Stumbling and Mumbling

When bad government matters

Here’s a nice contrast. On the one hand, Tim Stanley says:

Britain's still absolutely fine, by the way, probably better off than its ever been. It's just politics that's a mess. If you think this is the Apocalypse, which some people apparently do, then you haven't lived long enough or travelled far enough.

But on the other Tony Yates says that “the difficulties we face now have the potential to be much worse” than the financial crisis of 2008.

I agree with both.

The government is obviously a shit-show. But the messy Brexit negotiations are – so far – having only a small impact on real life. Yes, it’s plausible that they are adding to the output cost of the original decision to leave. And they seem to be contributing to weakness in the housing market. And they have forced down sterling which will raise import prices slightly. But on the other hand, their impact upon the stock market has been small – much smaller than the impact of gyrations in global markets. Net, these are minor irritations – much less than the everyday hassles of traffic jams, stressful work and troubled relationships.

For those of us outside of the Westminster bubble, life is going on as normal. Westminster politics is like my garden – an ugly mess but only if you look at it. In this sense, Tim is right. For someone wise enough to ignore day-to-day politics, life goes on as normal.

But Tony might also be right. What matters here is the distinction between government and the state. The government is a mess. But the state, to some extent, is not: the NHS is carrying on as usual, taxes and benefits are being paid and so on. (An exception, here of course, is that there is state failure in that Universal Credit is being maladministered: it is this, more than the mishandling of the Brexit negotiations, for which the government deserves contempt.)

Let’s put this another way. We can think of the state as a provider of intermediate goods – things that enter the production process: transport links, banking regulation, the rule of law and so on. And as Chad Jones has rightly stressed, these have multiplier effects: bad law enforcement (for example) can impoverish a nation, which can limit its tax-raising powers, which can make it harder to finance good law enforcement thus keeping it trapped in poverty.

One such intermediate good provided by the state, of course, are international trading arrangements. And these are in jeopardy: how much so is, I fear, indeterminable given the high noise-signal ratio.

 It’s for this reason that Tony is right: less good trading arrangements have multiplier effects in the sense that less trade means less innovation and (pdf) productivity growth (pdf) and hence lower wage growth for everybody.

In the short-term – which can last months – government by Keystone Kops is relatively harmless: it might even be a good thing, insofar as it reminds young people that the world is not a meritocracy. The more sensible of us can ignore it, and the more stupid of us can treat it as a game – which is how Oxford Union Tories and their BBC fan club regard it. In the longer-run, though, government failure threatens state failure. And that matters – a lot.

Brexit's irrelevant cost

I can understand why some reasonable people want to leave the EU. What’s more puzzling is why so many think it is worth the bother. Is it worth dividing the country, triggering a political crisis worse than 2008, causing a “toxic period” in politics, and stealing all cognitive bandwidth from countless other issues?

In truth, though, there is an answer here. It is precisely because Brexit is proving to be so expensive that its supporters will continue to value it so highly.

One reason for this was discovered back in 1959 by Elliott Aronson and Judson Mills. They got female undergraduates to undergo initiation ceremonies (pdf) into a college sorority. For some, these ceremonies were mild, but for others they consisted in asking students to read out obscene words to the group (which was embarrassing for young women in the 1950s). They found that:

Subjects who underwent a severe initiation perceived the group as being significantly more attractive than did those who underwent a mild initiation or no initiation.

This corroborated their prior belief that “persons who go through a great deal of trouble or pain to attain something tend to value it more highly than persons who attain the same thing with a minimum of effort.”

Dan Ariely has called this the Ikea effect (pdf). If we go to the trouble of schlepping to Ikea and then assembling one of its bookcases, we value the product more. As he says in Predictably Irrational: “The more work you put into something, the more ownership you begin to feel for it.” John Locke’s idea that we come to own something by mixing our labour with it might be bad law and terrible history, but it’s beautiful psychology.

By the same token, the very fact that Brexit is proving so hard to achieve will cause its supporters to value it so much. Far from applying the very wise Cushnie principle - “it’s not worth the bother” – they are as determined as ever to see Brexit through.

Aronson and Mills thought that what goes on in these cases is a form of dissonance reduction – an attempt to reduce the conflict between two apparently conflicting beliefs. So, if you believe “Brexit is good” and “Brexit is hard to achieve”, you reconcile these two by thinking that Brexit is so valuable that it’ll be worth all the sacrifices.

As Robert Cialdini says in Influence, we have a huge desire for consistency – no only to hold consistent beliefs at the same time, but to have consistent beliefs over time:

Once we have made a choice or taken a stand, we will encounter personal and interpersonal pressures to behave consistently with that commitment. These pressures will cause us to respond in ways that justify our earlier decision. (Influence, p57)

Marketing departments, of course, know all this. Financial advice and university textbooks are expensive not only in an attempt to signal quality, but also to induce choice-supportive bias – to get us to think “this must be good: I paid so much for it.”

Critics of mainstream economics might see this as grist to their mill. Orthodox micro assumes that for individual consumers price and marginal utility are separate things. They are, for expected marginal utility. For experienced marginal utility, however, they are not: a high price can give us higher experienced marginal utility.

 This, though, is a side-point. The main point is a depressing one. The high cost of Brexit, far from being a reason not to leave the EU, is only entrenching Brexiters' opinions.  Which means that the divisions Brexit is causing will last for years.

A behavioural economic case for Brexit

Is there an economic case for Brexit after all?

Superficially, it seems not. Almost all serious economists agree that less close trading arrangements with the EU and tougher immigration controls will make us poorer than we would otherwise be even in the event of a smooth Brexit, and the Minfordians protestations to the contrary are not credible.

Behavioural economics, however, suggests there might be a case. This rests upon two pillars.

Pillar one is the Easterlin paradox – the finding that long periods of economic growth in developed economies have not made us much happier. This suggests the blow to well-being caused by slower GDP growth will be very small.

Now, I know some of you think the Easterlin paradox is a statistical artefact arising from the fact that GDP is unbounded whereas well-being is tightly constrained, somewhere between “ain’t dead yet” and “all right, I suppose”.

I’m not entirely sure. There paradox draws attention to important facts.

One is that people adapt. We become accustomed to prosperity so it doesn't make us much happier. By the same token, we also adapt to ill-fortune. Andrew Clark, for example, has shown that after apparently nasty events such as divorce or even bereavement happiness returns to its baseline quite quickly: the merry widow is a real thing. And Christoph Merkle has shown that financial losses hurt people much less than they expected.

The other is that for many of us, our well-being depends upon relative income (pdf) more than absolute. For example, one survey by Sara Solnick and David Hemenway found that most people would prefer (pdf) an income of $50,000 a year when everybody else get $25,000 than an income of $100,000 a year when everybody else has $200,000.  If all of us become worse off, therefore, well-being doesn’t fall much: we’ll be comforted by the fact that we’re all in the same boat.

You might object that this is only true of Brexit ex ante. Ex post, some will suffer more from it than others. But this can be said of the normal everyday creative destruction of capitalism. And few oppose this.

Our second pillar is a finding by Matthias Benz, Bruno Frey and Alois Stutzer. They show that there’s such a thing as procedural utility. They say:

Participation rights provide procedural utility in terms of a feeling of self-determination and influence.

This is one reason why the self-employed tend to be happier than employees.

A sense of control over one’s destiny, and of having a right to a say, makes us happy even if we don’t actually exercise that right and even if the outcomes of decisions are the same.

You might object to this that nobody other than a minority of cranks much cared about sovereignty before 2016. True, but irrelevant. They care now. And this is what matters.

If we put together the Easterlin paradox with the finding that procedural utility matters, we have a clear implication: the loss of income caused by Brexit won’t much hurt us whilst the gain to national self-control should increase well-being.

Brexit trades off income against sovereignty. Behavioural economics suggests this is a bargain which many people might rationally want. The fact that a slim majority chose to make this trade-off is therefore reasonable - perhaps more so than they knew at the time.

So, how convincing is this argument? I'm not sure. I’ve two quibbles with it.

One is that the Easterlin paradox is a story about economic growth, not about the lack of it. Just because growth doesn’t make us much happier, it doesn’t follow that the lack of it will be harmless. In an environment in which we might well suffer capitalist stagnation anyway, Brexit raises the risk of a flatlining of incomes for a long time. Maybe 2% real growth per year versus 2.5% is no big deal. But 0.5% versus 1% might be. As Ben Friedman has shown, weak growth creates intolerance and closed-mindedness. For some Brexiters, of course, this is a feature not a bug but I disagree.

Secondly, there must be less cack-handed and divisive ways of increasing procedural utility than Brexit – such as greater worker democracy or means of giving clients a greater voice in the provision of public services.

I’m not sure, therefore, that all this is a convincing argument for Brexit. But it is, I think, a strong one – and certainly better than almost all Brexiters have managed. Which for me raises a puzzle: why haven’t they argued more along these lines?

"Chaos" with Ed Miliband

David Cameron’s infamous 2015 tweet that we face a choice between stability and strong government under him or chaos with Ed Miliband has long become a joke – a cliché, admittedly, but a good one. In a sense, this is unfortunate because it contains some truth: from a Tory point of view, a Miliband government would indeed have been chaotic.

This isn’t because he too would have unleashed the Brexit clusterfuck. He wouldn’t. Back in 2015 less than 10% (pdf) of voters thought that the EU was the country’s most important issue. Cameron called a referendum not because there was mass pressure for one but to try to silence a handful of cranks in his own party. Miliband wouldn’t have needed to do that.

Instead, he’d have caused “chaos” in three other ways.

First, his administration would have seen policy mis-steps, poor administration and ministerial gaffes: all governments do. Because political reportage lacks perspective, hyper-ventilating reporters would exaggerate these into episodes of grave perils. What Michael Oakeshott wrote in 1962 is perhaps truer now than then: “political life is resolved into a succession of crises.” We’d thus have “chaos” even if it were only about the misuse of paperclips at the Department of Administrative Affairs.

Secondly, the purpose of politics in capitalist society is not to provide good administration. It is to ensure the power and prosperity of the rich. Labour would not have done this as well as the Tories. Its policies (pdf) to tax bank bonuses, clamp down on tax-dodging, support coops and give workers a say on bosses’ pay were all threats to the power of the rich. Of course, they were mild ones: but faced with any threat at all, the over-entitled rich cry like spoilt brats (see Digby Jones, passim).

Remember: the Tories think the 1970s were a time of crisis and chaos. But in fact real wages rose nicely then – by 1.8 per cent per year according to Bank of England data. So where was the crisis? It was in profitability and in militant workers challenging capitalist authority.  That’s what matters.

You might have an obvious objection here: doesn’t Brexit threaten profitability? It does. But no more than it threatens wages. Brexit will make us all poorer. For many, though, this doesn’t matter because income and wealth are positional goods (pdf). As Andrew Oswald has said (pdf): “what matters to someone who lives in a rich country is his or her relative income.” For many, Brexit is tolerable because it doesn’t much disrupt relative incomes. What would be intolerable is the threat to the relative incomes of the rich posed by even the mildest of social democrats.

Thirdly, the Tories don’t understand the left*: the fact that some believe Jeremy Corbyn is a Marxist tells us this. This fact alone means that a Labour government would create uncertainty. And we’ve known ever since the work (pdf) of Daniel Ellsberg that people hate uncertainty. A Labour government would thus appear chaotic to Tories even if it looked stable to Labour supporters.

This sense of chaos would be reinforced by something else – that fact that we never see counter-factuals: that’s why they’re called counter-factuals. A world in which Ed Miliband is three years into his premiership would not be one in which there was a Jim Bowen showing voters our current Tory government and saying “here’s what you could have won”. (And even if there were, nobody would believe him.) Nobody would therefore credit Miliband with saving from the Brexit clusterfuck. And the Tories would be able to pose as a credible alternative government. The contrast effect would thus make a Miliband government look bad.

So Cameron was right. A Miliband government would have been “chaotic”. This tells us a lot - although absolutely nothing about Mr Miliband.  

* The left doesn’t understand the right either, but that’s not my point here.

Blind to luck

In a good article on how graduating in a recession does long-lasting damage to one’s career, Tim Harford says “it’s easy to overlook luck.”

It is indeed. Evidence for this has been uncovered in experiments by Nattavudh Powdthavee and Yohanes Riyanto. They got students in Singapore and Thailand to bet upon tosses of a fair coin and found that people were willing to pay to back the bet of students who had correctly called previous tosses. “An average person is often happy to pay for what could only be described as transparently useless advice” they conclude.

This is startling. But it has been corroborated by other research: experiments in Barcelona have found exactly the same thing.

It’s also been found in the real world. This paper finds that investors:

fail to understand that, in large populations of mutual funds, a few will outperform by pure chance...In addition, investors do not sufficiently account for volatility and are thus likely to confuse risk taking with skill. In large mutual fund populations, this can lead to an over-allocation of capital to lucky past winners.

People over-estimate the signal-to-noise ratio in what is really volatile data, and so under-estimate the role of luck. A recent paper by economists at Elm Partners shows this. They asked people: how many tosses would you need to see to be 95% confident of distinguishing between a far coin and one with a 60% chance of coming up heads? The correct answer is 143. But most subjects answered 40 or less.

All this suggests people are indeed blind to the importance of luck and are too quick to see patterns: the technical term for this is apophenia.

The truth is, though, that luck is everywhere. William Goldman famously said that “nobody knows anything”, and that success is largely unpredictable. But nevertheless we laud those who are lucky enough to have backed success as if they know what they were doing. As Ed Smith writes in his lovely book, Luck: “randomness is routinely misinterpreted as skill.”

Why do people do this? I suspect it’s not just because of a lack of statistical literacy: many of the subjects in the experiments I’ve cited had taken statistics classes. It’s also because of two reinforcing biases. One is the outcome bias. We judge a performance by its result so if a team wins the game, or if a fund manager beats the market, we infer that they did well rather than got lucky. The other is the narrative fallacy. We are story-telling animals. We seek links between things and detailed explanations even if the truth is only that a bit of good luck happened, then a bit of bad. I suspect that most football punditry is like this.

All this is about how we attribute skill rather than luck to other people. But of course, we also do so to ourselves, and asymmetrically: good results are down to skill and bad to luck. A study of day traders has confirmed what you probably suspected:

Retail day traders in the forex market attribute random success to their own skill and, as a consequence, increase risk taking.

The upshot of all this is that the successful are apt to become bumptious arrogant prats because they attribute their success to their own talents rather than luck. And observers are apt to take them at their inflated self-estimation.

Why for example did the housing, communities and local government select committee ask Mike Ashley yesterday for his views on reviving high streets? Does Mr Ashley really know more than anybody else with years of working in retail? Or were MPs failing to see that companies can succeed in much the same way that some species do – because the environment selects for mutations which are in fact random and unintended? The mere fact the question is rarely asked (not just of Ashley) is itself significant.

This, of course, colours our whole social and political structure. Our tendency to see skill where there is just luck causes the successful to have an exaggerated sense of entitlement and the rest of us to be overly deferential to them. Very few people are luck egalitarians. This is one way – of perhaps many – in which inequality sustains itself.

Changing the agenda

It’s hard to believe now, but only three years ago the country was not divided between Brexiters and Remainers. In fact, the very idea of such a split would have seemed as absurd as Swift’s division between big-enders and little-enders. Yes, there were a few fanatical Brexiters but most of us gave the matter no thought - including, we now know, most Brexiters themselves. It was a low-salience issue.

This fact has enormous implications for how we should think about Labour party policy.

It shows that it is possible for a government to shift the political agenda. Cameron’s simple trick of holding a referendum transformed our political priorities. Despite the fact that the Brexit negotiations have been an utter shambles, this might actually have benefited the Tories as it has distracted people from the government’s many other failings. If the media weren’t obsessed with Brexit, it might devote a little more attention to the collapse of the railway network, inadequate mental health care, rising homelessness, wage stagnation and the many other effects of austerity.

Cameron has shown that we don’t necessarily need a popular political movement to change the agenda. It can also be done by one-off top-down policies, which can themselves then build movements, as Cameron created Leavers and Remainers.

It’s in this context that we should interpret Labour’s plans to give customers a say on executive pay or to expand worker ownership. It is of course wholly reasonable to question whether such policies, as they stand, will work*. Doing so, however, sometimes misses a Big Fact – that these are not merely technocratic fixes.

Instead, they are efforts to change the political culture. For too long, the question of how much pay and power bosses should have has been off the agenda. Giving workers and customers a say on such matters is a way of showing that such issues are important, and a means of getting people to question bosses’ rapacity and incompetence. It's a stepping stone towards worker democracy and socialism, and a step away from Westminster-centric politics.

We can also read Labour’s – ahem – constructive ambiguity towards Brexit in this light. The party’s dominant attitude to Brexit should be (and I suspect is): “this is Tory shit; they should shovel it.” Their priority is to keep the party together, maximize electoral advantage, and move onto the issues that really concern them: ending austerity and moving towards socialism. (This is quite consistent with opposing Brexit when necessary).

My point here is to stress a point that’s often overlooked. Politics is not merely about finding technocratic solutions to existing issues. It is also about deciding what is an issue in the first place. Those who judge Labour only on the former grounds are framing politics wrongly. And they are neglecting an important political question – of how, and by whom, the agenda is set.

* The details can be fixed later. If it’s acceptable for Microsoft to release beta versions of Windows and fix them months later, it’s acceptable for opposition parties, which have vastly smaller resources, to do so too.

Against debate

Everybody, it seems, wants a debate. Theresa May wants to debate her Brexit deal with Corbyn; Grace Blakeley invites her critics to “come debate me”; and Sarah O’Connor wants a “nuanced debate now about what we value in the economy”.

Include me out. Most debates – and especially televised ones between politicians – are worse than a waste of time. They are downright pernicious.

A debate, like many things, is a selection device. The question is: does it select for the truth, or against it?

There’s a presumption – best expressed by John Stuart Mill – that it selects for the truth. Honest and rational men, he thought, would present arguments and evidence to other rational men and so the truth would emerge:

There must be discussion, to show how experience is to be interpreted. Wrong opinions and practices gradually yield to fact and argument: but facts and arguments, to produce any effect on the mind, must be brought before it.

This is woefully over-optimistic. It’s very possible instead that debates are counter-selection devices. Far from selecting in favour of the truth, they select against it. I’m thinking of four mechanisms here:

 - Some facts are hard to present in debates. Numerical data can be cherry-picked or presented out of context, with the result that the debate degenerates into claim and counter-claim. The truth about numbers is often best shown in chart or tabular form, not by talking heads. In this way, “hard” data doesn’t get the weight it merits in debates. But not just hard data. As Michael Polanyi pointed out, there can be tacit knowledge – senses of comfort or disquiet that cannot be properly articulated. This too is underweighted in debate. Debates select for articulable arguments, which means selection against both hard numbers and tacit feelings.

 - Debates select not just for truth but for overconfidence. The confident assertion of a clear statement beats caution and caveats. Experiments tell us that people often mistake overconfidence for competence thereby selecting for it and against actual ability. Debates favour articulate overconfident posh folk who in fact know nothing – which is why we got into this mess.

 - Lies can win. Mill assumed that interlocutors would present facts. But this isn’t necessarily true. As Tim Harford has said, “a simple untruth can beat off a complicated set of facts simply by being easier to understand and remember.” As we saw in the Brexit debate, with claims that Turkey was about to join the EU and that leaving would give the NHS £350m a week, bare-faced lied can gain credence. Selection for dishonesty isn’t necessarily a problem if we are choosing our next Prime Minister: I’m happy to have a lying bastard deal with Putin and Trump. But it is if we want to ascertain the truth of an issue.

 - Debaters appeal not to reason but to cognitive biases. Mill assumed, implicitly, that audiences were good Bayesians who would yield in the correct fashion to “fact and argument”. We now know that they are not, that all of us (yes, even me) are a mass of cognitive biases. Debates can be won not by the side with the most rational arguments and strongest facts, but by those who best appeal to our irrationality. This, I suspect, was the genius of the Brexit campaign: it harnessed such biases as wishful thinking and prospect theory whilst remainers were mired in abstract facts about GDP.

On top of these adverse selection mechanisms, debates have another baleful effect. They are polarizing. If we ask “who’s right?” we cannot build consensus. This problem is magnified by a phenomenon first pointed out in 1979 by Charles Lord, Lee Ross and Mark Lepper. They showed people mixed reports on the effects of the death penalty. They found (pdf) that, after reading these reports people who supported capital punishment became stronger in their support, whilst opponents of the death penalty also became more dogmatic. Even balanced and factual data thus produce polarization and extremism, through mechanisms we now know as asymmetric Bayesianism and the backfire effect.

As evidence for all this I need only point to Brexit. We’ve now had three years of debate about it. The result is ignorance and division. Or just watch Question Time, or any other of the endless "posh twats talk shit" shows that pollute the airwaves. 

I’m not saying that there is no point to political discussion. Instead, such discussions, if they are to be useful, must be carefully structured. There are strict rules on how court cases should be conducted and what evidence is admissible. The same should be true for political deliberation.

In its current form, political debate perpetuates the idea that the road to power lies in the ability to rationally persuade people. This is a lie. 

Strategic vs parametric thinking

Brad De Long makes an important point when he says that rational thinking depends upon context, and we must always ask: “are we playing some kind of game against nature, or are we playing against another mind?” If it’s the former, then standard parametric thinking is appropriate (max U subject to constraints). If it’s the latter then we are in the realm of game theory.

You might think the distinction obvious. Many people, however, fail to make it. As Meir Statman says:

Think of trading stocks, bonds and other investments as a trading race. Traders who commit framing errors frame the trading race as between them and the market…Traders possessing human-behaviour and financial-facts knowledge frame trading correctly as against traders on the other side of the trades. (Finance for Normal People, p40)

An especially egregious example of this is the IPO anomaly, the tendency for newly-floated shares to do badly in the three years (pdf) after they come to market. One reason for this is that investors think they are playing a game against nature when in fact they are playing against another mind – those on the other side of the trade. They fail to ask: “if this is such a good investment, why are its owners selling it?”

David Navon calls this mistake the egocentric framing error – the tendency to think only from our own point of view and to neglect how others are thinking. Bad chess or poker players, for example, consider only their own strategies without asking what their opponents are planning. In traffic jams we often try to switch lanes without getting any further because we fail to see that others are behaving just like us. And bad negotiators consider only what they want without thinking about their counterparty’s strategy: as Roger Fisher and William Ury show in Getting to Yes (pdf) good negotiators put themselves in the shows of those on the other side of the table. One reason (of many) why we’ve ended up with a bad Brexit deal is that the government failed to do this.

There are other examples of egocentric framing, described in Jerry Muller’s The Tyranny of Metrics. Managers and politicians who set targets without seeing that they can be gamed or misused are committing this mistake. They believe they are in a parametric environment when in fact they’re in a strategic one. They’re attributing agency only to themselves and not to others.

Perhaps this point broadens. Maybe there are particular types of people who are especially prone to egocentric framing. Those who are traditionally the subjects rather than objects of history have historically had less need to treat others as agents with their own strategies – especially if those others have been cowed into submission, Men have traditionally had little need to think about gender, or the posh about class, or white people about race. They haven’t therefore had the need to ask David Mitchell’s question: “are we the baddies?” Those on the dirtier end of these sticks haven’t had such luxury. As Robert Burns wrote:  

O wad some Power the giftie gie us 
To see oursels as ithers see us! 
It wad frae mony a blunder free us, 
An' foolish notion.

Blinded by ideology?

Andrew Neil tweeted yesterday that low gilt yields were a sign that “at least the credit markets still have confidence in the country” to which I replied that they were, to the contrary, a sign that markets expect low economic growth, partly thanks to Brexit. This was a cue for a mini pile-on by Neil’s Brexiter followers claiming that low yields are indeed a sign of improved creditworthiness.

You shouldn’t need me to tell you this is pish. The government’s creditworthiness has never been in question, except perhaps in the fevered imaginings of a few hysterical austerians. And nor could it have been. A government that can print its own money can always repay its debts: this is why comparisons between the UK and Greece are idiotic. The only question concerns the value of the money that gilt-holders will get. There’s no credit risk, therefore, only inflation risk*.

My chart shows that gilt yields are lower relative to their US and German equivalents than they were before the referendum. It would surely be silly to infer from this that the UK government’s creditworthiness has improved relative to Germany’s or the US’s. It’s more plausible that markets believe our growth prospects have worsened – though I’m not sure Brexit is wholly responsible for this.

Other indicators of markets’ “confidence in the country” tell a different story from what Neil would have us believe. Sterling’s trade-weighted index is lower than it was pre-referendum. And even ignoring currency effects, the All-share index has slightly under-performed the rest of the world: since just before the 2016 referendum the All-share has risen 17% in sterling terms whilst MSCI’s world index is up 21% in dollar terms. All this is more consistent with a deterioration of our relative growth prospects than with increased “confidence in the country.”

In truth, no Brexiter claimed during the referendum campaign that Brexit would improve the government’s creditworthiness. And nor should they have. What Neil and his fanboys are doing is the equivalent of shooting at a wall and then painting a target around the bullet-holes and claiming to have hit a bulls-eye.

This poses the question: why do some Brexiters fell the need to argue the unarguable? They have instead two different claims they could make. They could argue that stock and bond markets are wrong to take so gloomy a view of the UK’s growth prospects. Or they could argue – more tenably I believe - that less prosperity is a price worth paying for sovereignty and freedom.

I’d be sceptical even of the latter argument. But it’s not manifestly absurd, which is far more than can be said for the claim that Brexit has improved the government’s creditworthiness.

Which poses the question: why do some Brexiters feel the make to make such silly claims?

It’s become fashionable to say it’s because they are blinded by ideology.

I disagree. We all have ideologies. Yes, even you centrists. But we are not all blinded by it. In fact, in some ways ideology can make us wiser. It can motivate us to study a problem: many of us became economists, for example, because we hated the unemployment and poverty we saw in our youth. And it can sometimes actually improve our vision. My Marxism has made me a less bad economist than I’d otherwise be because it means I have no dog in a lot of fights about economics.

Instead, I suspect that what we have here is not so much the result of ideology as of fanaticism. Fanatics want to believe that all evidence supports their side and that there are no trade-offs. And the wish is father to the belief.

But it’s the fanatics we hear from. They’re the ones on Twitter and who get into the BBC and newspapers whilst the more level-headed – almost by definition - don’t make the effort to do so; there are Brexiters who agree with all I've said above. There is, therefore, a form of adverse selection in favour of bad ideas. As Edmund Burke said:

Because half a dozen grasshoppers under a fern make the field ring with their importunate chink, whilst thousands of great cattle, reposed beneath the shadow of the British oak, chew the cud and are silent, pray do not imagine that those who make the noise are the only inhabitants of the field.

* In truth, this has increased recently: the ten-year breakeven inflation rate is now 3.3 percentage points, compared to 2.6 percentage points in the six months before the Brexit referendum though I’m not sure how much Brexit is to blame for this.

Against foxes

Nick Cohen makes a good point:

Political correspondents, who couldn’t find a big picture in a multiplex, buzz around Westminster hyperventilating about the number of letters sent to the 1922 Committee, and the replacement of minister X with junior minister Y, as if it mattered in the slightest.

The cliché is right. It is indeed easy to miss the wood for the trees. The fox (pdf), who knows many things, can indeed miss the big picture which the hedgehog (who knows one thing) sees. Those same political correspondents’ - despite or perhaps because of their knowledge of detail and minutiae - failed to anticipate Brexit and the rise of Corbynism.

It would, however, be wrong to single out political correspondents here. Nick’s point generalizes. Take, for example, finance. Advisors are often good foxes: they know many things. It’s better, however, to know one big thing – that active fund managers generally do not earn their fees (pdf) – and so simply hold market tracker funds.

A similar thing works in forecasting. Sometimes, it’s better to know one big thing. For example, if you’d wanted to know where stock markets were heading this year, one fact would have told us – net foreign buying of US equities. When this is high (a low point on my chart) it predicts that markets will fall in the following 12 months*. High buying last year predicted that the market would drop this. And yes, this indicator also warned us of the 2008 financial crisis. Knowing one thing would have served us better than knowing many things.  

In saying this, I’m echoing Gerd Gigerenzer. Simple heuristics (pdf) – knowing one robust and relevant thing – beat knowing lots of little irrelevant ones. Big Facts matter. Knowledge, prediction and explanation are three different things: you can have one without the other two. 

The issue here is whether we can distinguish between noise and signal. A mastery of detail can mean that you have full knowledge only of noise. This is handy for pub quizzes, which is no small thing (I write as a member of the team that’s top of division two of the RIQL) but it can blind you to what’s important. You have only cargo cult expertise. One reason why I’ve paid little attention to the day-to-day developments in Brexit negotiations (progress might not be the mot juste)  is that I’ve not known what’s noise and what’s signal.

Rogue companies exploit this. When they are under investigation from regulators or the police they often boast that they are cooperating fully. What they mean is that they are handing over terabytes of data and hoping the authorities will miss the wood for the trees.

You might think that in siding with hedgehogs against foxes I’m disagreeing with Philip Tetlock who has shown that foxes make better predictors than hedgehogs. I’m not sure I am. We mean different things when we distinguish between the two. I’m thinking of the distinction between those who know lots of small things and those who know one big relevant one. He instead uses it to differentiate between empiricists and grand theorists. In that sense, I agree with him. The problem with that sort of hedgehog is that the one big thing they know is sometimes wrong. You might have heard of such people.

* The reasoning here is simple. Foreign buying is an indicator of investor sentiment (pdf): high buying betokens high sentiment. And when sentiment is unusually high, it tends to mean-revert downwards, thereby dragging prices down.

Why the left needs "bottom"

Conservative men of a certain age used to speak approvingly of some men (it was always men) as having “bottom”. By this they meant a combination of a moral code and loyalties that gave them a solid reliability.

I was reminded of this by these words of John McDonnell:

We’ve got to convert ordinary members and supporters into real cadres who understand and analyse society and who are continually building the ideas.

This is absolutely bang right.

Underlying his words is a fear – that the massive current popularity of Corbynism might just be a fad.

There’s ample precedent here. The revolutionary ideals of the 68ers faded as they acquired careers and (cheap) property. The Greens won 15% of the vote in 1989, but that soon vanished. And of course there are countless people who, in Christopher Hitchens’ words, made the stagger from left to right – and who rarely became less employable as a result. Personally, I wouldn’t stake my wealth upon Aaron Bastani or Laurie Penny being vocal leftists in 30 years’ time.

The vogue for Corbynism could go the same way. Although McDonnell is giving the programme real and often inspiring economic content, there’s danger that Corbynistas themselves are motivated by what James Bloodworth calls “a vague and muddled ideal”, a backlash against “neoliberalism.” If your leftism consists only of an emotional spasm, a belief that Tories are “evil”, it will not long survive contact with real human beings.

Nick Cohen has long complained that leftists have lost touch with their better values and adopted a “my enemy’s enemy is my friend” mentality that has seem them “excuse antisemitsm, misogyny, tyranny, and obscurantism, as long as the antisemitic, misogynistic, tyrannical obscurantists are anti-Western.” I know many of you reject this account. But in a sense it speaks to what McDonnell fears – that a leftism which is just childish rebellion cannot last long or grow large.

It’s in this context that the left needs “bottom” – ballast that stops it drifting with the tides of fashion and instead becomes a genuine solid force for change.

Classical Marxists understated the problem here. They thought workers would be so desperately poor and exploited that they’d have nothing to lose but their chains and so would become radicalized. They were wrong. Yes, one factor behind Corbynism is that erstwhile “middle-class” jobs have become proletarianized; professionals have both lost some autonomy at work and become unable to afford a house.  Resentment alone, however, is not a strong enough base for lasting leftism. It might not survive career progression and more affordable housing.

It’s in this context that McDonnell is right to say the left needs an understanding of society. Of course, it would take far too long to spell out exactly what this would consist of. For me, a key principle here is that of complexity. Inequality – of power as well as wealth - does not exist and persist because the rich are evil. It also happens, as Marx recognised. because of impersonal forces which operate with only a little input from people’s intentions. Capitalists’ influence over the state, for example, happens because politicians want to create jobs and so need to maintain business confidence; support for inequality exists not just because our media is biased but because ideology is endogenous; exploitation occurs not (just) because capitalists are greedy but because competition forces wages and working conditions down.

Equally, the capitalist crisis is the result not just of “greedy bankers” – everyone would like a few quid more – but of impersonal factors causing a lack of capital spending and hence stagnation in productivity and real wages.

A lasting, well-rooted leftism requires an understanding of forces such as these – of why capitalism does not work as we would wish it to. Moralizing is nowhere near enough. The problem is that there are pitifully few institutions that enhance understanding and several powerful ones that actively militate against it.

Angry Brexiters

Brian Cox asks a good question:

The thing I don’t understand about these Conservative MPs is that they are such angry people. They haven’t done badly out of Britain - they aren’t on the receiving end of their own policies. And yet they want to smash everything up. The EU, The Union and now their own party.

It’s no coincidence that many of those he has in mind such as Rees-Mogg and Johnson - though we might add Farage and Banks – come from posh backgrounds. We know that our preferences adapt (pdf) to our circumstances. As Amartya Sen has written, “deprived people tend to come to terms with their deprivation”: Daniel Neff has shown how this is true for some of the poorest people in the world. Just as the poor resign themselves to their wretchedness, however, so too do the wealthy take for granted their privilege. Rather than rejoice in their advantages, they are irked by the small stone in their shoe. Just as the rich banker gets the hump with a £1m bonus if he expected more, so Brexiters are angered by slight (and often imaginary) infringements on their freedom from the EU.

In this sense, demand for Brexit is a little like white male resentment. Both are reactions against challenges to the privileges to which one has become accustomed.

There’s also a sense of entitlement here. Just as posh folk sometimes apply for jobs for which they are ill-suited – most famously David Cameron becoming PM because he thought he’d “be rather good at it” – so they noisily demand the removal of all obstacles to their whims.

All this is in fact at least as old as the Bible. It is mechanisms such as these that give us the Matthew Effect:

For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.

Socialization also matters. If you’ve got so many advantages in life, especially from a young age, you’ll be less aware of the importance of trade-offs – that, for example, academic and career success will estrange you from your family and cause loneliness. You will therefore not be as alive as the rest of us are to the words (pdf) of Isaiah Berlin:

The notion of the perfect whole, the ultimate solution, in which all good things coexist, seems to me to be not merely unattainable – that is a truism – but conceptually incoherent; I do not know what is meant by a harmony of this kind. Some among the Great Goods cannot live together. That is a conceptual truth. We are doomed to choose, and every choice may entail an irreparable loss.

They therefore fail to appreciate sufficiently that there are trade-offs between sovereignty and prosperity, or between controlling our borders and observing the Good Friday Agreement.

Such socialization-induced blindness isn’t however merely the product of upbringing. It’s also the result of recent political history. Throughout their adult lives Brexiters have got what they wanted from politics – lower taxes, the defeat of trades unions and victory of neoliberalism. Even the Labour government did not seriously challenge the power and prestige of the wealthy.

Victory, however, breeds complacency. It led Brexiters to forget what we Marxists have known all along – that there are some interests which the state lacks the will or the capacity to promote. They were therefore unprepared for the hard work of implementing Brexit. They failed to appreciate that politics sometimes requires something more than bluster. Their anger is a form of displacement – attacking others for what are in fact their own inadequacies.

Beer, & economic determinism

Devarshi Lodhia has a nice piece on the decline of the pub. I wonder, though: to what extent are the social and cultural changes that have contributed to their decline a product of raw economics.

My chart shows what I mean. It shows that since the mid-80s the price of beer in pubs has doubled relative to its price in shops. Today, for example, you can get 12 cans of Lager at Tesco for £8.50, which means that a pint of beer is 4.2 times as expensive in pubs as in shops. 30 years ago, it was only twice as expensive.

Millennials who are going to dessert parlours or staying home and drinking whilst playing Fifa therefore look like they are responding to price signals. The ONS tells us that increasing numbers of young folk are teetotal: 23% of 16-24 year-olds claim to be, compared to 16% of 45-64-year-olds.

Whilst this behaviour is harmless, there might be a nastier effect of this price change. When I was a 15-year-old kid, I’d drink in pubs. Today, higher prices plus tougher law enforcement means teenagers don’t go to pubs: even Wetherspoons has a door policy. They drink instead in parks which is more dangerous: there’s no barkeep to sling them out when they’ve had too many or to have a word when boys pester drunken girls.

There are two important mechanisms here.

One is peer effects: if your mates go to the pub, so do you. These create multiplier effects: if a few people stop going to pubs, others follow. Hence the large number of pub closures.

The other is habit formation. When we were kids getting served in a pub gave us a frisson of excitement and achievement. We came therefore to associate even the most mundane pub with good times, and this keeps us going to them today*. If young people don’t get that kick, and don’t get into the pub-going habit, they’ll stay out even if they get rich enough to afford to go.

In this way, short-term changes can have long-term effects. This suggests that pub-going will continue to decline as older pub-goers die out and are not replaced.

Now, it’s possible that the cultural changes that keep more young people out of pubs might have happened anyway**. What I suspect might be more likely, however, is that what we have here is a case of economic determinism: price changes cause cultural change. Which is why economics matters.

* This mechanism is much the same as Adam Smith’s account of conscience. The fact that aunts and uncles watched us whilst we were children inculcated into us a sense that an impartial spectator was overseeing us without us knowing it– a sense that persists throughout our lives.

** The obvious counter-argument to this claim is that if there had been a decline in demand for drink in pubs then their relative prices should have fallen. The counter-argument to that, though, is that tax changes and rent rises prevented this.  

Contrarians in public life

What role, if any, should contrarians play in public life? This is the question posed by the appointment of Sir Roger Scruton as housing tsar despite (or perhaps because of) his unconventional opinions on eugenics, date rape and gay rights.

The issue here is not a left-right one. We could ask the same question of John McDonnell: does his support of the IRA disqualify him from office?

In fact, for me the analogy is a quite close. Both men have valuable ideas. McDonnell’s ideas on fiscal policy and worker ownership are good. And Sir Roger is a rare rightist who can (sometimes) think and write well and who is fascinating for being a conservative whose mind isn’t addled by Brexit or free market simplicities: I’d recommend his books Gentle Regrets and England: an elegy. (Perhaps there’s another parallel; both men’s most deplored utterances are the products of their class, age and environments.)

The case for excluding such men is that the expression of bad ideas itself betokens a lack of judgment. Just because you believe something does not mean it should be said. The ability to shut the fuck up is much to be prized.

But, but, but. Excluding such men doesn’t just risk depriving us of talent. If people know that heterodox ideas will carry heavy costs we’ll end up with men falsifying their preferences – using politically correct language to disguise racist or sexist behaviour: Harvey Weinstein, remember, has been a keen supporter of liberal causes.

What’s more, if we select people for having uniformly orthodox opinions we’ll end up not with office being held by those with phronesis, but by poker-up-the-arse careerists who are too dull or stupid to challenge our managerialist conventional wisdom. One McDonnell or Scruton is worth a dozen of them.

Everybody is irrational about some things. Scruton and McDonnell join the long list of people such as William Shockley, Richard Dawkins, Larry Summers, Vicky Pryce, Bobby Fischer, Glenn Hoddle and James Watson – people of brilliance who also have made some terrible decisions. If you’re looking for people of uniformly sound judgement, you’ll find nobody but crooks, dullards and disappointments. In this context, I'd rather judge people by their best rather than their worst.

And then, of course, there is Mill’s famous point – that we need contrarians, even if they are wrong, to sharpen our perception of the truth:

The peculiar evil of silencing the expression of an opinion is, that it is robbing the human race; posterity as well as the existing generation; those who dissent from the opinion, still more than those who hold it. If the opinion is right, they are deprived of the opportunity of exchanging error for truth: if wrong, they lose, what is almost as great a benefit, the clearer perception and livelier impression of truth, produced by its collision with error.

Note that the silencing here need not be legal suppression; it could be via the tyranny of the majority, or simply self-censorship.

But again, there’s a but. Contrarians don’t always (or even often) provoke intelligent debate. They can be as tiresomely conformist as the dullest careerist: is there a more predictable writer than Brendan O’Neill?  And what looks like contrarianism is often no more than mindless tribalists whining about political correctness gone mad zzzzz: despite my analogy, how many defenders of Scruton would also defend McDonnell?

If all this sounds inconclusive, that’s because it is. My hunch is that Scruton should not be housing tsar not so much because of his regrettable ideas on some things, but simply because his merits do not extend to especial expertise on housing. This, though, does not solve the underlying questions: how tolerant should we be of otherwise useful people in public life who say things we hate? What is the proper place for those who question society’s flawed conventional wisdom? What, if anything, can we do to get a better and more diverse type of contrarian?

Stabilization policy with ignorance

Eric Lonergan’s good discussion of fiscal rules has triggered an intemperate debate about MMT. For me, though, it poses a question: from which fact(s) should thinking about macro policy begin?

For old-style Keynesians, the fact was that labour markets could not be relied upon to clear. For new classicals, it was that people were rational maximizers. I want to suggest a different fact – that recessions are unpredictable.

Prakash Loungani has shown that both private and official forecasters “miss the magnitude of the recession by a wide margin until the year is almost over”. In February 2008 for example – after the recession had begun – the Bank of England attached only a slight probability to GDP falling when in fact it fell more than 6% in the following 12 months*.

Exactly why this should be is a question for another day: I suspect it’s because recessions have micro-level origins which are magnified by network (pdf) effects between heterogenous firms.

Whatever the reason, this Big Fact has a devastating implication. It warns us that there are severe limits upon what demand management can achieve, whether it be through fiscal or monetary means. This is simply because there’s a lag between policy and outcome. Fiscal or monetary policy can boost demand once it has fallen. But it cannot reliably prevent all recessions. This point applies to conventional as well as unconventional policy. By the time the Bank of England knows there is a sufficiently deep recession to require (say) a helicopter drop, the recession will be well under way.

How can we respond to this?

We could follow Robert Lucas and say it’s a non-problem because the welfare costs (pdf) of economic fluctuations are trivial. Most of you, though, would resist this, and I think (pdf) rightly so.

Or policy-makers could reject conventional macroeconomic forecasting and place more weight upon the yield curve (pdf) to tell us the probability of recession. This, though, is inviting us to be smacked in the face by Goodhart’s Law.

This leaves a third response: we need better automatic stabilizers.

The obvious possibility here is more progressive taxation and a higher welfare safety net. Another possibility is for Shiller-style macro markets to enable those most exposed to the risk of recession to buy insurance: this requires state support for such markets. A third possibility is one suggested by Eric: a sovereign wealth fund. Insofar as this holds overseas assets, it would help diversify local UK economic risks, and would rise as sterling falls.

It’s in this context that a Job Guarantee becomes attractive (pdf). It would provide schemes which expand to create jobs in recessions, and contract as private sector jobs are created in the subsequent upturn. It’s another automatic stabilizer.

Now, there are issues with a JG, not least of which are administrative ones: how do we identify what work needs doing? How can we ensure a JG doesn’t deteriorate into demeaning workfare under rightist governments? And so on. Such problems are a case for thinking about a JG now, and for rolling it out in good times, so that difficulties can be addressed before the scheme needs to be scaled up.

We should regard a JG not as a faddish idea of some sect – although that it how it is sometimes presented – but rather as one of a suite of possible policy responses to one of the fundamental facts of the human condition: our inability to reliably foresee the future.

* It’s unclear that heterodox economists foresaw the 2008-09 recession; permanent warnings of the risk of recession are of limited use for the purposes of macroeconomic stabilization.