the same levels of experience and education. That’s because networks operate to their disadvantage.

Such networks diminish social opportunities as well as career ones. Men from poor homes are less likely to be married in later life (pdf), even controlling for their own incomes. This isolation, allied to the subtle stresses of living a life in unfamiliar surroundings is bad for our heath. As Michael Marmot has written:

Where you come from does matter for your health…Family background, measured as parents’ education and father’s social class, are related to risk of heart disease.

We know that immigrants tend to suffer from worse mental health than others. Perhaps migration across class borders has a similar effect.

All of which makes me think that Adam Smith had a point:

The poor man's son, whom heaven in its anger has visited with ambition…labours night and day to acquire talents superior to all his competitors. He endeavours next to bring those talents into public view, and with equal assiduity solicits every opportunity of employment. For this purpose he makes his court to all mankind; he serves those whom he hates, and is obsequious to those whom he despises. Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquillity that is at all times in his power, and which, if in the extremity of old age he should at last attain to it, he will find to be in no respect preferable to that humble security and contentment which he had abandoned for it. It is then, in the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments which he imagines he has met with from the injustice of his enemies, or from the perfidy and ingratitude of his friends, that he begins at last to find that wealth and greatness are mere trinkets of frivolous utility.

The point of all this is not to say that young working class people should not be ambitious. Instead, it is to suggest that social mobility is no substitute for genuine equality.

Cummings on complexity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Honesty vs electability

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

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

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

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

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

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

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

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

Here are some examples of what I mean:

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

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

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

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

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

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

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

Electability: voters want politicians who are tough on migrants.

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

Electability: we need a strong leader.

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

Electability: “Get Brexit Done”.

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

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

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

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

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

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

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

On professional deformation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Not) reading Marx

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dehistoricizing identity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Inflation, markets & the right

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Symptoms of stagnation

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

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

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

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

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

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

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

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

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

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

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

The history of each of the large Western democracies – America, Britain, France and Germany – is replete with instances in which [a] turn away from openness and tolerance, and often the weakening of democratic political institutions, followed in the wake of economic stagnation that diminished people’s confidence in a better future. (The Moral Consequences of Economic Growth, p8-9)

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

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

All of which vindicates our old friend:

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

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

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

The right's intellectual decline

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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