Stumbling and Mumbling

Stagnation - get used to it

The debate about how to raise UK economic growth begs a question: is rapid growth possible even with the best feasible policies?

My chart shows growth in real GDP per head over 30-year periods since 1750. Trend growth of much above 1% per year is unusual, seen mostly only in the post-1945 period. From a long-run perspective, therefore, the stagnation of recent years are a reversion to the norm.

Why was the post-1945 period so unusual?

On one view, it was because WWII created a large backlog of civilian investment opportunities as well as a need to repair war-damaged assets, not least of them housing. This implies that growth in that period was indeed one-off, something that cannot be repeated.

On another view, though, it was because post-war insitutions facilitated growth. The credible promise to maintain full employment gave companies the confidence to invest because they knew that demand would be strong enough to justify it. Public ownership and high income tax rates reduced incentives and opportunties for rent-seeking. And strong unions and rising wages incentivized companies to invest in labour-saving technologies and productivity improvements.

Personally, I find this debate of historical rather than practical interest. The political obstacles to recreating post-war institutions are now so huge that doing so is a mere fantasy.

It's not just social democracy that faces strong opposition, though. So too do centrist attempts to raise growth. Incumbent companies and monopolists don't want increased competition; lawyers and accountants don't want tax simplification; landlords and financiers don't want taxes to shift from incomes to capital or land; Brexiteers don't want us to rejoin the single market; and nimbys don't want laxer planning controls. For that matter, many voters and workers also don't want the disruption and uncertainty that must accompany creative destruction. A stagnant economy in which zombie firms preserve jobs and in which we face less threat from foreign competition or new technology is perfectly tolerable for many; they spent the 2010s consistently voting for it.

Not that there's anything unusual in such opposition. Joel Mokyr has written (pdf):

Technological progress in a given society is by and large a temporary and vulnerable process, with many powerful enemies whose vested interest in the status quo or aversion to change of any kind continuously threaten it. The net result is that changes in technology, the mainspring of economic progress, have been rare and that stasis or change at very slow rates has been the rule rather than the exception.

Barriers to rapid growth, however, are not only political. There are also economic ones.

Often in thinking of long-term growth it helps to distinguish between the level of potential output and the speed at which an economy approaches it. There are barriers to both.

One is simply that even big investments yield only moderate increases in output. Conventional production functions put the elasticity of output with respect to capital at around 0.3, meaning a 10% rise in the capital stock yields a 3% rise in potential output. With the ONS estimating that the UK's net capital stock excluding housing is £3.5 trillion (yes, I know), this implies we need £350bn of extra investment to get just a 3% rise in potential GDP. To get that in a year requires more than doubling business investment*.

Why do we get so little bang from our buck from investment? One answer is at the end of my road. The canal there has been unused since the 1840s when traffic switched to the newly opened railway. Which is how investment works: it renders earlier projects useless. When Lidl invests in a new store it reduces Tesco's sales; Amazon's expansion has cut the sales of bricks and mortar retailers; investment in wind turbines is meant to displace gas-fired power stations. And so on. Investment doesn't add much to output but rather shifts production from one capital to another.

This is not the only reason, though. The railways and internet were both huge transformative technologies. Both, however, fuelled investments in projects that simply failed. Lots of new capital; not so much extra output. And of course, it's not just shiny new technologies that have this problem. Any high street sees shops open and close within a few months.

A lot of capital spending is wasted. This is partly because investment is driven by sentiment rather than a rational view of a project's prospects. It's because the future is unknowable. The "dark forces of time and ignorance" mean that some investments will always fail.

Even potentially productive investments, however, don't yield big immediate rises in aggregate output. 19th century factories tell us one reason why. For years, electrification of these did little to raise productivity. Until someone realized that electricity meant that machines didn't have to be clustered close to a driveshaft but could instead be arranged linearly - which allowed for more efficient workflow and the development of the production line. To be really useful, technological change often requires organizational change. And that can take many years.

Simple maths tells us another reason. New dynamic industries are small. Even if they grow very quickly, therefore, they'll add little to overall GDP. If an industry accounts for 1% of GDP and trebles in size over ten years it will add only 0.2 percentage points per year to GDP growth. This is one reason why the early years of the industrial revolution did not greatly raise GDP; there just weren't that many steam engines.

There's another reason for that low growth, though. The UK saw financial crises in 1772, 1796, 1810, 1815, 1825, 1837, 1847, 1857, 1866 and 1890. Such panics retarded capital spending by creating uncertainty and restricting credit. It's no accident that the period of history to have seen the fastest growth - the 1940s to early 70s - was also one which did not see a crisis.

Crises, though, aren't the only reason for low investment. Another is that, except in periods of irrational exuberance, companies hold back on capital spending either in the hope of benefitting from future better, cheaper technology or from fear that if they invest today their rivals will use those technologies to undercut them. William Nordhaus famously showed that producers capture "only a minuscule fraction of the social returns from technological advances". That companies have now learned this is, I suspect, one reason for our recent low growth.

There's a further problem. At times of near-full employment, extra production of capital goods requires extra workers - workers who must move from other industries. But people are slow to move. As Abhijit Banerjee and Esther Duflo say in Good Economics for Hard Times, economies are "sticky." 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. All of which delays the movement necessary for growth.

It doesn't just retard investment, however. It also slows down productivity growth.

To see the problem here, consider how much your personal productivity has risen in the last few years? I don't mean in the sense of being able to do the job more comfortably with less stress, but in the sense of doing more or the same in fewer paid hours. If you've been in your job for more than say ten years, the answer is: not much. Ater a while, the productivity gains from learning are small. We've two pieces of evidence for this. One comes from the effect of experience and tenure upon wages; this is generally small (pdf) for older people staying in the same job. The other comes from Jonathan Haskell and colleagues, who have shown that most productivity (pdf) gains don't come from companies simply upping their game.

Instead, they come from inefficient places shutting and more efficient ones opening or expanding - creative destruction. But sticky economies and low labour mobility retard this process too.

We shouldn't expect AI to change any of this. If it is anything like every other technical innovation in history it will destroy some jobs and create others (and if it doesn't, that'll be a failure of policy). But this requires labour mobility, which is slow. It might also, as with electricity in factories, require organizational changes of a sort we cannot now foresee. Companies will be slow to make these.

And there's a downside to AI: it can increase the efficiency not just of productive workers but also of the enemies of genuine productivity. It will enable nimbys and their lawyers to write more letters to planning committees; it'll allow patent trolls to become even more litigious; and in facilitating more cybercrime it'll divert even more of our brightest people away from production towards cyber security. And even if it does raise productivity in the short-term, it could cut it in the longer-term. In writing essays for students, AI is depriving people of useful future skills. And in replacing some graduate trainees AI raises productivity today, but where will the experienced accountants and lawyers come from in 20 years' time?**

As if all this were not enough, there's one other problem. Every significant classical economist - Smith, Ricardo, Mill, Marx - thought that even the meagre (capitalist) growth of their time would eventually cease as diminishing returns won the race against technical progress. They would not be surprised that we are now talking about stagnation; what would surprise them is just that it's taken so long.

The problem here is not simply that returns on capital have fallen, thereby diminishing the motive and means for investment - though this does seem to have happened. It's also that we've plucked the long-hanging fruit, the easiest ideas. As Robert Gordon pointed out, the really great, life-changing innovations are long behind us. And the efficiency of R&D spending is declining around the world.

Now, none of this is to say we shouldn't try to increase productivity. We certainly should, but it's unlikely that small efforts will triumph in the face of big obstables; a big wall needs a big sledgehammer. It'd nice to have a government that at least tried to prove me wrong. Nor, of course, is it to deny the possibility of a short-term cyclical upswing.

What it does mean is that we must think about a plan B: what if we cannot grow our way out of the fiscal corner described so well by Giles?

This is a dispiriting thought. John Stuart Mill thought that the stationary state would be "a very considerable improvement on our present condition" which would give us "as much scope as ever for all kinds of mental culture, and moral and social progress". Recent experience, however, suggests he was wrong; low growth breeds not social progress but its opposite - intolerance and racism. Which poses the question: how might we avoid stagnation having this effect?

* Perhaps a lot more. Much of this investment is replacing worn-out assets rather than pure additions to the capital stock.

** My concern here is mitigated by the fact that a lot of what these people do is not to increase aggregate output but to cream off rents.

Some leftist economic policies

The prospect of a new leftist party poses the question: what should its economic policies be?

I'll tell you what they shouldn't be: fiscal expansion. The macroeconomic policy stance must be a matter of fact, not ideology. And the fact is that we are close to the point at which increased aggregate demand would add to inflation expectations. That would mean higher interest rates, which in turn would depress much-needed housebuilding and other forms of capital spending. Rachel Reeves might be wrong to talk about fiscal rules but she is dead right to want fiscal restraint.

Here, every leftist is screaming: "we can have fiscal restraint and greater equality: tax the rich!"

As macroeconomic policy, however, this is questionable.

Remember the core truth of modern monetary theory - that the government does not need taxes to raise money; it can just print the stuff. Instead, the government needs taxes to reduce inflation. But taxing the mega-rich will only do this if it causes them to reduce their consumer spending or their contributions to Oxbridge college building. If instead they reduce their savings and their planned bequests there'll be no reduction in inflationary pressures.

To put this another way, the government needs more real resources: more care workers, nurses, solar panel installers and so on. These cannot come from the dole queues: they're not long enough for that. Instead, they must come from existing workers changing jobs. And this requires cuts in either private or public spending. Taxing the mega-rich isn't guaranteed to achieve this to a great extent - and it's surely unlikely that £1 of extra tax revenue will mean anything near £1 less spending.

This isn't to say we shouldn't tax the rich more. FAFO, especially as macroeconomic policy isnt everything: justice also matters.

What it does mean, though, is that leftist economic policy must be much more than taxing the rich. Here are a few possibilities.

"Don't do stupid shit." Barack Obama's motto for foreign policy should also apply to UK economic policy. It requires that we not strangle business with post-Brexit red tape and instead rejoin the single market. It means we shouldn't cripple some of our most successful export earners by limiting student visas or taxing them. It also means we shouldn't allow nimbys to stifle the night-time economy or block construction projects. And it means there's little case for higher military spending: in a resource-constrained economy, there are better uses for government money than boosting BAe Systems share price.

Economic democracy. It's no accident that our two decades of economic stagnation have coincided with high inequality, because there are many ways in which inequality - perhaps more of power than of incomes - depress productivity. As As Joe Guinan and Martin O’Neill say:

The institutional arrangements at the heart of today’s British capitalism...together form a powerful engine for the extraction of value and its distribution upwards. It is this basic institutional design that drives the outcomes we are seeing in terms of crumbling public infrastructure, social atomisation, environmental degradation, and a widespread sense of popular disempowerment.

Economic democracy is a way of fighting this. The precise form it will take will vary from organization to organization, but will probably include democratic oversight of industry regulators and more user say in public services. Also important will be worker cooperatives because as Virginie Pérotin says:

Worker cooperatives are more productive than conventional businesses, with staff working “better and smarter” and production organised more efficiently.

Reform outsourcing. In some cases - such as children's homes, fostering services and adult social care and probation services - this has delivered bad performance. The alternative here isn't simply to bring all services in-house. One possibility would be to ditch the ideology behind outsourcing and rely on proper transactions cost economics, which tells us that when performance is hard to measure, direct oversight beats contracting. Another possibility is to use government and local authority procurement as a means of promoting coops.

Ameliorate the misallocation of labour. Any leftist government needs to increase jobs in public services, housebuilding and in greening the economy. But where will the workers come from?

The macroeconomic answer is to raise taxes, thus destroying jobs supplying consumer goods and services, compelling workers to move elsewhere. What this fails to address, however, is that market and government failure have created lots of wasteful labour. An excessively complicated tax system has bloated the legal and accountancy industries. Inadequate financial regulation and tax breaks have inflated a sector parts of which are "socially useless", to use Adair Turner's (pdf) phrase. Agency failures have created "bullshit jobs" and guard labour. Asymmetric information gives us fund managers “the vast majority” of whom are “genuinely unskilled”. And unpriced externalities support jobs which produce not just environmental pollution but also intellectual and risk pollution.

How to shrink these industries is a question almost entirely ignored by mainstream politics. It shouldn't be.

Tax reform and simplification. A radical option here is to increase taxes on land (pdf), perhaps by replacing council tax and business rates with a land value tax; billionaires might be able to leave the country, but they can't take Essex with them. Other possibilities would be to equalize income and capital gains tax rates; unify income tax and national insurance contributions; or remove the interest deduction for corporation tax. And this is not to mention countless lower-revenue options that would cut red tape. The Mirrlees Review would be a good basis for starting to think about tax reform.

Stronger competition policy. Competition drives productivity; most efficiency gains come not from incumbent companies upping their game but from inefficient firms leaving (pdf) industries and newer ones entering. Government must facilitate this process by suppressing monopolies and encouraging new entrants. This requires more than aggressive competition policy. It might need a state investment bank to help finance start-ups. And it might also require a relaxation of intellectual property protections. Tech companies have already unilaterally abolished such protections, so they can hardly complain if a government were to give them their own medicine.

A maximum wage. This is often advocated on the principle of reducing inequality. But it might also create better incentives. If it is set as a multiple of an organization's lowest or median wage, it would incentivize bosses to increase these, thus sharpening incentives to raise productivity rather than merely increase exploitation. It might also, at the margin, disincentivize bonus culture (pdf) or office politics and so facilitate motivation crowding-in, whereby professional pride displaces chasing every pound. And if it applies to only some organizations, such as those in receipt of government money or companies in which bosses have only small ownership stakes, it would encourage business start-ups. It would tell bosses: "if you want big money, you've got to be an entrepreneur not a bureaucrat."

Reform utilities. An obvious possibility here is simply nationalization. Another would be to follow Dieter Helm's suggestion and replace them with a franchise model. A third would be to stop utilities buying regulators by placing them under more democratic control.

A sovereign wealth fund. In their excellent Angrynomics, Mark Blyth and Eric Lonergan advocate this as, in effect, a trust fund for the worst-off from which young people in the future can draw to buy housing or education. Another case for one lies in macroeconomic stabilization; to the extent that sterling tends to fall in recessions, the value of the wealth fund's overseas assets would tend to rise, which could be used to support economic activity in a downturn. Yet another purpose was suggested by Aneurin Bevan: public ownership of corporate assets gives a flow of dividends which could be used to fund public services.

Benefit reform. Yes, we should consider a universal basic income. Even if we don't go that far, however, we could move in the direction by making benefits simpler and less difficult to get (try applying for PIP!) or by letting people keep their benefits for a while when they find work, thus sharpening incentives to do so.

Universal basic services. This idea has been proposed by Jonathan Portes, Howard Reed and Andrew Percy and was discussed (pdf) at the time by the Labour party. It consists in expanding the welfare state to include free busses, council housing, phone, broadband, TV licences and some food. This would raise living standards for the worst-off without, they say, much reducing work incentives to the extent that the services are not withdrawn as people move into jobs.

All of this is of course only the merest outline, and isn't meant to be exhaustive. I've tried to keep it brief not merely because I don't want to test the reader's patience too much (this isn't Substack or a podcast) but because, to paraphrase Marx, there's little point writing recipes when you don't have a kitchen. A big priority for the left isn't so much to come up with ideas but to create a space where good ideas can be discussed intelligently. This requires the repairing of the public realm and the removal of the influence of liars, billionaires, racists, the lobby correspondent mindset, and culture war charlatans.

You will all have doubts about these proposals. But there's one issue that needs more attention than it gets.

The fate of many Sure Start centres shows the problem. Tories closed many of these even though IFS evidence shows that the fiscal benefits of them exceeded the costs. Which tells us that good evidence-based policies cannot survive a philistine government. This is an especial problem for nationalization; nationalized utilities merely give a future right-wing government stuff to sell off cheaply to their cronies.

The question, then, is how to future-proof policies. This is one case for universal benefits. It's also a case for greater devolution, so that national government can't wreck everything. And it's also a case for highly localized action - be it energy coops, credit unions, repair cafes, communal gardens and so on. But all this is another story.

Not debating immigration

How should we debate immigration? Here's my advice: don't.

Debates don't work, at least not as they should. They don't favour the truth, but plausible liars and for those who can best appeal to prejudice and cognitive bias. Jonathan Portes, who is doing great work in trying to bring facts and rationality to the issue, describes his opponents' strategy: "Flood the zone with a mixture of lies, half-truths, misleading claims and statistics taken out of context." Against this, rational discussion is bringing a knife to a gunfight.

We needn't look far for a parallel here. It's now obvious that Brexit was a bad idea: only 31% of voters say it was the right decision. But have Brexiteers retired in shame? No. Dan Hannan - who gave us the most absurdly cretinous fantasies - still has a seat in the House Of Lords and a newspaper column. The marketplace in ideas is broken; peddlars of crap do not exit as they would in a well-functioning market. Even if immigration scaremongerers could be proven wrong, they'd not shut up. And why would they when they have much of the media on their side? As the old(ish) saying goes, "never argue with a man who buys ink by the barrel."

Put it this way. Imagine that net immigration were to fall to (say) under 200,000 by the next election, a drop of three-quarters from its 2023 peak. Would Reform 2025 Ltd then say "Labour's making great progress; we'll therefore give up"? Of course they wouldn't.

Or to put it another way, the UK has been receiving immigrants for decades - be it Jews in the late 1800s, Pakistanis and the Windrush generation in the 40s and 50s, Ugandan Asians in the 70s and so on: as one who remembers the latter, talk about immigration seems as relevant as Slade or power cuts. If the "debate" about immigration hasn't been resolved by now it's not going to be, because the evidence isn't decisive.

A second reason not to debate immigration (or at least to be very careful about doing so) lies in a distinction between two types of politics - that based on lived experience versus that based on abstractions often gleaned from the media. Some us us think of immigrants as our friends, uncles or the local shopkeeper. The right by contrast invites us to see them as an abstract threat. Hence the fact excellently described by Ben Ansell; people who live in areas with more non-UK born residents tend to be more likely to think immigration is a good thing. One reason, I suspect, why support for Trump's immigration policies has declined is that "immigrants" are changing from the demons mythologized by Fox News into actual real people.

Unless we're careful, debating immigration risks us being like a therapist who indulges his patient's fantasy thus threatening to make the psychosis worse. If we must do so, we must speak in concrete terms, about real people not abstractions.

So, what should we do instead?

Matt Goodwin inadvertently gave us the answer recently on Twitter. "London is over —it’s so over" he said, pointing to unreliable and overpriced trains, homelessness, crime, and struggling restaurants.

Which blurts out the truth. Immigration is not merely about immigration. "Concerns" about immigration are linked to a wider sense of national decline, of economic stagnation and government failure.

Sure, Goodwin might be seeing what he wants. But we now have abundant evidence that economic stagnation fuels the far right. Back in 2006, Ben Friedman showed that, historically, slower economic growth led to increased racism and intolerance. Markus Brueckner and Hans Peter Gruener have found that, across Europe "lower growth rates are associated with a significant increase in right-wing extremism." Thiemo Fetzer showed how areas hardest hit by austerity were more likely to vote for Brexit. He and his colleagues have shown that shop closures are correlated with support for rightist parties. And Diane Bolet has found that areas seeing more pub closures are more likely to support Ukip (as was).

A place in decline invites the post hoc ergo propter hoc fallacy: "since the immigrants arrived, this place has gone to the dogs". We could reverse this: if the cost of living were declining and places thriving, it would be harder for people to see immigrants as a problem - unless of course they were mere racists.

Which points to the way to fight the immigration battle: stop places going to the dogs. We should be saying to voters: "we get that many areas seem in decline, but this isn't because of immigration: here's what we should be doing instead." The better Labour MPs see this. Jeevun Sandher recently wrote:

If we want to win the next election, we need to make life affordable for our voters. Investing to get energy and housing costs down while creating good non-graduate jobs for Reform-curious voters will put more money in these voters’ pockets. If we get cash in peoples’ pockets, we win the next election. If we don’t, we lose.

This is easier said than done. One problem is that these aims are undermined by the government's plan to raise military spending; doing so requires lower spending than would otherwise be the case elsewhere - on either public services or private consumption. And cuts in the latter would exacerbate the pub and shop closures which fuel the far right.

A second obstacle is the large number of vested interests blocking growth. I'm thinking not just of nimbys opposed to infrastructure spending and housebuilding but: incumbent companies opposing tougher competition policy; lawyers, accountants and financiers opposed to simpler taxes; landlords opposing a shift from taxing incomes to taxing land; utility companies opposed to fairer prices; Brexiteers opposed to rejoining the single market; and a financial system generally that likes the low real interest rates that accompany stagnation.

A further problem is the quality of British management. It has become so accustomed to rent-seeking and bullying that it has largely lost the ability to raise productivity.

And all this is before we mention the possibility that capitalism itself might be a barrier to growth. The problem isn't just that low profitability deters investment-enhancing growth: why do so many industries from steel to nuclear require government subsidies? It's also that some investments don't happen because capitalists fear that they will get only a "minuscule fraction" (William Nordhaus's words) of the payoffs from them, whilst others are undertaken out of misplaced optimism rather than a rational assessment of their returns.

Perhaps my pessimism is misplaced. But that's the debate we should be having. And the right don't want it because they don't want to discuss the failure of British capitalism. If they do, they only show the vacuity of their own thinking, be it about Brexit or "Britannia cards". They'd prefer that we demonized migrants than looked at the root causes of stagnation - and certainly prefer that we divide people along ethnic rather than class lines.

We should ask Reform: "why should we talk about your hobby horse when we know that your last pet obsession (Brexit) was a failure, and when we have more important things to think about?"

You might object that we should stand up for the rights of migrants and indeed - given that immigration controls also reduce their liberty - the rights of citizens too. Morally yes, but we have to choose our battles. When we discuss immigration, we are fighting the battle the right wants to have. That ignores Sun Tzu's advice: "he will win who knows when to fight and when not to fight." Setting the agenda matters, and we should not concede this to the right but rather set our own.

Discussing immigration steals cognitive bandwidth. The opportunity cost of doing so is that we don't discuss more important matters - matters that, if we could at least partly resolve them, would boost economic growth and so defeat the far right.

What do politicians do?

Politicians make mistakes. This is inevitable because society is complex and knowledge is limited. But there are different types of error. Being bad at your job is one type, but another is simply not understanding what your job actually is. By some definitions of political activity, leading politicians have for some time been guilty of the latter.

Consider two of these definitions. Here's Michael Oakeshott (pdf):

Governing is a specific and limited activity, namely the provision and custody of general rules of conduct, which are understood not as plans for imposing substantive activities but as instruments enabling people to pursue the activities of their own choice with the minimum frustration.

And here's Bernard Crick:

Politics are the public actions of free men...Politics, then, can be simply defined as the activity by which differing interests within a given unit of rule are conciliated...A political system is that type of government where politics proves successful in ensuring reasonable stability and order.

By these definitions, some of MPs' recent activities are not politics. Sir Keir Starmer's call for Kneecap not to perform at Glastonbury is not politics by Oakeshott's definition, because it is not the provision of a general rule. Yes, there is (and should be) a general rule against incitement to violence, but whether Kneecap have broken this is a matter for the courts, not for MPs. When asked the question, Starmer should have replied: "it's none of my business; I'm not the taste police."

Nor is it proper politics for MPs to say who should use which toilets at work. Having a piss is not a "public action". In a free society it is not for MPs to decide on who uses toilets but for the managers of those sites (assuming they have nothing better to do). And if staff or customers don't like their decisions they should negotiate with those bosses or go elsewhere. MPs should butt out.

I'd say the same about their calls to ban mobile phones in schools. Classrooms are not truly public spaces - try going into one without proper authority. Decisions on what should happen in them should be left to teachers. In thinking otherwise, MPs go beyond the boundaries of politics - and, I'd add, their own competence.

Stepping beyond their remit, however, is only part of MPs not understanding their job. There's a worse part - that they are not doing some things that, by many conventional definitions, should be political activity.

In domestic policy I'd put these loosely into three categories.

One is the solution (well, more like amelioration) of collective action problems - the problem of what happens when an individual's pursuit of their self-interest conflicts with others' interests. Addressing these problems allows individuals "to pursue the activities of their own choice with the minimum frustration."

The Tory/LibDem government of 2010-15 was egregiously bad at doing this. For example, Cameron's encouraging people to buy petrol before a tanker drivers' strike failed to see that if everyone did this then there would indeed be fuel shortages. And "encouraging" the unemployed and disabled into work failed to see that if everyone tried to do so at a time of a slack labour market the result would merely be falling wages and frustration. Worst of all, in pursuing austerity they failed to see the paradox of thrift - that if enough people try to increase their savings, the upshot is merely lower aggregate incomes and hence less ability to save.

And this is not to mention the abject failure of the provision of some collective services, such as dentistry or insurance for social care. 

In this context, there's one area where the current government is also at fault. The public sphere is blighted by a tragedy of the commons: the domination of money and the decline in norms against lying mean that the marketplace of ideas is broken - the fact that Dan Hannan is a legislator for life despite issuing perhaps the most moronic prediction in political history is just one datapoint of evidence for this - and rational debate and policy-making thus much harder than it should be.

Good politicians should be asking how they could repair this by limiting the power of the wealthy to buy politicians, by democratizing the media, or by promoting deliberative democracy (pdf). Which they are clearly failing to do.

A second category of where politicians aren't doing their job lies in the recognition and management of tradeoffs. MPs are not telling voters that tougher controls on immigration would mean worse public services or higher taxes. Nor are they saying that increased military spending means less spending elsewhere, on either private consumption or public services. Nor that faster economic growth comes at a price: it requires both attacks on vested interests (nimbys, financiers, incumbent companies, Brexiteers and so on) and the insecurity associated with creative destruction.

And thirdly, the role of politicians should be to mobilize some interests and demands whilst demobilizing others. Brexiteers were great at this, moving a fringe issue to the centre of politics: before 2015 less than 10% of voters thought relations with the EU were one of the most important issues. So successful were they that they even created new identities: few of us thought of ourselves as Leavers or Remainers before 2016. Most politicians however - and especially this government - don't even try to repeat this. Instead, they take public opinion as a given, oblivious to questions of how it is formed or changed, and don't even try to change the agenda.

Politicians, then, are not doing what seems to be their proper job in two senses; they're doing things that aren't politics in expressing opinions that are irrelevant; and they are neglecting the proper political tasks of ameliorating collective action problems, managing trade-offs and shaping public opinion.

Why is this?

One possibility lies in the fact that societies often have exemplars, ideals of what a person should be: the heroic warrior, the devout Christian, the romantic, or the detached rationalist, and so on. One of today's exemplars is the newspaper columnist, Loose Women presenter or the terminally online, who inflict upon us their ill-informed opinions about everything, and MPs feel the need to conform to this exemplar. What this fails to see is that the right response to very many questions is either "none of my business" or "I don't know". There should be a distinction between an MP and a general-purpose rentagob.

There is, however, another possible reason why MPs neglect the proper job of politicians. It's quite simply that such neglect works well for those in power. Ignoring how the public realm has been debased by the tragedy of the commons enables a few billionaires to dominate the discourse, especially given most politicians' lack of interest in changing public opinion or in setting the agenda. Similarly, ignoring tradeoffs avoids an awkward possibility - that some of the costs of improving economic growth or public services might have to fall upon capitalists. POSIWID.

Perhaps, therefore, those high-minded definitions of politics are wrong. Bourgeois politics is not about high-falutin ideals but simply about preserving capitalist power. On this definition, MPs are doing their jobs well.

Politics vs Econ101

Once upon a time, the phrase "classical liberal" meant something other than "racist crank". In that idyllic era, those liberals loved to point out how their opponents were failing to understand Econ101. I yearn for those happy days, because our government is actually committing just this failure.

Giles Wilkes points to one way it is doing so. In her Spending Review, he says, Reeves did not tell us what programmes were being cut to finance her pet projects such as Sizewell C or Transport for City Regions. This, says Giles, means it's impossible to say how much (if at all) the Review will boost economic growth, because we don't know (and I suspect not does Reeves) how much the green-lighted projects will boost growth relative to the projects not undertaken. She is ignoring opportunity cost.

A more egregious example of this lies in the government's promise to raise military spending to 3% of GDP. This, of course, means that almost a percentage of GDP less will be spent elsewhere - on either private sector capital spending, other public services, or private consumption. All these cuts (relative to what would otherwise be the case) carry costs - one being that they risk continuing the visible symptoms of economic decline such as pub and shop closures that have fostered support for the far right.

Maybe these costs are worth it, maybe not. My beef is that Labour isn't trying to show that they are costs. That's a failure of basic economics.

And it's not the only one. Another is an apparent reluctance to recognize the concept of comparative advantage, the notion that countries (and indeed regions or people) should specialize in what they are least bad at.

Like it or not, much of the UK's comparative advantage lies in higher education and the creative arts. But Labour is restricting these by imposing a levy on income from foreign students; making it hard for musicians to earn a living by red tape on EU tours or by allowing nimbys to restrict music venues; or by allowing the theft of writers' work. By contrast, the government is supporting less competitive industries such as steel, even though it makes little sense for this to be produced in a country with some of the highest energy costs in Europe.

There's another way in which this government, like its predecessors, are ignoring Econ101: transactions cost economics. Why do companies exist? Why not instead just pick up workers to do specific tasks (as with TaskRabbit) or buy all inputs on spot markets from suppliers? The answer, wrote (pdf) Ronald Coase in 1937, is that it is sometimes expensive and difficult to use the price mechanism as the buyer often cannot specify in advance (or even verify after the fact) precisely what he's getting:

Owing to the difficulty of forecasting, the longer the period of the contract is for the supply of the commodity or service, the less possible, and indeed, the less desirable it is for the person purchasing to specify what the other contracting party is expected to do. It may well be a matter of indifference to the person supplying the service or commodity which of several courses of action is taken, but not to the purchaser of that service or commodity.

Coase's work inspired a massive field devoted to the question of when things should be allocated by the price mechanism and when by companies. And it's a field successive governments have ignored in contracting out services that are subsequently badly or expensively done. It might be easy to tell if your office is cleaned well, but can you really tell whether a child is well brought-up or an old person well cared-for? And if you can't, then you can't enforce the contract. (I strongly recommend Sam Freedman's Failed State on this.)

If you're beginning to see a pattern here of ignorance of basic economics, you'd be right. Here are five other examples:

 - Competition. Strongly competitive markets don't just help customers get a better deal. They also improve productivity by forcing bad companies out of the market and enabling good ones to expand. Rachel Reeves, however, seems to be weakening the Competition and Markets Authority in an attempt to "attract investment" by permitting more takeovers.

 - Free trade. Econ101 advocates this for the same reason it likes competitive domestic markets. Of course, global free trade is impossible whilst the orange abomination is in the White House, but the government's remaining outside the Single Market - whatever other case there might be for it - is unjustifiable by conventional economics.

 -  Balance sheets have two sides. Rachel Reeves has said that nationalizing utilities "just doesn’t stack up against our fiscal rules”. But in acquiring a company the government would get an asset that pays a higher return than debt. That would actually strengthen the government's balance sheet. Reeves ignores this obvious fact because the fiscal rules look only at debt but not at assets, as if a home-owner focused only on his mortgage and ignored the value of her house. Which of course makes no sense. 

 - Regulatory capture. "Regulation is acquired by the industry and is designed and operated primarily for its benefit" wrote (pdf) George Stigler in 1971. And this is true of Ofwat and Ofgem, who offer regulators the prospect of well-paid jobs, thereby acquiring the freedom to pollute and overcharge. To its credit, the government is aware of the "failure of regulation and governance" in the water industry. But it has been slow to change this, and seems unaware that this is a systemic problem with regulation.

 - The tragedy of the commons. Back in 1968, Garrett Hardin pointed out that commonly-owned assets were in danger of becoming worthless as people over-exploited (pdf) them - for example as herdsmen overgrazed common land, or fishermen depleted fish stocks or (we might add) as polluters put too much carbon into the atmosphere. In many ways, Hardin overstated his case because as Elinor Ostrom showed (pdf), people devise ways of conserving the commons. But there's one way in which he was right. The public sphere is a common asset that is being degraded. The media pushes an agenda which squeezes out many issues; dishonesty often prevails over honesty; and politicians are selected sometimes for incompetence and often for a distorted view of the world. And yet the government shows no sign of wanting to do anything about this.

In all these respects, what we have is a government largely detached from economics. Not that this is true only of the Labour party: almost all I've said applies equally or more so to the Tories and Reform 2025 Ltd.

You might reply that this is a good thing, because Econ101 is wrong. True, it sometimes/often is. But this doesn't explain or justify Labour's ignorance of it, any more than can Trump's tariffs be justified by the errors of basic trade theory. In fact, the opposite. The government is most deferential to Econ101 in just those areas where it is wrong - for example in not recognizing the many imperfections in labour markets, or in equating a high wage with high social utility.

The question of whether one subscribes or not to heterodox or orthodox economics is logically if not sociologically largely independent of one's politics.

In terms of policy recommendations, I'm not making an especially leftist point here. Yes, Econ101 might oppose privatization in its current forms and urge restictions upon those media which produce intellectual pollution, which is as much a negative externality as environmental pollution. But wanting competition and free trade were once conservative principles.

In another sense, though, I am posing a radical question. Why is it that our politics has become so degraded that it has abandoned basic economic reasoning? Might it have something to do with the nature of UK capitalism?

The political engagement dilemma

"The only thing necessary for the triumph of evil is for good men to do nothing." "If a battle cannot be won, do not fight it." These two great truths (wrongly attributed respectively to Edmund Burke and Sun Tzu) encapsulate the dilemma of whether we should engage with bourgeois politics.

Better men than me have thought we shouldn't. "When offered a choice between two politically intolerable alternatives, it is important to choose neither" wrote Alasdair MacIntyre of the 2004 US presidential election. This, he continued, is because the competing candidates narrowed down debate to exclude important, attractive, alternative viewpoints.

Which is exactly what we have in UK politics now. Many important questions are off the agenda such as: can we use tools beyond macroeconomic policy to reallocate resources towards housebuilding, decarbonization, social care and so on? How can we economize on the scarcity of management ability? Does inequality impede productivity growth? Might the UK's poor economic performance be due to fundamental forces within capitalism? How can we improve the public sphere to facilitate better policy-making? Is there a case for greater economic democracy? Etc, etc.

It's not just specific policy agendas that are excluded from mainstream politics. So too are entire viewpoints, and not just Marxian ones. Where would a cool-headed Oakeshottian sceptic find a political home? Where would a Hayekian wary of top-down management do so? Or someone wanting to combine competitive markets with equality? And how can someone who values freedom support parties that concern themselves with which toilets people use or what women wear?

Instead, three of our main parties seem to be pandering only to a small subset of voters: older social conservatives who still support Brexit, are obsessed with immigration and want a return to the 1950s with national service, metal-bashing and coal-mining. (Though, strangely, they don't want the income tax rates of that period.)

The standard objection to all this is that we should hold our noses and support the lesser of two (or three or four) evils. That's just what many of us did last year. But there are problems with this.

One is that those demanding that we do so don't return the favour: those centrists who urged leftists to suppress their doubts and vote Labour last year weren't so enthusiastic about supporting the party in 2019*, preferring to whine about being politically homeless.

Another is that our vote was (deliberately) misinterpreted. It was taken not as a mandate to reject the Tory party and all that it stood for, but rather as a reason to kow-tow to Reform 2025 Ltd.

And thirdly, voting legitimates an illegitimate system - one that not only gravely restricts cognitive diversity but which gives weight to nasty or ill-informed preferences; which insults our intelligence with drivel about "maxing out the credit card" and there being "not a huge amount of money"; and which, in giving undue weight to the power of the rich, is a debased form of pseudo-democracy.

On top of all this, politicians - merely by being politicians - have a distorted worldview. Even the best of them tend to be overconfident about the potential for top-down policies to change a complex society; to under-rate the value of emergence (via either markets or economic democracy); and to overvalue hard work.

Of course, voting is not the only form of political expression. There's also protest.

But there's a simple problem here: protests don't work - not only by failing to influence governments but also by often reducing public support for their cause. Anti-war protestors might be just as correct today as they were in 2003 - and they are just as impotent**. Protesting is more a form of self-expression than a means of forcing change, a futile gesture. And there are many other forms of self-expression - music, needlework, writing and so on - that are better for one's mental health.

Yes, mental health. Engagement with politics makes us miserable, frustrated and angry that politicians are so stupid, nasty and limited in their worldview. We've academic research to support this. Whilst most forms of volunteering make people happier - because they have a purpose in life and get to meet others - Stephan Humpert has shown that political activity actually worsens life satisfaction. One of the many good things I did on retiring was to switch from Radio 4 to Radio 3 which is gloriously unpolluted by news between 8.30am and 1pm. Let us cultivate our garden.

But, but, but. There are arguments to the contrary.

One is that, as Terence said, "I am man, and nothing that is human is indifferent to me." Some of us take an interest in politics because it is a branch of interesting subjects - social science, psychology and, increasingly, psychiatry - in a similar way to how zoologists might study baboons.

Many of you might add that we have a public duty to engage in politics. Such claims are often bad faith. I've not been deafened by centrists urging we Marxists to be more politically active. Quite the opposite: the goal of the McSweeneyite tendency in the Labour party seems to be to silence the left.

And herein is a reason for us to be active. Our silence means that politics will remain dominated by know-nothings and cranks hostile to fundamental questions of how to build a more prosperous and freer country. Good collective decision-making requires there to be cognitive diversity. And in exiting the public sphere we further diminish the albeit slight hope of ever attaining such diversity.

Nor will our inactivity be interpreted properly. The political class (of which the legacy media is part) will see it as apathy and not what it really is - which is contempt.

And engagement can bring with it power. Why has pensioner poverty fallen so much this century whilst housing has become unaffordable for younger people? Is it really nothing to do with the fact that pensioners are more likely to vote than younger folk?

But there's something stronger. Whilst disengagement is an easy option for affluent older people like me (and Farage) it is not so for others. Post-2010 austerity policies killed tens of thousands of people. That's many more than could be saved by charity and voluntary work. Even if political action can't build a much better society, it could save us from a much worse one.

Perhaps very much worse. In the US there is a very real threat of the country descending into fascism. That's something to be resisted by any means necessary, the only issue being how most effectively to do so.

And there's the rub. Even if MacIntyre was wrong to advocate withdrawal from bourgeois politics, he was correct - and wrongly ignored - on another point. At the end of After Virtue, he urged the construction of new forms of community "within which civility and the intellectual and moral life can be sustained through the new dark ages." To put it into more economic and political language, we need vehicles for collective action - be they environmental groups, stronger unions or consumer advocacy organizations to be a counterweight to captured regulators. This side of electoral reform, these probably shouldn't consist of a new party. But they should include groups capable of putting not just intellectual but also political and financial influence upon the political class.

* Perhaps because they didn't regard a corrupt clueless buffoon who wanted to cut us off from Europe as the lesser evil compared to mild social democracy.

** Not all protests fail, though. The poll tax protests of 1990 did force a change of policy. Whether this was because they were correct and powerful, or because financial markets took fright at the sight of riots in Trafalgar Square, is however unclear to me.

Systems, not individuals

Here are three recent items that are connected:

 - Morgan McSweeney thinks that abolishing the two child limit on universal credit wouldn't give Labour "enough political capital with voters."

 - Nick Clegg is criticised for saying that requiring tech companies to observe copyright laws would “basically kill” the AI industry. If burglars had to ask homeowners permission, his critics say, this would kill the housebreaking industry.

 - People are mocking Jordan Peterson for his incoherence in front of a bunch of (albeit smart) young people.

The connection here is that all three are examples of systemic problems and yet people focus instead on criticising specific individuals.

For example, there have always been idiots and charlatans, so there's nothing notable about Peterson. But why is he more famous than, say, Alasdair MacIntyre or (to cite just a few younger people) Brian Klaas, Cory Doctorow, Daniel Chandler or Matt McManus? The answer lies in selection effects. Many of those claiming to be public intellectuals are selected not for merit but for something else.

It's hard to say what this something else is. I don't think it is mere ideology; many intelligent conservatives aren't famous*. What is the case, though, is that there has been a decline in the standard of public intellectuals: on the iPlayer you can see Kenneth Clark, Jacob Bronowski and AJP Taylor; compare them to many of their modern equivalents. Or compare Laura Kuenssberg to Brian Walden. Peterson's status as a prominent "intellectual" is a symptom of a systemic problem.

So too are Clegg's remarks. The fact that capitalism is founded upon theft is of course no surprise. Capital, wrote Marx, comes into the world "dripping from head to foot, from every pore, with blood and dirt." And profits are, from a Marxian point of view, a form of theft - the extraction of surplus labour. Clegg is thus merely blurting out a truth.

Two truths, in fact, because he's channelling another of Marx's insights:

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.

The question is: how is this conflict to be resolved? Do we do so by restricting creators' property rights? Or could we do so by restricting those of tech oligarchs through some form of socialized AI development? Obviously, I don't know. What I do know is that we have here a systemic problem, requiring systemic analysis: is it possible to reconcile a common sense conception of justice with technical progress?

McSweeney also raises a systemic question. The point here is that cutting child (and adult!) poverty is not just morally right but also very possibly economically correct too because fewer poor children today mean fewer low-earners or criminals in the future. If McSweeney is right** that there are few votes in this, it tells us something important about our political system and culture - that it mitigates against sensible policy. Sam Freedman is bang right:

It's a pretty dismal reflection on our politics that a policy as bad as the two child limit was introduced in the first place and has survived for a decade.

But what exactly is it reflecting? It might be the power of our reactionary oligarchic media. Or it might be that the "Treasury brain" disease has spread beyond Whitehall. Or maybe endogenous ideological formation has caused people to resign themselves to poverty and injustice. Or maybe politicians wrongly take public opinion as a datum rather than as something that can be changed by campaigning or by economic change. Or maybe something else.

Whatever the answer, we need to think about politics and economics as systems, and very often systems which select for some things and not others: why do they select for charlatans and against good policies? Is technical progress compatible with justice or not? And so on.

Instead, too many people - even good clever ones - don't do this. In confining themselves to criticising McSweeney, Clegg or Peterson as individuals they are engaging in what I've called schoolteacher politics, focusing upon individual error rather than systemic processes. But as schoolteachers used to tell me, "must do better."

* Jesse Norman for one; his novel, The Winding Stair, is very good indeed.

** Of course, McSweeney might be wrong. But that merely raises another systemic problem: how can it be that a man who is wrong about his whole job - how to get Labour re-elected - can become so powerful?

Why we need a strong left

Anyone hoping that the marginalization of the Labour left would lead to rational, liberal policy has been badly disappointed by Starmer's recent remarks (pdf) on immigration echoing Enoch Powell and speaking of "incalculable" damage. "Disgraceful and damaging" says Simon Wren-Lewis; "untethered from reality" says Jonathan Portes; and "a moral, political and economic embarrassment" says Ian Dunt.

I want to suggest that there's a causal link here. The absence of leftist voices in mainstream political discourse is a cause of dishonesty, lies and stupidity in policy-making. I'm not going to try to persuade centrists of the merits of leftist policies, but to do something else. In politics we must ask not only "what is the right policy?" but also "what type of political culture or ecosystem is conducive to good policy-making?" My argument is that the demise of the left has created an ecosystem hostile to good policy.

Old stockbrokers had a saying: "it takes differences of opinion to make a market". And the loss of some opinions has led to a worsening political market.

Here, I'm using "left" in a particular (idiosyncratic!) way, to mean a left that pushes for economic policies for workers and customers against the interests of the rich. The absence of such a left is in small part its own fault. Pretty much the only idea many leftists have now is a wealth tax. But even if this would work (which as Dan Neidle argues is doubtful) it does not address our main economic problems: how to reallocate jobs; and how to raise productivity. What has been forgotten is any interest in economic democracy. That's a big loss.

I don't much blame leftists for this: there's no point writing recipes if you don't have a kitchen. Nevertheless, it is something intelligent non-leftists should mourn.

Starmer's talk of the damage done by migration echoes Reeves' embarrassing drivel about there being "not a huge amount of money" and "maxing out the credit card". Neither seem to believe in logic or fact. Contrast that with New Labour, which based its policies upon evidence and research. Working tax credits were modelled on the US's earned income tax credits; the minimum wage upon the work of Card and Krueger; Bank of England independence upon research by economists such as Alex Cukierman; and Brown's interest in endogenous growth theory was influenced by economists such as Paul Romer and Philippe Aghion.

Of course, this evidence was incomplete. But New Labour at least looked for it. Blair used to speak a lot about "evidence-based policy-making." His epigones do not. Why the difference? It's because Blair and Brown had to appeal across the political spectrum, so they needed evidence*. New Labour faced competition from the left, and competition keeps people on their toes. Reeves and Starmer, on the other hand, feel the need to appeal only to a few newspapers so any drivel is good enough.

It's not just Labour that has been degraded by the decline of the left. So too has the Tory party. Trades unions taught generations of their opponents a valuable skill: how to negotiate. As they shrank, so too did that ability. The result was that the Tories were unable to negotiate Brexit, falling instead into a childish tantrums of "I want, I want a fairy unicorn". Had they been formed by dealing with unions rather than by appealing to their nannies, they might have done a little better.

Conservative constituency associations used to be dominated by businessmen accustomed to recalcitrant unions. That taught them that it was difficult to bend the world to their will. That lesson has been lost, and so Tories have voted for the fantasies offered by Truss or Badenoch.

For much of the 20th century strong unions had other benefits. One is that they imposed a modicum of justice and efficiency onto corporate management. They helped rein in bosses' pay (pdf) - for fear that big boardroom pay rises would provoke workers' demands for similar - and in doing so might have helped discourage rent-seeking and jockeying for the top job. And insofar as they raised workers' pay, unions compelled firms to look for ways to raise productivity growth; this was faster even during the strike-riddled 70s than it has been in recent years.

Allied to the genuine fear of communism, unions did something else. They forced governments to focus upon avoiding recessions and upon improving economic growth, because these were ways of helping to shore up the legitimacy of capitalism - and, from capital's point of view, a better alternative to redistribution.

The loss of these pressures, however, has led to the triumph of what Joel Mokyr has called the forces of conservatism, constituencies hostile to economic growth. For example, financiers and rentiers like the low interest rates and resulting high asset prices that are the consequence of stagnation; lawyers and accountants support the complicated tax system that diverts effort to compliance or avoidance; incumbent companies oppose competition; little Englanders like the trade barriers erected by Brexit; and landlords don't want taxes to be shifted from incomes to land. And so economic growth is strangled.

Politically, it's pointless to debate economic policy, because policy is determined not by ideas but by interests. Good policy doesn’t require merely technical know-how. It requires the right material conditions, the right power bases. It is these, rather than technical know-how, that are lacking. And the demise of the left is one reason for this.

I'm not saying that intelligent policies can come only from the left. What I'm saying is that a strong left creates the political space for such policies from anywhere on the spectrum. Would Starmer have spoken about immigration in that way if he'd been fearful of the left of the Labour party?

Here, though, we come to a vicious circle. The absence of a significant left contributes to economic stagnation, and stagnation in turn fosters the far-right. Since Ben Friedman's work we have lots of evidence that weak economies lead to reaction and illiberalism. Thiemo Fetzer for example has shown that austerity boosted support for Brexit; he and his colleagues have shown that shop closures encouraged support for Ukip; and Diane Bolet and colleagues have demonstrated (pdf) that pub closures have a similar effect.

A stronger left could act as a circuit-breaker here. It would offer an alternative account of our economic decline and better remedies for it than Farage's Truss-on-steroids fantasies. The absence of this, however, gives us the grotesque sight of a Labour PM pandering to the far-right.

My point broadens. Dan Ariely has shown that belief in conspiracy theories is more common among the victims of poor economic performance**:

The feeling of being hard done by is prevalent among the misbelievers I've met, and I think it goes a long way toward explaining the recurring theme of "the elites" that we find in many common conspiracy theories. If you're convinced that you're at a disadvantage, someone else must have an (unfair) advantage. If you're suffering unusual hardship, someone else is getting off easy. If you're lacking control, someone else must be controlling things. (Misbelief, p67)

Again, a healthy left would help correct this. It would provide other, better explanations for why people feel at a disadvantage, and (because any serious left must be committed to some form of economic democracy) offer people more genuine control over their lives. Without this, however, we see the rise of fruitloop conspiracy theories.

There's an analogy here. You might not like Wetherspoons or McDonalds. But they offer something even if you never go into them; competition from them forces other pubs and restaurants to up their game. Similarly, you might not like a strong left, but it too would force other parties to do better. That's competition. And who can possibly be scared of competition?

* It might be no accident that Blair's gravest error was the Iraq war, which was the result of ignoring both the evidence and the voice of the left.

** Ariely doesn't mention Andrew Tate, but I suspect his case might fit our point.

Labour's manufacturing bias

Lots of you have pointed out the contrast between the government's keenness to support British Steel and its reluctance to help universities despite the fact that the latter have been cutting even more jobs than British Steel. So, why does the government seem to value manufacturing more highly than services?

The rescuing of British Steel has been defended on grounds of "security" - although as Daniela Lai says, this alone does not tackle the problems of global overcapacity in the sector or the need to green the industry*.

But the steel industry isn't unique in winning government favour. Starmer is also cutting "red tape" to help the car and pharmaceutical industries whilst not cutting it to help universities, for example by increasing the numbers of student visas. That's a clear bias, despite the fact that universities do what the government claims to want - create and support well-paid jobs across the country.

Of course, nobody (except perhaps Patrick Minford) believes governments should deliberately wreck manufacturing. But they should recognize that services industries sometimes need support as much as manufacturing. So why doesn't the government see this?

The question isn't of course confined only to the UK: some of those who defended one iteration of Trump's many tariff policies did so on the grounds that protectionism would lead to the return to the US of manufacturing jobs.

For me, two things deepen the puzzle. One lies in Wuthering Heights. Everyone in it seems to catch a chill and die. Which seems implausible - until you look at the buildings around Haworth where Emily Bronte was writing. They are still caked in soot. And if manufacturing did that to stone, it would have wrecked people's lungs - hence so many early deaths from what today are mild infections. Today, however, many of those satanic mills have been converted to flats or (in the case of the gigantic Salt's Mill**) to popular art galleries, shops and cafes. What once shortened lives now enhances them. Post-industrialism is fantastic progress.

The other thing that deepens the puzzle is that there's nothing new about the loss of manufacturing jobs. In the UK we've been losing them since the early 60s. Many of the problems this caused are now decades old: Bruce Springsteen's Born in the USA adressed themes of loss of community and masculine identity 40 years ago. If successive governments haven't much fretted about manufacturing since the 80s, why start now?

A lot of the answers just aren't good enough. Let's consider them.

"We need to produce goods to pay our way in the world."

But we don't need to make things. Just as individuals sell services to pay for goods, so too can countries: France, Spain and Portugal - to name but three - all have net exports of services to pay for net imports of goods. In principle, the UK could too. That we do not do so is because we consume too much: a current account deficit, by definition, is equal to the excess of domestic investment over savings.

"Manufacturing jobs are better paid."

True. On average, weekly earnings are 11% higher in manufacturing than in services. But manufacturing is not a magic sauce that raises pay. Insofar as wages are higher there, it is because the jobs are more skilled or give workers more bargaining power. If you want to raise wages, the answer is not to create more manufacturing jobs - and certainly not in low-skilled assembly work - but to ensure a tight labour market; encourage strong trades unions; or increase skills. The latter, of course, requires (among other things) a thriving university sector, something the government is doing little to encourage.

"Manufacturing provides more satisfying jobs."

It's true that making and repairing things is both personally satisfying and worthy of admiration in others - hence the popularity of TV shows such as The Great British Sewing Bee, Repair Shop or The Great Pottery Throwdown. And it's also true that the service sector contains a lot of bullshit jobs. But you don't need to be Harry Braverman (pdf) to know that mass manufacturing and individual craftsmanship are entirely different things - a point made by the Sewing Bee's Patrick Grant in his book, Less. The reality of manufacturing work was better captured by Arthur Seaton in Saturday Night, Sunday Morning; back-breaking monotony in which the bastards grind you down. There's a reason why Marx's theory of alienation originated in the manufacturing era.

If we want better, more fulfilling jobs, the answer isn't to restore manufacturing but to reassert the values of professionalism or craftsmanship against the corrosive effects of capitalist managerialism. Which, of course, is so far off the agenda it might as well be a passenger on Voyager 1.

Instead, I suspect there are two other reasons why Labour is so much keener to protect some industries than others.

One is simply the power of lobbying. This is why Reeves is keen to cut banking regulation, despite obvious evidence that insufficiently lightly regulated banks can do enormous damage to the whole economy. Perhaps if university VCs did what bosses should do and spent more time managing upwards, universities would be in better shape.

Except that there's another reason for the government neglecting them. It's the same reason that will keep the pubs open a little longer on VE Day. The government's vision of the UK is an atavistic, backward-looking one, be it of Britain standing alone against Nazism or of us being the workshop of the world. Of course, we no longer live in such a world. Our comparative advantage now lies less in manufacturing than in higher education and creative industries: we have (or have had) far more world-class universities than manufacturing businesses. It is what Hardt and Negri have called immaterial labour that dominates the economy, not overalls-clad industrial workers.

But as the Economist's Bagehot says, politicians are more concerned with dead voters than with living ones:

Manufacturing, a small part of the economy, plays a big role in politics everywhere. Britain is no exception. A speech at a jlr plant has become a rite of passage for any leading politician in recent years. Dead Man’s old job comes first for Britain’s politicos. The lives of workers in Britain’s services economy come second. True, manufacturing’s weak performance after the financial crisis is one reason for Britain’s woeful productivity growth. Yet politicians cling on to a primitive vision of it.

This is why the government's love of manufacturing doesn't go so far as wanting to remove trade barriers with the EU by rejoining the single market***. It's about pandering to a dead voter's image of a (partly mythic) past, not about actual real material conditions.

Alongside this primitive vision of the economy is a primitive one of the working class. For the political elite, this consists of uneducated bigots who, if not dead, are retired. The reality is that the working class comprises anyone struggling to pay the rent - very often, young, educated socially liberal people working in services.

But these don't count politically. Whereas Blair and Thatcher used to speak of modernity, politicians today rarely do so. Their mindset is one of dragging us back to the past. And the fetishization of an outmoded vision of manufacturing is part of this.

* It's also curious that "security" concerns didn't stop Thatcher from destroying the steel industry in the 80s during the cold war, perhaps because a world in which we cannot import steel could also be one in which we can't import iron ore either.

** I strongly recommend you visit it - and don't miss the fantastic early music shop there. 

*** Nor will it cut energy prices for industry despite them being high by international standards, given its kowtowing to rent-seeking monopolists. 

Governments vs capitalists

It's a nice irony that one of the most capitalistic nations on earth should be one of the few which has a government which is acting against the interests of capital.

This isn't, however, merely embarrassing for those bankers and tech billionaires who supported Trump. It's also awkward for a Marxian conception of politics.

"The executive of the modern state" wrote Marx "is nothing but a committee for managing the common affairs of the whole bourgeoisie." But Trump is managing these affairs appallingly. His tariff rises have wiped trillions off stock prices and threaten to cause a recession that will hit the interests of the whole bourgeoisie - not just of mainstream corporate America but also of the tech billionaires who have lost hundreds of billions.

Marx's theory isn't a fringe view. All those investment bankers who stayed in equities (until a few days ago!) in the belief that Trump wouldn't be as good as his word also seem to have believed it. They thought Trump wouldn't act against their interests because the prospect of a stock market crash would prevent him imposing such stupid tariffs: such a prospect is one of many levers that capital has over governments, which it often uses to maintain its power and influence.

So, where do recent events leave Marx's theory?

One possible defence of it is that Marx was speaking of the state, not of particular governments. And the state is still managing the common affairs of the bourgeoisie. Courts, for example, still defend property rights, and the Fed is trying to maintain some degree of financial stability.

Another defence is that Marx wasn't so daft as to think that the state always maximally pursued capitalists' interests. Governments do sometimes harm capitalism, but when the damage is big enough, they are compelled to either change course or be deposed. Allende, Mitterrand and Truss among many others discovered this. Maybe, somehow, Trump will too.

We don't, however, need to look far to find a government behaving more consonantly with Marx's theory: just look at Starmer's Labour.

Capitalism has always demanded two things from the state (though these can sometimes conflict): profitability and legitimacy. Labour is providing both.

For example, not nationalizing utilities helps to keep profits in private hands; Reeves' desire to relax merger rules will help big companies earn monopoly profits; her refusal to tax the rich ensures that profits remain in private hands; increased military spending is good for contractors; reduced planning restrictions boost the profits of developers and land owners; more infrastructure spending is good for construction companies; and "deregulation" can help firms make profits by cutting corners on safety.

Labour is also helping to legitimate capitalism. One way it is doing so is by raising the minimum wage and giving some extra rights for workers, thereby trimming the most egregious forms of exploitation.

But it is also trying to maintain capitalist legitimacy simply by keeping many questions off the agenda. Everybody knows that our economic performance has been terrible recently: real GDP per head has grown only 0.6% a year in the last 20 years compared to 2.5% a year in the previous 20 and 2% a year in the 20 before that. Why? Plausible explanations might include, among other things, the poor quality of management; the dominance of financiers and rentiers; high inequality; or an overly-complicated tax system with its many loopholes. Discussing any of these, however, would call our actually-existing capitalism into question and so antagonize powerful interests. It's easier to blame the powerless.

We should read this from Starmer alongside the attack on the disabled:

There is little that strikes working people as more unfair than watching illegal migration drive down their wages, their terms and their conditions through illegal work in their community.

He has to blame immigrants and the disabled, because to blame anything or anyone else would be to question capitalism. Which cannot be done.

It seems, then, that from a Marxian point of view we have a sharp, and paradoxical contrast: a (nominally) leftist UK government is slavishly promoting capitalists' interests whilst the (rightist) US government is attacking them.

But, but, but. It is often wrong to speak of capitalists' interests as if they were homogenous. Often, they are not. For example, financiers are content with weak aggregate demand if it delivers low real interest rates, but companies wanting to sell into a mass market are not: one reason why we have full employment for almost 30 years after WWII is that mass market capitalists then had more influence than financiers. Similarly, utilities companies want high energy prices but manufacturers want low ones; landlords want high rents, retailers low ones; banks want high interest margins, companies lower ones. And so on. When Ed Miliband spoke of a distinction between producers and predators he was driving at these sort of distinctions.

This is why Marxists have often spoken of the relative autonomy of the state: these conflicts of interest mean that governments can sometimes choose, at least to some extent, which segment of capital to side with.

And the Starmer government is making such choices. There aren't many employers saying "I really want to hire drug addicts, wheelchair users and people with chronic anxiety but I just can't find them". It is newspapers that are pressing the goverment to cut disability benefits, not the entirety of capital. Welfare benefits, remember, are not so much a payment to recipients as a payment through them and thus a way of supporting some capitalists. In cutting benefits to increase military spending the government is shifting profits from Tesco (share price down 15% since early February) to BAe Systems (share price up 22% since ditto).

By the same token, in allowing water companies to pour shit into seas and rivers Labour is siding with these monopolists against tourist businesses; in allowing energy companies to charge high prices it is siding with them against energy users; and in not adopting a land value tax it is favouring landlords over businesses that must pay rates and corporation tax to make up for that lack of revenue.

In all these respects, Labour is choosing some parts of capital over others. The problem is not so much that it is obeying the diktats of capital, but that it is obeying the diktats of the most reactionary segments of capital.

Which brings us to a commonality between the UK and US. In both countries the right has stopped thinking about economics, and relies for its support on: incels, racists, xenophobes, Brexiters, and those who are not only uneducated but actively hostile to knowledge and learning. In the US, these client bases have tempted the government to act (for now?) against capitalist interests. In the UK, they've led Starmer to side with backward and sclerotic segments of capital. Which is itself an artefact of capitalist stagnation: as Ben Friedman showed, slower growth promotes reactionary politics.  

People on Bluesky have been laughing at the banker quoted a few days ago in the FT as saying that Trump's election "liberated" him to say "pussy" and "retard" "without the fear of getting cancelled". But those words revealed a trend on the right. Much of it has been taken over by narcissistic obsessions with language (often pronouns), to the detriment of thinking about how to repair or defend capitalism.

Yes, some people do have intelligent ideas to try to make capitalism work better. But these voices of relatively enlightened capitalists have nugatory political influence. Which should worry anyone who wants capitalism to survive.

Constraints

Econ101 says that individuals maximize utility subject to constraints. There are many problems with this - like, have you ever actually met a human being? - but there's one that is under-appreciated. It's simply that we often just don't know what the constraints actually are.

This is true of the most basic problems in personal finance. I don't know how long I'm going to live and so I don't know how much I can spend from month to month. If I shuffle off this mortal coil next week, I can live lavishly. If I'm going to see my 90s, however, not so much. I half-solve this problem by following a rule of thumb, to keep my spending within a particular limit on average. Yes, some economists advocate annuitizing (pdf) my wealth, but I fear this merely replaces a rule of thumb with a harder constraint.

Every man d'un certain age knows that constraints are not givens but instead need to be disovered - often the hard way. Every time you back gives you agony after gardening, or your shoulder after a session in the gym or your knee after a run, you've learned that the constraint upon your physical activity is more binding than you thought.

The fact that constraints are not known but rather must be discovered is especially important in entrepreneurship. Entrepreneurs do not maximize profits subject to constraints as Econ101 claims. Instead, as Hayek (pdf) and Kirzner (pdf) emphasized, their role is to discover what these constraints are.

This is true of the most quotidian of businesses: is the fact that a town has seven coffee shops a constraint on a ninth being profitable or not? It's also the case on a grander scale. ICI's chemicals business had been struggling for years, a fact which several potential buyers saw as evidence of constraints upon it ever making money. Jim Ratcliffe, however, did not see it as such. And he was right, with the result that Ineos expanded into the giant it is today. As Laura Huang writes, "constraints don’t have to be constraining."

Except that they often are. More than 10% of companies close every year, and around half of new firms shut within three years. That's a lot of people learning that constraints upon profitability are more binding than they thought. A good argument for liberal bankruptcy laws is that, in giving a chance for failed entrepreneurs to try again, they can learn from their earlier errors. But of course, the learning works both ways. Jim Ratcliffe has not (yet?) replicated his Ineos success at Man United, which reminds us of what Boris Groysberg pointed out - that successful management is often not portable, because an ability to overcome constraints in one business doesn't guarantee an ability to do so in others.

All of which brings me to a curious division in politics today: centrists and some leftists seem to believe that constraints are tightly binding, whereas the right do not.

So, for example, Rachel Reeves treats her "iron-clad" fiscal rules as if they were a tight constraint rather than what they are: arbitrary self-imposed commitments intended to appeal to low-information voters and (to repeat myself) political reporters. Similarly, Labour feels so tightly constrained by the press that it makes self-evidently absurd decisions such as to raise employers' NICs (a tax on jobs) whilst at the same time complaining about “discouraging people from working.” We Marxists have long thought that capitalism tightly constrains what a left-leaning government can do for the working class: the Starmer government seems to agree with us.

US Democrats have a similar attitude. Danielle Webber complains that they regard "the distribution of voter preferences as a fixed point rather than recognizing that those preferences can be informed by the actions and words of politicians and media elites." That is, they see public opinion as a constraint rather than as something it can change.

This perception of tight constraints isn't a new thing for centre-left governments. We saw it too in Clinton and Brown's fear that "bond market vigilantes" would prevent even modest fiscal easing. It was, however, under the first majority Labour government of 1929-31 that it manifested itself most pathetically. It collapsed when ministers refused to make big spending cuts in an effort to keep sterling on the gold standard. When its successor, the National government, abondoned the standard however there was no disaster: far from it; the economy grew nicely. And former Labour minister Sidney Webb bewailed: “nobody told us we could do that." He and his colleagues thought there was a constraint forcing them into austerity - but there wasn't.

It's not just the centre-left that sees constraints as tightly binding, however. So too, sometimes, do those further left. When they claim that Israel is breaking international law they are implicitly regarding this as a constraint upon Netanyahu. As a brute empirical matter, however, this seems to not be the case.

All of which contrasts sharply with Trump. He's learned that being a semi-literate convicted felon isn't a constraint upon being elected, and he is acting as if there are no other constraints upon him - perhaps not even Supreme Court rulings. As Timothy Garton Ash writes:

I still find it hard to believe how weak the checks and balances, both constitutional and habitual, of what was once the world’s greatest democracy are so far proving to be.

Now, we don't know who's right here: you only know what is a constraint when you hit it. What is notable, though, is that this perception of a lack of constraints is alien to what used to be conventional mainstream conservatism. This - expressed by men such as Burke, Chesterton and Oakeshott - thought that reforms should be undertaken cautiously because we all have limited knowledge of complex, emergent systems. As Burke said, "men little think how immorally they act in rashly meddling with what they do not understand." For him, politicians should be constrained by respect for the wisdom of ages and for the existing social order. And the function of voters was not so much to exercise power via MPs doing what they were told, but rather to constrain that power, so that the MP "sacrifice[s] his repose, his pleasures, his satisfactions, to theirs; and above all, ever, and in all cases, to prefer their interest to his own."

Exactly what changed to make the right completely reverse its attitude is a story that needs telling, and not by me. The point is that we all need to think more about what are and (a different question) what should be the constraints upon political action.

On intensive vs extensive growth

There might be more to be said for the government's approach to raising economic growth than we think.

To see what I mean, let's first see the criticism of its approach. This rests upon the distinction between extensive and intensive growth. Extensive growth comes from simply adding more inputs: capital and labour. Intensive growth, by contrast, comes from using inputs more efficiently. To express this in terms of the most general production function, Q = f(K, L, A) where K is capital, L is labour and A is technology, the government's focus is mainly on K and L rather than A. In her recent speech on kickstarting growth the Chancellor spoke much more about investment than productivity; planning laws are being reformed to speed up infrastructure projects; and there's talk of getting the disabled into work*. By contrast - aside from talk about reforming the NHS - the government says little about improving productivity, especially in the private sector.

All this betokens a concern for extensive growth more than for intensive growth; more K and L rather than more A, in the production function framework.

And there are obvious problems with this. One is the environmental cost, most obviously in Reeves' desire to expand Heathrow.

Another is that there are diminishing returns to extra inputs. Maybe the government could get more of the unwell into work. But a lot of these can only do part-time or low-productivity work: people with long Covid aren't going to work on building sites or in the armed forces. And there's plenty of research which shows that additional investment has only a moderate impact in raising output. Of course, it has a bigger impact when we're in a depression thanks to multiplier effects. When we are close to full employment, however, it crowds out other investments: if people are building houses they cannot build runways or railways.

Intensive growth by contrast - if we could achieve it - doesn't have these drawbacks. If we are more productive we can have more of everything - including more leisure and a greener economy. And if you are worried by an ageing population and increasing dependency ratio, intensive growth is a solution; the more that workers produce, the easier it is to support non-workers.

It seems, then, that the government is looking in the wrong direction: we need intensive growth - more A, not (just) more K and L.

But, but, but. There might be more to be said for Labour's approach. In our dumbed-down political culture, they aren't saying what it is. So I'll try.

Our story starts in the early Industrial Revolution. Many of its founders - such as George Stephenson, James Hargreaves, Richard Arkwright and others - were not greatly educated. As Joel Mokyr put it:

With some exceptions, Britain's early inventors tended to be "tinkerers" without much formal schooling, whose genius lay primarily in their mechanical ingenuity. (The Lever of Riches, p244)

But they had to have something to tinker with - that is, with primitive versions of equipment which they improved upon. Investment, therefore, caused innovation. A lot of innovation isn't the creation of something from nothing, but rather a novel combination (pdf) of existing technologies. This was the point of Jacob Schmookler's 1966 book, Invention and Economic Growth.

It's not just in the early days of the industrial revolution that this was the case. It's still true today. Igal Hendel and Yossi Spiegel have shown that in a small steel mill output doubled (pdf) in the space of 12 years without great new investment or generic technical discoveries outside the firm because managers kept tweaking machinery to eke out more output from the same inputs. The same thing happens every day: whenever you discover an Excel shortcut, you are making a productivity improvement on the back of a pre-existing investment. It also happens in more high-tech industries: it was investment in broadband and 4G that permitted the emergence of streaming services and phone apps, and investment in better semiconductors that facilitated the growth of AI.

All this means that we cannot distinguish clearly between A (technical improvement) and K (the capital stock) as conventional production functions do. Not only does investment embody new technology, but it also is a pre-condition for discovering more productivity improvements - not just big new innovations, but small tweaks and marginal gains. What's more, an environment in which there's a lot of capital spending will generally be one in which there is plenty of demand and therefore opportunities and incentives to discover (pdf) ways to produce more from the same inputs. And competition from new investments can spur the owners of older technologies to up their game: sailing ships, for example, continued to improve for decades after the introduction of steamships. 

In an unjustly neglected book in 1989 Maurice Fitzgerald Scott urged economists to ditch standard production functions and think instead of investment as driving innovation:

Scientific discovery and invention are best regarded as forms of investment, and...at least to begin with, a theory of growth can be constructed without distinguishing between them...Fresh [investment opportunities] are created by undertaking existing opportunities, since one learns from the changes made thereby. Consequently, instead of scientific discovery and invention being the creators of investment opportunities, investment itself creates them. To understand economic growth, therefore, we need, in the first place, to examine the rate, quality and determinants of investment. (A New View of Economic Growth, p 131)

If this is right, conventional economists are wrong to criticise the government for focusing on K rather than A, because K will beget A.

Now, there's an obvious objection here. Jon Elster famously warned that there are no general laws in the social sciences but only a collection of mechanisms which work in some times and places but not in others. And there is one place in which Scott's mechanism seems not to work - infrastructure investment. If this begat discovery and learning, we'd expect to see the cost of such projects decline over time as builders discovered new techniques. But this hasn't happened. Instead, as Sam Dumitriu has shown, the UK's projects cost vastly more than those in comparable countries. There's no evidence of learning there.

Or is there. We have learned something from such investments - that a lot of the extra cost is because of a hideous planning system, which the government is simplifying. The question is: is this learning - and the technical progress that will follow - sufficient to ensure that Scott's theory will apply here? Personally, I doubt it, simply because even with the most perfect planning system, infrastructure investment will be constrained by a lack of labour and machinery; we need techical progress to relax these constraints too.

This would not be so much of an issue if the government also had policies to boost private sector business investment generally. It did have one good idea - that this would be stimulated by reducing policy uncertainty. But this has been undermined by Trump; the prospect of a tariff war and higher taxes and labour reallocation to boost Europe's military have created new uncertainties, giving firms good reason to delay capital spending.

So, yes, perhaps the conventional criticism of the government's growth policies is correct: it does need to focus not just upon investment but also upon raising productivity.

Nevertheless, there are still two defences it has - not that it will say them in public!

One is simply that even the crudest forms of extensive growth generates tax revenue. Given that fixing the public services is a high priority, this is a benefit to weigh against such growth being only short-lived or having environmental costs.

Another thing to be said for extensive growth is that the alternative, raising productivity, creates enemies.

This is partly because, as Schumpeter said, intensive growth is a process of creative destruction; a lot of productivity growth occurs because new entrants displace older less efficient firms. That creates insecurity as people fear for their jobs. This is exacerbated by the fact that the government needs to destroy jobs simply to reallocate labour towards the housebuilding, social care and military sectors.

Also, even the most conventional policies to raise productivity create losers. Tougher competition policy would weaken incumbent firms; shifting taxes from income to land would hurt landlords; tax simplification would put lawyers and accountants out of work; and a return to the single market would anger Brexiters. All of which matters because, as Mancur Olson famously pointed out, losers make noise whilst winners keep quiet which means that even good policies cost political capital.

And this matters. Politics is not a seminar in which the best ideas win, but is instead about the clash of interests. For now, it is the interests of what Joel Mokyr called the forces of conservatism that are prevailing. Perhaps the government will eventually find the strength (or necessity) to challenge these. And there is a precedent for it doing so: Thatcher avoided a lot of such conflicts early in her government, only taking on the miners and doing large-scale privatizations in her second parliament. Until then, however, extensive growth might be the only option.

* Albeit belied by the government raising the cost of employing them.

Using & misusing markets

The marriage between free market thinking and the right has ended in divorce, on the grounds of adultery by the latter with a mercantilist buffoon. It was only ever a marriage of convenience; the right liked markets when they forced wages down, but aren't so keen when tight labour markets force them up. They were always fonder of wage "flexibility" than rent flexibility.

This clears the path for a more intelligent approach to thinking about the use and misuse of markets.

Textbooks tell us that the virtue of competitive markets is that they achieve allocate resources efficiently. If a company is making big profits others will move into its market, bidding prices down and so giving customers a better deal. Conversely, if companies are losing money they'll exit the market, and their capital and labour will be hired by companies who can use them better.

Sadly, however, this isn't as true as we'd like it to be. Abhijit Banerjee and Esther Duflo show in Good Economics for Hard Times that resources are slower to move than market fundamentalists believe. In the 1980s the latter wanted to close coal mines because they thought unemployed miners would find jobs producing goods and services in higher demand. But this didn't happen to the extent they expected; miners stayed on the dole and pit villages turned into ghettoes. This doesn't mean economies must be preserved in aspic. But it does mean that markets need state intervention to work well - for example by maintaining full employment so that jobs are easier to find, and by offering genuine help with finding jobs, retraining and relocation.

Allocative efficiency, however, is by no means the only case for free competitive markets.

Another case lies in the experience of J.K. Rowling. She, like Agatha Christie, C.S.Lewis and many others, had her work rejected by numerous publishers until it was finally taken up. Similarly, George Lucas's initial proposal for Star Wars was rejected by both Universal Studios and United Artists. And record companies turned down the chance to sign Elvis and the Beatles. All of which vindicates William Goldman: nobody knows anything. Had there been only one or two publishers, film studios or record companies, we'd probably not have heard of these. But in a healthy market economy there are many, and so readers, viewers and listeners get what they want. Markets, as Hayek noted, help to overcome the fact that any individual has only very limited knowledge.

One of their great benefits is that they give us product variety. The USSR put a man into space but struggled to give people nice shoes. That's the merit and demerit of central planning.

Competitive markets do something else. They increase productivity (pdf) not just by forcing incumbents to up their game but also by driving inefficient firms out and having more efficient ones enter. Jonathan Haskell and colleagues have found that around half (pdf) of manufacturing productivity growth comes from the latter. As the CMA put it (pdf) in 2015:

There is a strong body of empirical evidence showing that competition can drive greater productivity. Within-country studies demonstrate a positive relationship between strength of competition and productivity growth across sectors. Similarly, cross-country studies suggest that countries with lower levels of product market regulation, enabling stronger competition, tend to have higher levels of productivity growth.

Markets, however, also have their downsides, and not just in the textbook cases of them sometimes leading to monopoly and often producing negative externalities such as environmental degradation and not enough positive externalities such as research and development.

Many of these downsides are in financial markets. Markets are selection devices, and sometimes they select wrongly, in part because of an inability to distinguish luck from skill. As Armen Alchian wrote in 1950 (pdf):

The greater the uncertainties of the world, the greater is the possibility that profits would go to venturesome and lucky rather than to logical, careful, fact-gathering individuals.

In this spirit Bjorn-Christopher Witte has shown that fund managers who take risks and get lucky win market share at the expense of more skillful but cautious ones. That's consistent with a finding by Nick Motson and Andrew Clare, that retail investors buy into good performing funds, only to see them subsequently under-perform. And Pascal Seppecher and colleagues at the University of Paris show that markets select in favour of highly-geared companies in good times but in favour of cautious ones in bad times, with the result that booms and slumps are more violent than they otherwise would be.

Markets also have costs because, as Ronald Coase pointed out (pdf), it is sometimes difficult to write contracts or to check whether they have been fulfilled. This true of private pensions, and workplace pensions. We can't know in advance what returns a provider will offer, and their management charges compound horribly over time. It's cheaper and less risky for the state to provide pensions than the market.

Yet another example is government subcontracting. Sam Freedman's Failed State is especially brilliant on this. He shows how contracting out probation services led to subcontractors not caring about re-offending, and how privatized childrens' homes move children miles away from friends and family, making them vulnerable to grooming gangs and other criminals. He says:

Much government business with private providers no longer conforms to anything resembling a functional market with properly aligned incentives. (Failed State, p96).

This problem is exacerbated by another: motivation crowding out. Who is likely to be the better probation officer: the one drawn to the profession by a desire to rehabilitate offenders; or one who will earn a little more for hitting a contractual target? Who is likely to better look after vulnerable children: someone attracted to work in childrens' homes by a love of children; or one working for a profit-maximizing private equity firm? If the cash nexus comes to dominate, other motives such as professional pride recede not just because people change but because those with strong professional ethics simply leave the job.

Which brings us to a problem. Markets are not merely a value-free technology, to be used or not depending upon the precise job in hand. They also have an ethical dimension. In Spheres of Justice Michael Walzer argues that there are some things which money should not be able to buy, because to do so would violate the very meaning of them: criminal justice; divine grace; political rights such as to vote and free speech; and so on. The Beatles were right: "money can't buy me love", even if it can get you some of its correlates. In this spirit, the buying of political influence via lobbyists and party donors is simply wrong; it denies what democracy is. Allocative efficiency is not the only value.

Another argument for limiting markets comes from those with environmental or aesthetic motives, or those wanting to restrict the domain in which capitalism operates. Patrick Grant urges us to buy less disposable clothing from companies like Shein and fewer but better items. Jason Hickel proposes measures to reduce advertising and planned obsolescence. And in everyday activities such as allotments, repair cafes or early retirement people are reducing the realm of market activity. Colin Leys, echoing Marx, has shown how capitalism tries to expand markets in order to raise profits - but there is a backlash to this.

Saying all this raises a problem. The government's attitude to markets seems at odds with what I've said. Genuinely useful pro-market policies would impose fierce competition, not just through strong anti-monopoly measures but through looser intellectual property protections and ensuring start-up companies have access to credit. If anything, however, the government is doing the opposite to this. Its demand that the CMA take "pro-business decisions" betokens a bias to incumbent companies. And in her recent speech on "kickstarting" growth Reeves praised businesses without noting that market forces cause growth through creative destruction, which is (or should be) a threat to such businesses.

On the other hand, though, the government seems keen on markets where it shouldn't be. It's showing little enthusiasm for ending the subcontracting of public services, or for stopping the sale of political influence. It is permitting a sham market in water, which is merely a front for theft. It is sympathetic to financial deregulation and cryptocurrencies, whilst doing nothing to promote useful financial innovations such as in GDP-linked securities. And in permitting lobbyists and rich donors to buy political influence it is enabling a market which undermines the value and meaning of democracy.

What's more, it is doing nothing to promote decommodification. It has dropped the Corbynite interest in universal basic services (pdf), for example, and its desire to expand Heathrow and cajole the unwell into work is a sign of a desire to simply expand economic activity at all costs. This, however, is one of the drawbacks of social democracy: the need for tax revenue and to retain the cooperation of capitalists conflicts with the need to reverse commodification, be it on grounds of environmentalism, efficiency or ethics.

John Stuart Mill famously said that liberty is often granted when it should be withheld and withheld when it should be granted. The same is true of market activity. We no longer need trouble ourselves with sloppy thinking about markets on the right, but we need to confront it in the government.

Capitalism vs democracy

People are falling out of love with democracy. In one recent poll, over half of 13-27 year-olds said they would prefer a "strong leader" to our curent democracy. A survey last year by Pew Research found only 31% of UK people saying that representative democracy is a very good system of government, a decline since 2017. And only 30% of voters now say it was right to leave the EU, suggesting that they believe our biggest exercise in direct democracy was a failure.

This scepticism about democracy is shared by some thinking people, embodied in Jason Brennan's Against Democracy and Bryan Caplan's The Myth of the Rational Voter.

None of this should be surprising in a historical context. Benjamin Franklin didn't actually say that democracy was "two wolves and a sheep voting on what to have for dinner" but the line was plausibly attributed to him because there was for decades antipathy towards democracy among a ruling class who feared it would lead to the tyranny of an ill-educated mob. That's why Victorians were so loath to extend the franchise.

Unquestioned enthusiasm for democracy was only a 20th century phenomenon - and one that seems to be on the wane in the 21st.

We should therefore ask: what's so good about democracy?

One standard answer is that it give power to the "will of the people". This, however, runs into obvious problems. Why, then, does the government have a massive majority despite winning less than 34% of the votes? Why does public opinion shape policy in some areas (such as migration) more than in others, such as public ownership or wealth taxes? Are people's preferences a datum or a product of social pressures and of what is on offer from the capitalist media? Are they a good guide to their interests?

This answer, then, has rarely been used as a serious defence of democracy.

Which wouldn't be a problem, were it not for the fact that other defences don't seem terribly strong in our actually-existing capitalist democracy.

One is that democracy embeds a form of equality, that of citizenship rights (pdf). As the 1789 French Declaration of the Rights of Man (sic) put it:

Men are born and remain free and equal in rights...
Law is the expression of the general will. Every citizen has a right to participate personally, or through his representative, in its foundation. It must be the same for all, whether it protects or punishes. All citizens, being equal in the eyes of the law, are equally eligible to all dignities and to all public positions and occupations, according to their abilities, and without distinction except that of their virtues and talents.

The problem is, however, that whilst we all have equal rights to vote and to participate in the making of law, we don't have equal influence, and not merely because the votes of those living in marginal constituencies matter more than those of people living in safe seats. It's also because the rich have much greater say, and not just because they've bought politicians and the media. It's because they control businesses and so governments (wrongly) believe they must win their favour if they are to achieve economic growth. It's also because, as Adam Smith said "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" and so we defer to them - a tendency corroborated by research into the just world illusion (pdf) and related cognitive biases.

In these ways the rich have more power than those with more relevant "virtues and talents". This conflicts with the notion of democracy being valuable because it is a form of equality.

A second argument for democracy is perhaps more plausible. It's that, as Adam Swift put it in a popular textbook:

People living under laws that they have made for themselves enjoy a kind of freedom (the kind of freedom called autonomy - self-rule) not enjoyed by people whose laws were made by others. (Political Philosophy, 2nd ed, p204).

It's this that Brexiters celebrated when we left the EU. But the mere fact that many younger people don't value democracy suggests they don't feel the benefits of self-rule, perhaps because they don't feel they have much chance of influencing policy.

Another argument for democracy is more consequentialist. It was put by Tocqueville:

Democracy does not provide people with the most skilful of governments, but it does that which the most skilful government often cannot do; it spreads throughout the body social a restless activity, a superabundant force, and energy never found elsewhere, which, however little favoured by circumstance, can do wonders.

And echoed by Mill:

Wherever the sphere of action of human beings is artificially circumscribed, their sentiments are narrowed and dwarfed in the same proportion.

Whether this is actually true is doubtful; there's plenty of energy and self-improvement in China or Singapore, for example. Even if it is, though, it's not clear that recent UK governments welcome it. Harsh penalties against protesting; Labour's lack of support for counter-protests to the far right last summer; and the indifference (or worse) of both main parties to the shrinking of universities all suggest that the political class doesn't value the energy or "intellectual exercise" which Mill and Tocqueville thought were the results of democracy.

There's a further alleged benefit of democracy which is even more absurd, though. It's that democracy uses the wisdom of crowds.

The problem with this is simply that the conditions required for this wisdom to yield good results simply don't hold, because voters's beliefs aren't merely wrong but correlated and so are systemically wrong - a problem which, as Bobby Duffy has shown, is worldwide. Saying this is not the arrogance of a metropolitan elitist; voters themselves now think the result of the 2016 Brexit referendum was wrong.

This is why we have representative democracy. Voters' systematic errors about basic social facts needn't be a problem if their elected representatives can deliberate rationally on the basis of good evidence.

But they don't. The problem here isn't merely that the whipping system restricts diversity of opinion, or that some MPs have bought into the idea that they are mere delegates of the people to do their bidding. It's also that even the best MPs, like all of us, have biases by virtue of their profession. They are likely to be overconfident about what top-down policies can achieve; to be biased towards managerialism and against empowering people; and to underweight of the problems of bounded knowledge and rationality.

Nor are MPs less beholden to the rich than are voters generally. If anything, the opposite. The fact that the government isn't nationalizing utilities, imposing a wealth tax or rejoining the EU - despite these having popular support - shows they are swayed more by the opinions of a few billionaire crank newspaper owners than by the public.

None of this is an argument against democracy. Churchill was right: it is "the worst form of government, except for all the others." Instead, it's an argument for rethinking how democratic ideals should be implemented. Henry Farrell is dead right: "what we need are better collective means of thinking." We need more institutional brains, as we might acquire - for example - from forms of deliberative democracy.

Almost no mainstream politician or pundit is even asking how to do this. Why not?

Part of the answer lies in the fact that ideas are shaped in our formative years: as Napoleon said, “to understand the man you have to know what was happening in the world when he was twenty.” And in the formation of those of us over 50, western politicians saw democracy as a self-evidently good thing; it was contrasted to the "evil Empire" of the Soviet bloc. And so capitalism and democracy were conflated in the public mind.

But this was an unhappy alliance because, as Jean Batou says, there has always been a tension between the two. Yes, capitalism needs democracy because popular consent, even if partial and ill-informed, helps legitimate inequality. But on the other hand, the power of the rich - even when they are not drug-addled neo-nazis - undermines the virtues of democracy. And this is becoming obvious to voters: a survey by the Fairness Foundation found that 63% of Britons think that the very rich have too much influence.

For now, this opinion is latent and largely unarticulated except on the margins of political discourse. But it poses questions: can we build a better democracy without challenging actually-existing capitalism? And if we cannot, which should give way?

What the left can learn from Richard II

I've a feeling we're not in The West Wing any more. Educated technocrats have been in retreat against the likes of Trump and Meloni. And even where the anti-technocrat right are out of power, they have disproportionate influence over the agenda: culture war issues and immigration are more widely discussed than economic democracy, rentierism or the poor quality of management.

Farage's talk of "PPE bollocks" was the philistinism typical of the weirdo. But in one regard he had a point: PPE does not equip one to win and retain power today. A lot of what we learn in PPE is, to paraphrase Marx, how to write recipes before you have a kitchen.

So, we need a different education. One, I suggest, is Shakespeare and in particular Richard II, the story of how he lost his kingship to Henry Bolingbroke, as this tells us much politics today.

One thing it tells us is that morality doesn't much matter. Richard thought he ruled by divine right:

The breath of worldly men cannot depose
The deputy elected by the Lord. (Act 3 scene 2).

Those who challenged this right, he said, "break their faith to God" and "profane, steal, or usurp". He thought a criminal could not become ruler. Just like the Democrats, however, he got a nasty surprise. You don't get a clear view from the moral high ground.

Nor does truth very much. Two of the few factual claims Bolingbroke makes are quite likely wrong: that Mowbray has killed Gloucester; and that the king has separated from his wife. That didn't stop him winning power. There's nothing new about weaponizing fake news.

Something else doesn't much matter - narrative. Richard has one - that God made him king - and he has the pomp and theatricality of a divinely-appointed monarch. By contrast, Bolingbroke is down-to-earth and transactional and - on stage at least - gives no good reason why he should be king; in fact he speaks quite little, with 413 lines, many in short speeches, compared to Richard's 758.

If morality, truth and narrative are of little use, what then does matter?

Simple - power. Bolingbroke has the Machiavellian* skills - again manifested mostly off-stage - to win the support of both the common people and fellow nobles. What matters is the building of groups of supporters, and the weakening of potential rivals. And once one has a growing band of supporters, there'll be a bandwagon effect as others jump onto the winning side: Shakespeare's Duke of York joining Bolingbroke's cause prefigured American newspaper bosses aligning with Trump.

Richard's failure in this regard is described not by himself, nor even by a noble, but by a gardener:

O, what pity is it
That he had not so trimmed and dressed his land
As we this garden! We at time of year
Do wound the bark, the skin of our fruit trees,
Lest, being overproud in sap and blood,
With too much riches it confound itself.
Had he done so to great** and growing men,
They might have lived to bear and he to taste
Their fruits of duty. Superfluous branches
We lop away, that bearing boughs may live.
Had he done so, himself had borne the crown. (Act 3 scene 4)

Marx - a great reader of Shakespeare - thought that emergent trends within capitalism would, from a socialist point of view, do the gardener's job. A decline in the numbers of petit bourgeois, he thought, would "wound the bark" by weakening a class hostile to socialism, whilst a growing working class would strengthen the "bearing boughs" that support socialism.

He was too optimistic. Coalitions of interests don't just emerge. They must be created. It's in this context that policy matters. It is not merely a matter of technocratic fixes or hawking product like market traders, but a way of creating or weakening alliances.

In this, Richard was a failure. In confiscating Bolingbroke's inheritance, he not only motivated the latter to want to topple him but also alienated other barons who feared a similar fate.

Thatcher, by contrast, was - for a while - a success in this respect. She did not use sweet reason alone to persuade people of the merits of free markets: we know now that public opinion doesn't much favour these. Instead, she "wounded the bark" by weakening trades unions thus enfeebling a threat to her power. And she fostered the growth of "bearing boughs" who would support her by creating a new class of house-owners who identified with the interests of property owners.

Blair also helped bearing boughs to thrive, albeit perhaps inadvertently. In expanding higher education he created a cohort of liberal-minded people who are frustrated with working conditions and inability to afford decent housing. That's a potential source of support for the left for years to come. The right's antipathy to universities isn't founded upon clever estimates of Mincer equations, but upon the sense that graduates are, like "great and growing men", a threat to their power.

Here, we see another failure of the Democrats, pointed out by Dani Rodrik. Bidenomics, he says "paid too little attention to the changing structure of the economy and the nature of the new working class". In not doing enough to offer service sector workers good jobs, it did not sufficiently cultivate the "bearing boughs" that could be a wide working class base.

Which brings us to the question: what is Starmer doing to weaken "great and growing men" who threaten his power, and to cultivate "bearing boughs" that might keep him in office? He needs to do so because, as Russell Jones says, his "mandate is a mile wide and an inch deep."

Here, he's missed a chance. He could have used Huw Edwards' conviction as a pretext to remove the BBC's Tory-leaning senior management, and he could use newspapers' admission of criminal behaviour as a reason to launch "Leveson 2" which if nothing else would bring the press into disgrace by publicizing its crimes against some of the people's favourite celebrities. In not doing this, he's not weakening opponents.

We must also ask: what coalition of interests is he fostering that will continue to support him? So far, the strategy seems to be to cultivate business interests. Supporting Lloyds against claims for compensation for mis-selling car finance; sacking the chair of the CMA for not offering enough "pro-business decisions"; and offering big tech help with developing AI all signal that Labour is on the side of incumbent big business.

Which is not enough. As Machiavelli said:

He who obtains sovereignty by the assistance of the nobles maintains himself with more difficulty than he who comes to it by the aid of the people.

So, what sections of the people are going to be "bearing boughs" for Starmer? Unless he can offer better public services, more affordable housing and better jobs, the answer might well be: not enough. Labour needs to achieve these not merely out of intellectual considerations of morality or economic efficiency, but because of the brute power politics of needing a client base beyond the media and a few rich donors. There'll come a time when revulsion against the Tories is not enough.

Here, though Richard II contains another lesson for Westminster politicians. Not only does the gardener know better than Richard the skills needed to maintain power, but he also knows, before the Queen does, that Richard has been deposed. A "little better thing than earth" (as the Queen calls him) posesses more wisdom and knowledge than she or her husband.

Which tells us that ground truth and the wisdom of crowds matter. Shakespeare was anticipating Kenneth Boulding's words (pdf):

All organizational structures tend to produce false images in the decision-maker, and that the larger and more authoritarian the organization, the better the chance that its top decision-makers will be operating in purely imaginary worlds.

Starmer's fate, ultimately, will be determined not by the advice of his courtiers or by Westminster bubblethink or by his own self-image but by the brute facts upon the ground: what bases of interests favour him? which ones oppose him? and what are their relative powers? If he loses grip on this, he faces a similar if less grisly fate than Richard II.

* It's not clear how much Shakespeare knew of Machiavelli. The Prince was banned in England during his lifetime, but - in an early example of the Streisand effect - seems to have been popular, and Shakespeare does make passing reference to "Machiavel" in Henry VI part 3.

** "Great" here means "powerful" rather than being a term of approval; Adam Smith used the word in Shakespeare's sense.

Another thing: in saying all this I am of course making a case for education in the humanities. Literature isn't just entertainment (though what's wrong with that?); it sheds light upon some neglected truths about the world.