Stumbling and Mumbling

When reputation misleads

Rebecca Long Bailey inadvertently posed a good question yesterday, when she tweeted:

Rishi Sunak the new Chancellor is a former Goldman Sachs banker who has backed anti trade union regulations; tax cuts for big business; opposing tax avoidance clampdown; cutting tax for wealthiest. The mask is slipping already, this isn’t a different kind of Tory government.

This raises the same question that is being begged by the Labour leadership contest: to what extent does a person’s past behaviour and beliefs predict their future behaviour?

We have countless examples of it not doing so. All of you will have worked with somebody who arrived at your firm with a glittering CV but who turned out to be a dunderhead, and conversely with somebody of no great reputation who turned out to be excellent. Indeed, this is pretty much the history of top-flight football managers.

Similarly, in politics, people have defied their reputations. Martin McGuinness had a history of terrorism, but he became essential to the peace process. The racist Lyndon Johnson did more for civil rights than JFK who had a liberal reputation. Theresa May arrived at Number 10 carrying hopes she would fight “burning injustices”, just as Gordon Brown did to hopes he would be a Viking warrior, whilst Thatcher was initially an under-estimated housewife. Francois Mitterrand became president amid socialist hopes, but was soon forced to make the austerity turn. And few people in 1997 predicted that Blair would become a reckless military adventurer.

And this is not to mention the many “future Prime Ministers” who shrank into obscurity - who today remembers John Moore? – or the ministers hoping to make reforms only to “go native” under pressure from the Sir Humphrys.

So, why might a man’s past be an unreliable guide to his future?

Sometimes, it’s because he can use his reputation to do things that others can’t. McGuinness’s links to the IRA allowed him to persuade men to put down their arms, just as Richard Nixon’s reputation as a cold warrior gave him the political capital to seek détente with Russia and China.

A second reason lies in William Goldman’s eternal truth: nobody knows anything. What we know of somebody – especially if only by CV or reputation – is only a partial guide to the reality and their future. As investors in Woodford’s equity income fund know, even a good long track record is an imperfect indicator of the future.

Thirdly, and perhaps most importantly, we all face constraints and incentives that break the link between character and future conduct. As Marx said:

Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past. 

But this is not an insight confined to Marxists. Quite the opposite. Warren Buffett made the same point when he said:

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains.

And Charles Prince, former CEO of Citi, said the same thing when he famously said: “as long as the music is playing, you’ve got to get up and dance.” If incentives are strong enough, one’s past choices don’t predict one’s future ones.

Herein lies the reason why Ms Long Bailey might be wrong. Even if Mr Sunak is a head-banging inegalitarian, incentives and social structures constrain how far he can implement his desires. Acting upon his past beliefs is no way to retain the support of people who have only “lent” their votes to the Tories.

Now, I don’t say this with great certainty: I prefer to leave futurology to people who are paid enough to compensate them for making fools of themselves. I do so, however to flag up a danger for Labour – that they might be mischaracterising the Tories by painting them as simple-minded Thatcherites.

Indeed, Ms Long Bailey might be making a very anti-Marxist error – a version of the fundamental attribution error, of attributing too much to character and underplaying the importance of social structure.

Thatcherism's death

Thatcherism is dead. Boris Johnson’s love of big infrastructure projects conflicts with her preference for markets and caution about spending public money. His pulling out of the single market contrasts with her hailing it as “a fantastic prospect for our industry and commerce.” His increase in bus subsidies conflicts with her antipathy to public transport. (She never actually said that any man on a bus after the age of 30 should consider himself a failure, but the fact that it is so widely believed that she did so reveals something about her). And, of course, whereas Thatcher chose free market ideology over the wishes of northern (now post-) industrial towns, Johnson is making the opposite choice.

John Harris has quoted a senior minister as saying that “some very prominent strands of Conservative thinking were now in retreat” and that “some of the things we’ve celebrated have led us astray”. Those things are Thatcherite ones.

It’s not just the political climate that is anti-Thatcherite, however. So too is much of the intellectual climate. Thatcher regularly invoked Hayek and Friedman as intellectual influences. Not only does Johnson have no such equivalents, but perhaps the two most prominent economics Nobelists today – Paul Krugman and Joe Stiglitz – are hostile to Thatcherism. And Banerjee and Duflo’s latest book, Good Economics for Hard Times, is a flat rejection of her naïve faith in free markets, with its message that economies are sticky and slow to respond to shocks.

All this reflects the fact that the facts are now anti-Thatcherite. She hoped that deregulation, privatization, lower top taxes and the smashing of trades unions would lead to not just to an economic renaissance but also to a revival of what Dierdre McCloskey calls bourgeois virtues. But they haven’t. In fact, productivity growth was much slower in the Thatcherite era than it was during the post-war years. As I’ve said, there are many ways in which neoliberalism caused the productivity slowdown.

Nor have we seen a flourishing of bourgeois virtues. Thatcher hoped to create a society of men like her father, but left us one with men like her son. The assertion of “management’s right to manage” has led not to a healthier economy but merely to more expropriation. An under-appreciated sign of her legacy can be found on daytime TV. Programmes such as Homes Under the Hammer, Bargain Hunt and Antiques Road Trip show that the British public prefer to make money from rising house prices and selling tat rather than from graft, innovation and entrepreneurship*.

You might object here that one legacy of Thatcherism lives on - inequality. True. But of course, inequality and its defenders long pre-dated Thatcher. In many ways, what most distinguished Thatcherism is now gone. 

Herein, though, lies a wonderful paradox. It is not the Conservative party that has suffered most from the death of Thatcherism. It has successfully reinvented itself, helped in part by not suffering the handicap of having principles or feeling the need to think deeply.

Instead, perhaps the biggest casualty have been centrists. The collapse of Change UK, or whatever they called themselves, means that their parliamentary presence now matches their intellectual heft. My biggest beef with them – and indeed with the Labour right – has been their total lack of any worthwhile economic ideas.

There is, I suspect, a reason for this. Centrists were keen to accept “economic realities” when these were Thatcherite ones of fiscal “credibility”, tolerance of the wealth and power of the 1%, and faith that the capitalist economy could grow nicely with only little state help. Now that the realities are anti-Thatcherite – that inequality does real damage and that capitalism is stagnant – they are as helpless as a whale left on a beach after the tide has gone out.

The old jibe against the Labour right had some truth – that they were capitalism’s second XI. And why would anybody want a second XI when the first XI have made themselves fit for selection?

* This worked for me: most of my wealth has come from tax-free capital gains on housing.

The dangers in balance

Would balanced and impartial news and current affairs journalism be dangerous, even if it were done with maximum integrity and competence? I ask because of a recent paper by Benjamin Enke and Thomas Graeber.

We’ve known for a long time that, in the words of Glaeser and Sunstein, balanced news can produced unbalanced views. In a famous experiment (pdf) in 1979, for example, Charles Lord, Lee Ross and Mark Lepper showed people mixed reports on the effects of the death penalty and found that people who supported capital punishment became stronger in their support of it after reading them, whilst opponents of the death penalty also became more dogmatic in their opposition. Balance, then, can lead to polarization.

This mechanism, however, works on partisans – those who fancy themselves already informed. For those who are not informed, another mechanism can be at work, which is described by Enke and Graeber.

They call it probability compression. People who are uncertain of their own minds especially tend to treat low probabilities as if they were greater than they actually are. This is consistent with experiments (pdf) by Baruch Fischhoff and Waendi Bruine De Bruin at Carnegie Mellon University. They found that when students were asked to estimate low-probability events such as their chances of being burgled or getting cancer, they chose 50% probabilities more than they should. We also see it in gambling: punters back outsiders more than they should – over-rating small chances – and favourites (pdf) not enough. There’s a good reason why online bookies so often advertise accumulators: punters over-estimate the chance of long odds paying off. And we see it in stock markets too. Investors have paid too much for the slim chances that small speculative stocks will come good: it is partly for this reason that Aim stocks have under-performed mainline ones since their inception in the mid-90s.

Probability compression is slightly different from the tendency described (pdf) by Kahneman and Tversky for very low probabilities to be generally over-weighted. Kahneman and Tversky say we over-value small probabilities because we have a taste for long-odds bets, whereas Enke and Graeber say we over-estimate those probabilities.

It’s this mechanism that populist enemies of technocrats exploit. Michael Weiss and Peter Pomerantsev describe (pdf) how Vladislav Surkov, Putin’s eminence grise, puts forward competing stories “not to persuade (as in classic public diplomacy) or earn credibility but to sow confusion via conspiracy theories and proliferate falsehoods.” He is weaponizing relativism. Trump does something similar when he attacks “fake news”. He’s not intending to establish that a story is false, merely to sow a seed of doubt. So too do climate change deniers (described well by Rebecca Long Bailey) when they claim that the “science isn’t settled”, even though the overwhelming majority of scientists think it is.

In all these cases, people are exploiting probability compression. They suggest there is a small chance that the established narrative might be wrong, and invite listeners to over-estimate that chance.

This means that our hypothetically perfect provider of balanced news faces a nasty dilemma. On the one hand, it must present challenges to the consensus, because it is important that we avoid groupthink. But on the other hand, doing so invites people to over-estimate the small chances that the consensus is wrong.

For example, Simon has criticized the BBC for inviting Patrick Minford to discuss Brexit without telling the audience that the overwhelming consensus among economists is that Brexit would be harmful to the economy. Even if the BBC had done so, however, some of the audience would have inferred that the chance of the consensus being wrong was higher than it is.

This is all the more true because in this case (and others) probability compression is reinforced by other biases. One is a halo effect: the appeal of Brexit to many for non-economic reasons can spill over into a belief that it’s also good economics. Another is plain wishful thinking; if you want Brexit to succeed, you’ll easily persuade yourself that it will. And then there’s the familiarity effect: a falsehood you are familiar with can seem more credible than a true claim that’s not so familiar. A balanced report that repeats a false claim (perhaps if only to debunk it) can end up causing the claim to become too widely believed.

We all criticize the BBC for its failure to be properly impartial. My point here, however, goes further than this. It’s that even if the corporation were immaculately impartial it might end up inculcating false ideas. The problem with our politics, then, is not (just) bad journalism but the fact that voters can be systematically irrational.  

In praise of trade frictions

Are restrictions on free trade a better idea than generally thought? I ask because, despite his lauding of it, it is reported that Johnson will impose customs checks upon goods imported from the EU. This lends credence to the estimate (pdf) by The UK in a Changing Europe that Johnson’s plan might eventually cut UK GDP by over six per cent.

But might this estimate miss an important mechanism and thus over-state the costs of us leaving the single market?

What follows cuts against all my instincts in favour of free trade and EU membership. My gut tells me to agree with Martin Wolf’s claim that Johnson’s proposals mean shooting ourselves in both feet. But we should always question our beliefs. And there is, I suspect, more to be said in favour of trade frictions than we have heard so far.

My story starts in a strange place, with the Feldstein-Horioka puzzle. This is the fact (pdf), pointed out in 1979, that net capital flows between countries are much smaller than you would imagine or, to put it another way, that current account imbalances are surprisingly small.

One reason for this is that financial markets, on their own, cannot achieve any net transfer of capital between countries This is simply because every seller needs a buyer: I can only dump my holdings of UK equities if somebody buys them. My effort to shift capital out of the UK is therefore offset by somebody else shifting it in. Instead, a net transfer of capital out of the UK requires that there be a trade surplus. This, by definition, entails an offsetting outflow of capital: if we are selling more goods and services to foreigners we are earning more than we are spending – ie saving, and these savings must be invested abroad.

So, what is it that limits trade imbalances and therefore current account imbalances? The answer, said Maurice Obstfeld and Kenneth Rogoff in a famous 2001 paper (pdf), are trade frictions. By these they mean not just tariffs but also non-tariff barriers such as the red tape of border checks, regulatory differences or simply customers’ preferences (pdf) for home-made goods. It’s difficult for a country to export or import a lot simply because trade costs (pdf) are high. Trade imbalances, therefore, tend to be small.

One Big Fact supports Obstfeld and Rogoff’s theory. It’s that the EU’s single market reduced trade costs - and this led to a rise in countries’ external imbalances. For example between 1980 and 1997 (when Schengen came into effect) Germany ran an annual average current account surplus of just 0.9% of GDP. Since then, though, it’s run an average surplus of 4.7% of GDP. And since 1997 the external deficits of Spain and Greece have been twice what they were in the previous 17 years.

Trade frictions, therefore, reduce current account imbalances.

Which can be a good thing. To see why, remember that a current account deficit means – by definition – that a country’s domestic investment exceeds its domestic saving. But think about what this means for its banking system. If investment exceeds savings, the growth in bank lending might well exceed the growth in deposits or the purchase of bank equity by domestic savers. Which means banks might well be becoming riskier – either because they are becoming more highly leveraged, or are more dependent upon wholesale funding to plug the growing gap between loans and deposits. It is for this reason that the NIESR (pdf) and Dallas Fed (pdf) have both found that big current account imbalances help predict financial crises.

The single market, therefore, might well have led to the euro crisis by fuelling greater external imbalances.

Was it really an accident that developed economies saw almost no banking crises during the Bretton Woods era, when current account imbalances were small, but saw plenty before and since?

In limiting current account deficits, then, trade frictions help preserve financial stability.

This is a great prize. Coen Teulings and Nick Zubanov have shown that financial crises lead to a huge and permanent loss of GDP. And this can be multiplied, because crises can lead to bad policy. Nick Crafts points out that the last one gave us austerity and hence Brexit. “The economic costs of the banking crisis are much larger than is usually supposed” he says. An important transmission mechanism here has been proven by Ben Friedman: economic stagnation, he has shown, leads to intolerance, xenophobia and anti-democratic sentiment.

Against all this is the fact that trade frictions create lots of deadweight losses. But even summed across countless goods, these can be small. So much, in fact, that Arnaud Costinot and Andres Rodriguez-Clare have estimated (pdf) that if the US were to shift to autarky it would only cost it 2-8% of GDP: for the UK, the cost would be around four times as much but for the EU much the same. As James Tobin used to say – rightly – “it takes a heap of Harberger triangles to fill an Okun gap.” And an Okun gap is what we get from a banking crisis.

Of course, Harberger triangles aren’t the only cost of trade frictions. There is also the fact that, in reducing competition, they retard productivity and innovation. But banking crises also do so. It’s a wash.

So, what can be said against this argument for trade frictions? I don’t think it’s sufficient to say that banks are sufficiently strong now that a crisis is unlikely. Even if this is true now, it might not remain the case in coming years. Over long enough periods, small probabilities become big ones.

Instead, you could argue that we are trading off a certain loss – all those Harberger triangles – for what is only a reduced probability of disaster. Your attitude to this trade-off will depend upon your taste for risk.

A stronger argument though is simply that there is a cheaper way than trade frictions of reducing the probability of a crisis – to impose higher capital requirements upon banks. But what if the power of the banking lobby prevents this?  

All this suggests there might be more to be said for trade frictions than supposed. Which poses the question: why have we not heard an argument along these lines, when we have heard so many much weaker ones?

On socially influenced preferences

Some ideas are both radical and conservative at the same time. This is a thought triggered by reading Robert Frank’s latest book, Under the Influence.

“Context shapes our choices to a far greater extent than many people realize” he writes. “In virtually every domain, evidence suggests that our consumption patterns tend to mirror those of others in our social circle.” He shows that behaviours such as smoking, becoming obese, committing crime (pdf) or even how many children we have are all heavily shaped by what our peers do.

This, he says, means that much of what we do imposes externalities upon others. The biggest externality of smoking, he says, is not so much the passive smoke that smokers impose upon others but the fact that their smoking encourages some others to take up the habit. This, he says, means there is an orthodox Pigovian case for taxing things like cigarettes or sugary drinks.

He goes further. There are, he says, expenditure cascades: others’ spending makes us spend more:   

Higher spending at the top has shifted the frames of reference that define adequate from those just below the top, and so on, all the way down.

This, he believes, leads to a case for a progressive consumption tax.

What’s more, he thinks that opposition to higher taxes on the rich is motivated by “the mother of all cognitive illusions”. A lot of what we buy are positional goods, such as big houses or big cars. Taxing these more heavily won’t affect their positionality, any more than would shortening a ladder change the fact that some people are on a higher rung than others.

We should, I suspect, distinguish here between behavioural externalities and informational externalities. For example, if I buy an SUV because others’ huge cars make me feel unsafe on the road in a small car, it is a behavioural externality. If, however, I buy a big car because I believe doing so is what somebody in my position should do, we have an informational externality. (The latter, I think, contribute to asset price bubbles, among other things.)

Informational externalities, says Frank, influence our political views. He cites rising support for gay marriage or the legalization of cannabis as examples: the more that others’ hold such positions, we more we are likely to see them as mainstream and so give them credence.

From one perspective, all this is unexceptional. Frank is just building on a point made by Adam Smith:

A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct. Custom, in the same manner, has rendered leather shoes a necessary of life in England. The poorest creditable person of either sex would be ashamed to appear in public without them.

Frank and Smith are expressing a form of cultural determinism – which has been a mainstream, if controversial, position in anthropology for years.

From an economist's point of view, however, it is radical. It is yet another challenge to the fiction of homo economicus, which envisages us as rational agents with exogenous preferences and beliefs. We should perhaps read Frank alongside Shiller’s Narrative Economics, which shows how our beliefs are shaped not just by facts but by stories of sometimes dubious truthfulness.

Indeed, we can push Frank’s theory a little further into much more radical territory than he explores. If our behaviour and ideas are influenced by context, why shouldn’t our identities be also? Although he never mentions it, there’s nothing in Under the Influence that contradicts Simone de Beauvoir’s claim that “one is not born, but rather becomes, a woman” – that femininity is a social construct.

And if our preferences are so endogenous, why should policy-makers attach weight to them? Pushed only slightly further, Frank’s ideas fit with Jason Brennan’s Against Democracy. And they certainly pose Daniel Hausman’s question: why satisfy preferences? (a question he answered mostly in the negative.)

We can go even further. Although Frank tries to reconcile his views on endogenous preferences with liberalism by pointing out that taxes are less restrictive than regulations, his work poses a challenge to liberalism. If our beliefs, wants and even identities are heavily socially influenced, then we are what Michael Sandel called in Liberalism and the Limits of Justice “radically situated subjects”, and we cannot slough off our identities to go behind Rawls’ veil of ignorance. And that brings into question a foundation of liberalism.

Many of us will find Frank’s points empirically unexceptional. And yet they raise some big questions. Which reminds us that economics cannot be a merely technocratic discipline.

The bias against social science

We need the social sciences, but the media does not provide them. I say this because of a recent tweet by Frances Coppola:

If there is one thing we should learn from Auschwitz, it is that atrocities are committed by ordinary, nice people with the full support of other ordinary, nice people.

This contains an unpleasant truth, captured by Hannah Arendt’s phrase “the banality of evil”: at least some of the perpetrators of the greatest crime in history were just very ordinary men.

But this is an extreme manifestation of a general truth, which is the essence of social science – that social events are not the simple product of individual character. History, said Adam Ferguson, “is the result of human action, not of human design.” His contemporary Adam Smith thought that the invisible hand would at least sometimes cause selfish men to act in the public interest:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. 

Conversely, Marx thought that competitive forces would cause even decent capitalists to endanger their workers:

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

Smith and Marx’s disagreement hides a common idea – that social facts are the product of complex mechanisms, not individual character.

Indeed, very often individuals’ intentions can prove self-defeating. If everybody tries to save more, aggregate incomes fall and so we save less. If everybody tries to work longer in the hope of getting promotion, we all slog ourselves without changing our job prospects. If each individual capitalist tries to raise profits by cutting wages, aggregate demand falls thereby cutting profits. And so on.

But there’s more. Individuals’ personality and preferences are themselves at least partly socially constructed. As Robert Frank shows in his new book, Under the Influence, our behaviour and ideas are shaped by our peers. Such apparently different events as riots or stock market crashes are caused by information cascades - sometimes ones in which the blind lead the blind. We are also shaped by history. And as Ben Friedman showed and subsequent events have proven, economics also matters: hard times, at the margin, dispose people to become more intolerant, anti-democratic and nationalistic.

The task of the social sciences is to illuminate all these effects. But there is a bias against the social sciences in the media – a bias which is not necessarily intended or even conscious. (What was that I was saying about events not being the product of character?) I’m thinking of five separate(ish) things here:

 - The news underplays slow but crucial changes. If you’re anti-capitalist you can cite the productivity stagnation as an example here; if you’re pro-capitalist, the decline in global poverty in recent decades.

 - Journalists prize human interest stories. But this can efface the sociological imagination. And it can lead to a kneejerk response to any event: “whose to blame?” For example, the financial crisis and CEOs’ high pay are blamed on greed. This ignores the fact that almost all of us are greedy much of the time, and yet crises occur only rarely and only a few of us earn millions – a simple fact which tells us to look for other explanations.

 - Journalists, especially perhaps on TV, try to describe what they see. But the essence of the social sciences is that there are countless mechanisms which are unseen, and invisible. To take an example from today, the BBC reports that dissatisfaction with democracy is at a record high. Public opinion can be measured and seen. But the reports tells us little about why this might be, and ignores Friedman’s important point that economic stagnation breeds anti-democratic sentiment (pdf).  

 - The best journalism invokes a distinction between fact and values, encapsulated by C.P. Scott’s maxim, “comment is free, but facts are sacred." This leads to a distinction between factual reporting and opinion – between descriptions of what is happening and of what should happen. This distinction, though, gives too little place to the question: why is this happening? Newspapers employ too many moralists and not enough scientists.

 - A concern with facts can deflect attention from mechanisms. Take, for example, the BBC headline, “Brexit deal means ‘£70bn hit to UK by 2029'”. What matters here is not the precise number; this merely invites the retort: how can they possibly know that?” Instead, what really matters are the mechanisms – that frictions to trade can impede growth and, worse still, gradually slow down productivity growth.

It is in these senses that we can speak of BBC bias. Bias doesn’t arise merely from bad journalism or individual ill-intent. It also does so from the fact that journalism and social science are two different things.

We don't want economic growth

In launching a new 50p coin to mark Brexit, Sajid Javid seems to be interpreting the role of Chancellor in the same spirit that Trigger regarded Del Boy’s request to talk about money: “I saw one of those old £5 notes the other day.” We might have hoped that his energies would be better directed towards improving the UK’s lamentable productivity performance.

In fact, though, we should not snark. Mr Javid has grasped an important point not understood by leftists and economists (two groups which increasingly overlap) – that the public do not want economic growth.

We know this because they have consistently voted against it. The party of austerity won a majority in 2015; the public voted for Brexit in 2016; and they supported Johnson’s hardline Brexit deal last month even though it will reduce (pdf) GDP over time. Philip Hammond – remember him? – claimed that “no-one voted to become poorer”. But he was wrong. They did.

It’s not just votes that tell us that people don’t want economic growth. The ONS has found that well-being has edged up since they started measuring it in 2012 despite (or maybe because of) lacklustre GDP growth.

All this is the flipside of the Easterlin paradox – the finding that, over long periods, rising income doesn’t increase happiness (pdf). If growth doesn’t make us happier, the lack of it shouldn’t trouble people much*.

There are, for my purposes, two things are going on here.

One is that what matters for well-being is not so much absolute income as our income relative (pdf) to our peers: if we are doing better than them, we’re happy and if we are doing worse, we’re miserable. Andrew Clark and Andrew Oswald have found that happiness depends more upon relative (pdf) income than absolute income, whilst Christopher Boyce and colleagues have found that it is a person’s position in the income ranking (pdf) that matters for their well-being, not their absolute income**.

If it is relative income we care about, then stagnation shouldn’t trouble us. We have as much chance of getting ahead of our peers when GDP is flatlining as we do when it is growing.

Also, though, economic growth is associated with some things many of us don’t like – with the creative destruction than runs down some industries and areas. As Banerjee and Duflo show in Good Economics for Hard Times, the economy is “sticky”: people do not or cannot adjust to such disruption. Hence Anand Menon’s heckler’s point: “that’s your bloody GDP. Not ours.” 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 – and better than the tumultuous, threatening growth of the 80s and 90s.

All this helps explain the Tories’ lurch towards nativism. The problem with any policies to revive growth is that they jeopardize vested interests. This wasn’t just true of Labour policy. Stian Westlake and Sam Bowman’s proposals – the best I’ve seen from outside Labour – envisage tougher competition policy and a tax on land values. Both are threats to the Tory client base.

And why bother rocking the boat? Of course, as Benjamin Friedman showed in 2006 – and as subsequent events have vindicated – economic stagnation breeds intolerance and xenophobia. For many, however, this is not a bug but a feature.

* Yes, there are big doubts about that paradox. For my purposes, however, we don’t need to believe the coefficient of well-being on GDP is zero: a small positive one is consistent with my point.

** This isn’t to say that all income inequalities depress those at the bottom of the pile. They can make younger people happier, if they anticipate getting the high incomes themselves. Graduate trainees, for example, need not get the hump at their bosses' high earnings.

The interest rate puzzle

Simon points to the widespread (but not universal) consensus among economists that house prices are high because (pdf) interest rates are low. For me, this raises a puzzle.

On the one hand, this seems not just true, but trivially true. Housing is an asset. And the price of an asset should be equal to the present value of its future cashflows: rent if you’re a landlord or the rent saved if you’re an owner-occupier. Lower interest rates raise the discounted present value of future cashflows and so raise asset prices. Which is consistent with the fact that house price to income ratios have trended up as real interest rates have trended down.

This is just common sense.

But, but, but. There is one significant asset class that has not benefited from the downtrend in real interest rates – equities. The dividend yield (or earnings yield) on the All-share index is now much the same as it was in the early 90s despite the slump in real interest rates.

Hence my puzzle: why have lower real rates boosted house prices so much but not share prices?

An obvious possibility arises if we remember the old adage, “never reason from a price change.” Why have real interest rates fallen? One obvious possibility is that growth expectations have done so; low rates are the product of actual and expected secular stagnation. To the extent that this is the case, the benefits to shares of lower discount rates have been offset by a drop in expected future dividends, leaving valuations unchanged.

This, however, doesn’t get us far. For one thing, lower expected economic growth should also mean lower rents. Rental yields therefore should not have changed either.

How, then, can we explain the failure of share prices to respond as much as house prices to lower rates?

In theory, this would happen if investors fear a shift in incomes from profits to wages; in the 70s, this caused house prices to rise relative to equities. But this seems more fear than reality: for most of this century, Kaldor’s stylized fact has held for the UK: the profit share hasn’t changed much.

A more promising possibility is that the expected growth of listed companies has fallen. Today, these are older than they used to be and many might have gone ex-growth. Perhaps the best growth companies are to be found among those that aren’t on the market.

All this, though, just raises another problem: the numbers just don’t add up. Since the early 90s, we’ve seen a six percentage point drop in real interest rates. But real GDP growth cannot have fallen that much. And even if we chuck in a bit of expected redistribution away from profits and a drop in growth of quoted companies relative to unquoted ones, we must surely still be shy of six percentage points.

There’s an obvious thing which might fill this gap – risk. One reason why dividend yields haven’t fallen is that the equity risk premium has risen.

There are good reasons why it might have done so – not least being that the financial crisis reminded us that economies and markets are more volatile than we thought during the “great moderation.”

But again, we have a puzzle. Many of the risks to equities are also a risk to house prices – such as the danger of recession or expropriation of exploiters. Why should equities have been more sensitive than house prices to these low-probability/high-impact dangers?

All this leaves us with three possibilities.

One is that housing was grossly under-priced in the 90s whereas equities were not, and falling interest rates have triggered a correction of that misvaluation. 

A second is that both markets are worrying more about distribution risk – a shift from profits to wages – than I think.

A third is that simply that housing is over-priced.

There is a precedent for an entire asset class to become grossly misvalued when interest rates change. Back in 1979, Franco Modigliani and Richard Cohn argued (pdf) that equities were hugely under-priced because investors were discounting future cashflows by high nominal interest rates; they were taking on board the bad news of high inflation and not the good. The subsequent rebound in the market suggests they might have been right (pdf).

I wonder whether a slightly analogous thing might be happening to house prices. They are pricing in the good news of low interest rates but not the bad.

I don’t say this with huge confidence. But there is, surely, a puzzle here.

Inequality under New Labour

Zarah Sultana’s recent claim that we have suffered 40 years of Thatcherism prompted Blairites to point to a big difference between Thatcher and New Labour – that whilst inequality rose a lot under Thatcher it largely levelled off under New Labour.

Measured by the Gini coefficient, this defence is correct. According to IFS data for incomes after housing costs, this coefficient rose from 0.261 to 0.374 from 1979 to 1996-97, but edged up only slightly more (to 0.405) during the New Labour years.

What should we make of this? A bit of me recalls Chris Rock: “you want some credit for some shit you’re supposed to do.”

Also, though, the Gini coefficient is, essentially, an average of all inequalities. It can stay the same if inequality increases in some respects but falls in others. And this is what happened under New Labour.

My chart, taken from IFS data, shows the growth in real incomes after housing costs, for each fifth percentile of the income distribution. It shows that it was the 20th-30^th percentiles that did best under new Labour – that is, those worse off than three-quarters of people. These are those with incomes after tax and housing costs equivalent to around £280 a week today for a childless couple.  

Inequality tended to fall under New Labour because these got better off relative those on slightly higher than median incomes. This wasn’t just because of market forces. New Labour did genuinely help the moderately badly off with policies such as the minimum wage and tax credits.

Other inequalities, however, increased. One was between the very lowest incomes and this 30^th percentile. Some of these shouldn’t be the object of our sympathy: they are wealthy folk who are living off their capital. Others, though, are those who have fallen through the safety net or are unemployed.

The other inequality that increased was at the top end. The 95^th percentile – equivalent to a weekly income of £1160 in today’s money – got even better off than the median. These IFS data don’t cover the very rich. But HMRC data do. And they show that the top 1% of taxpayers also did well under New Labour, with after tax incomes rising 56% compared to 38% for the median taxpayer. Peter Mandelson was famously “intensely relaxed about people becoming filthy rich”. And they did just that.

The flattish Gini, therefore, disguises the fact that some inequalities fell whilst others rose.

Which poses two questions.

One is: how does the Tory government compare to New Labour?

My second chart helps answer this. It shows a similar pattern in one regard: those slightly below median incomes have done well relative to both the very worst off and those on above-median incomes. But it also shows that the very best off have seen their incomes fall. Egalitarians should welcome the latter at least.

Perhaps the biggest difference with New Labour, though, is that the Tories have presided over little growth in incomes across the board. The group to have done best under the Tories are those around the 35^th percentile (on £340 a week in today’s money). Their incomes rose 5.3 per cent in real terms between 2009-10 and 2017-18. But this percentile saw income growth of 38 per cent under New Labour.

The second question is: which inequalities matter most?  It is here, I suspect that New Labour was at fault.

The equality that it increased was that between those a bit below and those a bit above the median. This, though, is a second-order problem. People on moderately low incomes can live almost as well as those on moderately decent ones, at least with a bit of careful budgeting. Sure, they’ll have smaller houses and worse cars. But their spending on everyday items, and on nights out and even holidays, isn’t very much different.

Instead, what matters more are inequalities at both extremes. Very low incomes mean genuine distress; having to forego essentials; being only one accident away from catastrophe; the uncertainty about wondering how many hours you’ll get to work next week; and the cognition-sapping stress (pdf) of just getting through the week.

And at the other end, it is the increase in very high incomes (and the power that lies behind them) that has contributed to the slump in productivity growth. What’s more, such inequality undermines democracy as the ultra-rich leverage their wealth – and the undue deference they get – to acquire disproportionate political influence.

So, yes, Blairites are right: New Labour did greatly slow down the increase in inequality we saw under Thatcher. But – in hindsight – it did not do enough to tackle the inequalities that most matter.

A case for nationalizing pensions

One of the fundamental questions in politics is: what should be done by the state, and what by the private sector? In at least one respect, I suspect that we have the mix wrong because there is a strong case for nationalizing pension provision – stronger, I suspect, than is the case for nationalizing utilities.

I say so because, as I point out in the day job, retirees and those approaching retirement face enormous uncertainties if they are managing their own pension: how long will I live? What will my spending needs be? And what will be investment returns? (Yes, equity returns have been great in recent decades, but we have no assurance whatsoever that the future will resemble the past.)

The state, however, is much better placed than the private sector to bear these risks. It can obviously pool longevity risk. And tax revenues are more stable than investment returns: in the financial crisis they fell only 3.4 per cent peak-to trough whereas MSCI’s world index in sterling terms fell eight times as much*. In particular, there is one source of risk to equity returns that the state can pool whereas retirees cannot – distribution risk, the danger of a shift in incomes from profits to wages. This would clobber (pdf) share prices, but not tax revenues.

And then, of course, there are deadweight costs. A private pension fund manager might easily charge a management fee of 0.5 per cent per year. On a £100,000 pension pot invested over 20 years, that can add up to over £20,000. State pensions are cheaper to administer. Fund managers are rich, civil servants are not, That’s a clue.

A common objection to a higher state pension is that it is unaffordable. This is nonsense in both fact and theory.

It’s nonsense in fact because spending on the UK state pension is projected to stay low. The OBR estimates that spending on pensions and other old-age benefits will rise from around six per cent of GDP now to 7.9 per cent in 2057-58. This would mean the state will spend less then than many European countries do today - among them Germany, which is not noted for fiscal profligacy.

It’s nonsense in theory too because, in a closed economy, all pensioners’ incomes must come from value-added created by current workers. The question is whether they pay pensioners via the tax system, or via the dividends and interest their employers pay**. For a given level of pensions, the burden is the same – only the name changes.

Granted, private pensions change this calculation by investing overseas and so extracting pensioners’ incomes from foreign workers. But the state can do this too. As Eric Lonergan has argued, we could set up a sovereign wealth fund which borrows at current gilt yields (almost minus 2% real) to buy higher yielding assets. Over time, this should give us all a big pension pot.

Even without that, however, we can achieve a sort of creeping nationalization over time by slightly strengthening the triple lock, one of George Osborne’s few laudable achievements in office. If we could look forward to a more generous state pension, we’d have less need to buy a private one so the latter would gradually wither.

We should regard the privatization of pensions as an example of how technocratic economic rationality can conflict with the logic of capitalism. Technocratic rationality says there’s a case for high state pensions. The logic of capitalism, however, requires that capitalist firms have sources of profits.

Another issue here is of course political risk: can we trust future governments to continue to raise pensions? Doing so requires there to be strong public demand for such a rise so that governments will fear a backlash if they do backslide. In this respect, the British can learn a lot from French protesters against pension cuts. We must regard a high and rising state pension not as a benefit but as an entitlement.

Which brings me to an under-appreciated point. The problem here is not merely one of economic privatization. A feature of modern British capitalism – neoliberalism if you like – has been a form of psychological privatization. What should be regarded as social problems have become individual ones. We see this with a lot of discussion of personal debt and mental health – an insufficient awareness of the social pressures which generate these. The same has happened with pensions. The question: “how can we as a society provide a decent income for older people?” has become: “how can I provide for my pension?” For too many – even the well-informed and affluent – this is too difficult a question.

* Of course, returns on more balanced portfolios were far more stable than equities – especially if they held decent quantities of non-sterling cash. But there are huge uncertainties about future risks and returns to balanced portfolios as well.

** OK, so taxes might deter investment, if they are badly designed. But so too do dividends and interest: high equity returns and bond yields mean a high cost of capital, by definition.

Great economics, bad politics

Non-economists (and quite a few trained economists too) often claim that mainstream economics is a simple-minded defence of free markets and inequality. Abhijit Banerjee and Esther Duflo’s Good Economics for Hard Times is a superb refutation of this.

They argue that:

It is unreasonable to expect markets to always deliver outcomes that are just, acceptable or even efficient.

A big reason for this is that the economy is “sticky” and that “resources do not always flow to their best use. Workers who are laid off because of international trade or technical change do not quickly move to decent jobs: instead, job loss has permanent adverse effects on wages. Banks are slow to lend to good new ventures and to cut credit to failing firms. Efficient companies find it hard to displace less efficient incumbents. And so on.

In this respect, much of their book is a repudiation of rightists’ belief in a flexible market economy. Though they don’t say so explicitly, all this gives ample reason to doubt that firms will be able to seamlessly adapt to take advantage of post-Brexit trading opportunities (even assuming them to emerge.)

It’s not just the far-right they challenge. They question even conventional economists’ attachment to free trade. In the US, they write:

Those zones more affected (pdf) by the China shock experienced substantially larger reductions in manufacturing employment. More strikingly, there was no reallocation of labour to new kinds of jobs. The total number of jobs lost was often larger than merely the number of jobs lost in the industries that were hit (P81).

A similar thing, they say, was true in other countries (pdf).

Because of this, they show, the gains to an economy from international trade are small:

If the US were to go back to complete autarky, not trading with anybody, it would be poorer. But not that much poorer (p86)*.

They stress, however, that this is not to endorse Trump’s trade war. This, they say, causes a new set of economic disruptions which people struggle to adapt to.

Banerjee and Duflo also flatly reject rightist arguments against redistribution. High top tax rates, they say, “are a perfectly sensible way to limit the explosion of top income inequality” as there is no evidence they deter work effort or growth. And they add, “there is no evidence” that cash transfers to the poor make then work less.

Banerjee and Duflo never use the word neoliberalism. But in all these respects, Good Economics for Hard Times is a refutation of it. And as you would expect from them, it is magnificently evidence-based. All economists, I suspect, would learn a lot from it.

But but, but. Whilst the economics is wonderful, the politics is not. They write:

Bad economics underpinned the grand giveaways of to the rich and the squeezing of welfare programs, sold the idea that the state is impotent and corrupt and the poor are lazy, and paved the way to the current stalemate of exploding inequality and angry inertia. Blinkered economics told us trade is good for everyone. (p326)

Any they plead with us to “set ideology aside”.

But Diane is right to reply to this that “good economics is about more than technical expertise.”

Brexit give us one example of this. Economics clearly says this was a bad idea. But voters chose it anyway. This wasn’t only because the corrupt media prevented economists’ voices being sufficiently heard. It was also because voters had other priorities. Banerjee and Duflo rightly champion the economic benefits of immigration, but some voters looked instead at what they perceived to be the adverse cultural impact of it.

Worse still, Banerjee and Duflo over-rate the importance of ideas and under-rate the sheer power, material and ideological, of the rich. Martin Gilens and Benjamin I. Page (pdf) and Pablo Torija Jimenez show that western democracies favour their interests over those of the median voter. It requires much more than abundant economic evidence to fight this power. Banerjee and Duflo have given us lots of bullets to fire in the class war. But are they sufficient?

* Even I’m a bit queasy about this. I’m not sure it takes sufficient account of the fact that exposure to international trade raises productivity.

Two conservatisms

The death of Sir Roger Scruton reminds us of an overlooked fact, that there is a massive difference between the sort of conservatism he championed and free market economics.

Scruton defined conservatism as the “instinct to hold on to what we love, to protect it from degradation and violence and to build our lives around it.” The creative destruction of the free market economy, however, often endangers what we love. It is always threatening to destroy traditional communities and industries. Coal miners and steel workers in the 80s, protesting against pit and plant closures, were conservatives on Scruton’s definition but certainly not Thatcherites. And Patrick Minford’s vision of a post-Brexit economy in which manufacturing disappears is surely alien to the Scrutonian love of tradition.

Scruton himself was of course awake to this. The Times obituary quotes him as saying that “Thatcher was completely indifferent to our kind of conservative philosophy.” And at many points, he opposed modern-day capitalism: in his antipathy to big housebuilders with their ugly and shoddily-built boxes; in his defence of high culture against marketized “pop” music; in his claim that supermarkets are “not only poisoning the world with packaging, they’re also destroying the ability of communities to survive without central distribution”; and in his critique of “absentee capitalism.”

All of this, though, raises a question. Why is there not more hostility between Scrutonian and free market conservatives? Why is there not the vicious bitterness we see in the Labour party between Corbynites and their critics?

One reason, I suspect, is that disputes about thought are often less rancorous than those about power or personality. This is especially true for people who are wise enough, as many Tories are, to know that politics isn’t everything.

Also, Scrutonian and free market rightists have much in common. They share a scepticism of top-down state intervention and reverence for unplanned emergence – for what arises from the market in one case, and from tradition in another. Both believe, with some justification, there’s more unstated wisdom in emergent orders than there can be in conscious top-down direction.

Some of you might add a corollary to this, that both wings of Tory thought are united by a love of freedom. I’m not so sure. Whilst Scruton undoubtedly incurred cost and jeopardy in supporting dissidents in the old Soviet bloc, many Tories have been less enthusiastic about freedom and much more selective in whose liberty they have championed: that of Chileans and South Africans (and for many years women and gays in the UK)  had a lower priority than east Europeans’.

But perhaps there’s something else. A while back, Bryan Caplan coined the phrase “the libertarian penumbra” to mean a set of beliefs which, whilst strictly not constitutive of libertarianism are in fact widely shared by libertarians. There is perhaps also a Tory penumbra, at least for those Tories who never bought into Cameronism. Things like a love of fox-hunting, a search for a genetic basis for inequality, hostility to climate change activists, hatred of the EU, or a perceived victimhood in the face of “wokeness” are perhaps not essential features of Toryism. But plenty of Tories share them – enough to create sufficient fellow-feeling as to compensate for what would otherwise be a large ideological gulf between conservatives and free-marketeers.

The flip-side of homophily, though, is exclusion. A love of “home” (a key element of Scruton's thinking) can easily spill into animosity towards immigrants; a defence of Christianity can tip into Islamophobia; and support of “high” culture can become a poncy snobbery.

Herein, I think, lies the reason why so many leftists hated him. Many – especially immigrants, ethnic minorities and even (despite Scruton’s own humble origins) those of us from working class backgrounds - sense that we don’t just belong among Scrutonian Tories. We fear that what also unites free market and Scrutonian Tories is, as Corey Robin said, a love of hierarchies – ones in which people like us are at the bottom.

Which raises a paradox. If we take Scruton’s definition at face value, almost all of us are conservative (just as almost all of us are working class on Marx’s definition!) The difference between us and Tories lies in what we love. People who value UK membership of the EU, or fear that VAR is ruining football are all Scrutonian conservatives. So too was the Communist Ewan MacColl when he tried to defend and revive English folk music in the face of commercial pressures for its decline. One of my favourite blogs, Jonathan Calder’s Liberal England, combines a reverence for English countryside and culture with Lib Dem politics. And one can argue – as Hilary Wainwright does – that Jeremy Corbyn is heir to an English tradition of radical dissent.

England has many traditions and customs, loved across the political spectrum. Tories who claim a monopoly on the love of tradition are adopting a very partial and reified notion of Englishness. Scruton himself saw this. In England: An Elegy (a book whose very title is anti-Thatcherite) he describes how his father blamed the Tories for the “desecrated townscape of High Wycombe.” Scruton pere was a conservative, not a Conservative. As are many of us. Which makes it all the sadder that Scruton himself was so sectarian and divisive a figure.

The strange death of libertarian England

It wasn’t just the Labour party that took a beating in last month’s general election. So too, but much less remarked, did right-libertarianism.

The Tories won on policies that repudiated many of their professed beliefs: a higher minimum wage; increased public spending; and the manpower planning that is a points-based immigration policy. And the manifesto (pdf) promise to “ensure that there is a proper balance between the rights of individuals, our vital national security and effective government” should also alarm libertarians. John Harris quotes an anonymous minister as saying that the libertarianism of Britannia Unchained is “all off the agenda” and that “some of the things we’ve celebrated have led us astray.”

Tories are not out of step with public opinion here. If anything, it is even more antipathetic to right-libertarianism than are Tories. Most voters support higher income taxes on the rich, a wealth tax, and nationalizing the railways, for example. Rick was right months ago to say:

British voters don’t share the free-marketers’ vision…The important thing to understand about right-wing libertarianism is that it is a very eccentric viewpoint. It looks mainstream because it has a number of well-funded think-tanks pushing its agenda and its adherents are over-represented in politics and the media. The public, though, have never swallowed it.

 A bit of me sympathizes with right-libertarians here. I suspect that one reason for public antipathy to free markets is that people under-appreciate the virtue of spontaneous order – that emergent processes can sometimes deliver better outcomes than state direction.

Nevertheless, all this raises a question: why are we not seeing more opposition to Johnsonian Toryism from right-libertarians?

You might think its because right-libertarianism has morphed into support for Brexit. Whilst I don’t wish to deny there is some link between the two, many Brexiter MPs have failed a basic test of libertarianism. In 2018 the likes of Bridgen, Cash, Duncan-Smith, Rees-Mogg and Francois all voted against legalizing cannabis.

One possibility is that they regard him as the lesser of two evils – they are supporting him with a heavy heart.

A second possibility has been described by Tyler Cowen. Intelligent right-libs have realized that free markets are not the panacea they thought and have shifted their priorities towards improving state capacity. Examples of this might – in different ways – be Dominic Cummings or Sam Bowman.

Perhaps relatedly, right-libertarianism has lost its material constituency. It once appealed to people by offering tax cuts. Today, however, many of the sort of businessmen who in the 80s wanted lower taxes now want other things, such as better infrastructure.

If these are respectable reasons for the decline of right-libertarianism, I suspect there are less reputable ones.

One is that we have lost the cast of mind which underpins right-libertarianism – that of an awareness of the limits of one’s knowledge. We need freedom, thought Hayek, because we cannot fully understand or predict society:

Since the value of freedom rests on the opportunities it provides for unforeseeable and unpredictable actions, we will rarely know what we lose through a particular restriction of freedom. Any such restriction, any coercion other than the enforcement of general rules, will aim at the achievement of some foreseeable particular result, but what is prevented by it will usually not be known....And so, when we decide each issue solely on what appear to be its individual merits, we always over-estimate the advantages of central direction. (Law Legislation and Liberty Vol I, p56-57.)

We live, however, in an age of narcissistic blowhards who are overconfident about everything. This is a climate which undervalues freedom.

Worse still, I suspect that some right-libertarians were never really sincere anyway. They professed a love of freedom only as a stick with which to beat the old Soviet Union. Liberty was only ever a poor second to shilling for the rich. And their antipathy to Gordon Brown was founded not upon a rightful distaste for the authoritarian streak in his thinking but upon simple tribalism. Maybe Corey Robin was right:

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

This isn't just a UK phenomenon, illustrated by Paul Staines: some (not all) US libertarians found it easy to throw in their lot with Trump. 

Whatever the reason for the demise of right-libertarianism, however, there is perhaps another lesson to be taken from it – that you cannot nowadays achieve much political change via thinktanks alone.

Labour's public opinion dilemma

To what extent should Labour accommodate itself to public opinion, and to what extent should it try to change it? This fundamental question is posed, perhaps inadvertently, by Jess Phillips in an interview with the Times.

She says that people didn’t trust Labour to deliver the many promises in its manifesto:

People in working class communities know that you can’t always have everything. They know that this week you’ll put the money away for your holiday, next week you’ll put the money away for Christmas.

Now, I’m willing to accept that this is a fair description of many people’s attitudes to Labour’s borrowing plans. But it is, of course, a wholly wrong assessment of the economics.

For one thing, government borrowing is not like household borrowing. When the government borrows, it raises other people’s incomes and so increases its own tax revenues. And for another, governments can borrow on much better terms than working class households. Whereas they face interest rates of hundreds of percent, and have insecure incomes and so cannot be confident of being able to repay, government tax receipts are more stable and it can borrow for the long-term at a real rate of minus two per cent. This means that for every £100 it borrows, it must repay only £67 in today’s money over the next 20 years. Bond markets are paying the state to borrow. And if people are paying you well to do something, you should do it.

Voters can be forgiven for not knowing this, just as I hope I can be forgiven for not knowing the first things about dentistry or plumbing: civilization depends upon the division of labour. This is especially true because they have been ill-served by the media. One of the BBC’s many failings has been its near-total absence of any reporting of one of the most remarkable developments of recent years – that government borrowing costs have repeatedly hit record lows and stayed low.

All this leaves Labour with a dilemma. Should it base its manifesto upon reality, which is that increased borrowing makes sense? Or should it instead defer to public opinion and adopt a milder manifesto which appears “credible”?

There is something to be said for the latter. You cannot change many people’s minds by snatched conversations on doorsteps during election campaigns. The job takes years, and requires resources (such as a benevolent mass media) which we do not possess. And in many cases, it’s a good idea to under-promise and over-deliver. Effective political parties should campaign in lies but govern in truth.

On the other hand, though, there are dangers here. One of Labour’s few advantages over the Tories is its mass membership. A centrist (and wrong) manifesto risks demotivating these supporters. And there’s the big risk that party leaders get high on their supply: if they prate about moderation and credibility long enough, they might come to believe such nonsense.

I’m not sure there is a correct answer to this dilemma. I would, however, hope that the next Labour leader at least appreciates that there is a difference between what’s true and what wins votes. I would also hope that he or she does not wrestle with it publicly. 

Conservative arguments for radical ideas

In my previous post, I used a rhetorical device which I think leftists should copy. This is that we should use conventional, orthodox economics to reach radical conclusions.

The point here is that we don’t persuade people by telling them that their worldview is wrong and by demanding that they change the ideas of a lifetime. We are more likely to succeed by showing them that their ideas are consistent with things they might not have considered.

Here are some examples of what I mean.

 - Fiscal policy. We don’t need MMT to argue for a significant fiscal loosening. Simple maths tells us that we can run big deficits and still see government debt fall as a share of GDP when real interest rates are negative, as they now are. And as Simon has said for years, the idea that we should use fiscal expansion when nominal interest rates are near zero is orthodox economics.

 - The efficient market hypothesis. You don’t need heterodox economics to show that this is wrong. Instead, you can point out that the first test of the EMH’s corollary, the CAPM, found it to be false. That was conducted by those high priests of orthodoxy, Myron Scholes, Fischer Black and Michael Jensen. Their finding that defensive stocks do better than they should has been corroborated many times. And the other great challenge to the EMH – the out-performance of momentum (pdf) stocks – was first noted in that most conventional of publications, the Journal of Finance.

 - Worker ownership. This sounds like a radical idea. But it’s not – and not just because law and accountancy practices are routinely owned by their workers. One inspiration for it comes from Hayek’s important point, that central planning is impossible because economic knowledge is fragmentary and dispersed. Worker control, more than hierarchy, can mobilize such knowledge. Hayek’s key insight – “you don’t know what you are doing” – is a challenge to top-down managers.

 - Rents. The idea that landlords’ high rents are killing high streets and choking off economic growth might seem radical. But it’s not. It was one of the many brilliant insights of David Ricardo, the man revered by orthodox economists for discovering, among other things, the theory of comparative advantage.

 - The falling rate of profit. This idea (which is true) is of course associated with Marx, because it predicts that capitalism will become increasingly stagnant and crisis-prone. But again, it’s not uniquely Marxian. The idea that diminishing returns would lead to a stationary state was, again, Ricardo’s.

What I’m suggesting here is, of course, nothing new: I pray each night that I will never have an original idea. All these are versions of an immanent critique – showing that existing conventional ideas aren’t necessarily as internally consistent as one might think, and might instead have radical implications.

This, I suspect was what Marx was doing when he argued that whilst the labour market looked like “a very Eden of the innate rights of man” things change when we go behind the factory door:

The can perceive a change in the physiognomy of our dramatis personae. He, who before was the money-owner, now strides in front as capitalist; the possessor of labour-power follows as his labourer. The one with an air of importance, smirking, intent on business; the other, timid and holding back, like one who is bringing his own hide to market and has nothing to expect but — a hiding.

Enlightenment ideas such as “Freedom, Equality, Property and Bentham”, Marx showed,  were not as compatible with capitalism as their advocates thought – something which remains true today.

Now, you might object that we need to do more than show merely that radical ideas are in fact quite compatible with conventional economics, and that we need to challenge it more. I agree: in particular, mainstream economics does a poor job of explaining inequality and exploitation.

However, if there is one thing we have learned in recent years, surely, it is that telling the truth does not always win arguments.