Stumbling and Mumbling

Nostalgia

It's the 50th anniversary of the death of James Dean. Which is a good reason to remember the best band ever to come from Merseyside*. I refer, of course, to the mighty Half Man Half Biscuit. From 99% of Gargolyes Look Like Bob Todd:

James Dean was just a careless driver
Marilyn Monroe was just a slag.

Speak for a generation, they do.
* This claim might not be correct.

A nationalized workforce?

The ratio of public to private sector jobs is not much different under New Labour than it was under Thatcher.
That's the surprising message of these figures out today (pdf).
These show that there are now 4.18 private sector workers for every general government employee. That's down from 4.43 when New Labour took office. But it's higher than the 3.89 ratio in 1993.
Direct comparisons with earlier years are impossible because of statistical rejigging and reclassifications. But the older statistical series shows only a small fall in general government employment, and little change in private employment, between 1988 and 1992.
So, it's quite possible that the ratio of general government to private employment is not  much different now from what it was in the heyday of Thatcherism. There are four reasons for this:
1. Private employment has grown under New Labour, by 1.5 million.
2. New Labour has only reversed the fall in government employment that occured under Ken Clarke's chancellorship in 1992-97 (although a lot of this fall was due to reclassifications rather than genuine cuts.)
3. Contrary to public image, Thatcher did not slash government jobs. The old figures (available here) show that general government jobs grew slightly between 1979 and 1988*.
4. Our image of New Labour might be coloured by the salience heuristic. We see lots of pointless public sector jobs advertised in the Groan, and infer that government is packed with parasites. In fact, these are only a small fraction of  total government jobs  (5.5 million), and the piecemeal rise in private employment, which is less salient, gets less attention.
All this is, of course, consistent with one big fact - that the tax burden, at 39.3 per cent, is lower this year than it was when Thatcher left office. (compare table C5 and C24 of this pdf).
I draw the following inferences from this:
1. It's wrong for free-marketeers to idolize Thatcher. She did less to create limited government than you might think. She was a class warrior, not a libertarian.
2. It's not likely that New Labour's plans will collapse under the burden of huge taxation (though it could do so because public aversion to a given level of taxes has risen).
3. The case for shrinking the state is one of political ideals (dependency is a bad thing; it's our money, not the state's) and allocative efficiency. It's not that we "can't afford" the current level of government.
* I'm leaving public corporations out here: employment in these collapsed under the Tories because of privatization, not just job cuts.

Guitar lessons

You might wonder what’s the link between my previous post and the core competences, such as they are, of this blog.

There are some. My feeble efforts at learning the guitar remind me of three interesting issues in economics.

1. The nature of knowledge. You cannot learn the guitar from books, or even – directly – from teachers. The mere transmission of facts from my teacher to me does not make me a good player. Instead, the ability to play is tacit knowledge – a knowledge that comes only from doing.

There’s a huge gap between knowing something intellectually – the notes and rhythm – and actually being able to play. Knowing in your head and knowing in your fingers are different things. When Bill Shankly told a young player “the trouble with you son is that your brains are all in your head” he was speaking a deep truth.

This insight translates into economics. It teaches me to be wary of the idea that central agencies - be they governments or the managers of private companies - can truly know enough to manage effectively. Not all knowledge is codifiable, articulable and transmittable.

2. The role of talent and individual ability. In the day job and this blog I might occasionally give the impression of a modest competence. No such impression ever emerges from my guitar playing.

Which raises the question: if I’m so crap at playing the guitar, why should I think I’m good at the day job and the blog? Maybe the little competence I have in economics is due not to natural intelligence, but simply from years of practice. And maybe this point generalizes. Maybe we overstate the importance of talent relative to experience. (Or maybe I'm just useless at everything.)

Points one and two have implications for the design of organizations. Maybe the most successful organizations are those that provide frameworks for conserving and pooling knowledge and experience, rather than being vehicles for talented individuals.

My scepticism about hierarchies is reinforced by my learning the guitar.

3. Against consumerism. I’m never going to play the guitar very well. So why do I bother? Why don’t I just listen to great music?

It’s because I’m a human doing, not a human being. Learning the guitar isn’t a means to an end, of hearing great music – there are easier ways of doing that. It’s an end in itself.

There’s a parallel here with the natural sciences. Philip Kitcher has suggested that the motivation of many scientists isn’t the attainment of true knowledge – which is elusive – but in the joy of discovery. It’s the road we enjoy, because we’ll never reach the destination.

This undermines the traditional Humean conception of rationality, as the choice among efficient means of achieving a given end. Sometimes, means matter more. And the notion of people as passive consumers, or products or of political parties, misses an important point about human nature.

There’s one other link between the guitar and economics. The best advice about learning the guitar came from James Buchanan’s advice to young economists:

Keep the ass to the chair.

Picking fault

My old history teacher used to say that one should criticize one’s opponents on their strongest arguments, not their weakest ones. Alan Johnson does just this in rejecting some fatuous oaf’s remark:

I do not believe the electric guitar is acceptable for Muslims.

This is indeed the Islamists’ strongest ground; the electric guitar is responsible for some truly hideous offences.

Sadly, Alan’s defence of it has three flaws.

First, David Rawlings plays a 1935 Epiphone Olympic archtop, which is acoustic. He says of it:

It’s not much of a solo instrument, but I can’t really play by myself worth a darn.

This, Dave, is the silliest statement ever to appear on this blog.

Second, Woody Guthrie’s “This machine kills fascists” was written on an acoustic.

Third, he omits the only defence the electric guitar needs – Brian Miller’s playing on Jolie Holland’s Wandering Angus (yes, the W.B Yeats poem). A of it clip is here. If you like Gillian Welch, you'll like Jolie Holland. And if you don't like Gillian Welch, you can go now - you're not wanted. My liberalism only goes so far you know.

New Labour's assault on liberty

So far, Gordon Brown has not been connected to the disgusting treatment of Walter Wolfgang yesterday. But there is a link.

On Monday, Brown spoke of “the thousands of public servants” whose behaviour on July 7th exemplified “public service at its best, not just a career but a calling, the ethic of duty, care, compassion and service.”

This gives the game away. Brown presumes that there's something high-minded about "public service."

If you start from this presumption, you’ll have little problem in wanting to extend the powers of the state – be it the Terrorism Act, banning glorifying terrorism or “a radical extension of summary powers to police and local authorities.”

This is because you’ll presume that the police and their allies will use these powers with “an ethic of duty, care, compassion and service.”

But what if this assumption is wrong? What if coppers, and their allies, are selfish and lazy, and motivated not by duty but by a desire to oppress others?

Then we’ll get what we got yesterday:

Police later used powers under the Terrorism Act to prevent Mr Wolfgang's re-entry [to Conference].

If you give powers to lazy neo-fascistic goons, they won’t use them to face up to gangs of bullies – who might fight back - but they’ll pick off easy targets like Mr Wolfgang. Or Subhaan Younis. Or Charlotte Denis. Or, possibly, Jean Charles de Menezes.

There is, therefore, a direct line from Gordon Brown to the assault upon a life-long Labour activist. And it’s no good Blair apologizing now. The fact is that Mr Wolfgang’s treatment is the natural result of New Labour ideology.

This is where a connection emerges between economics and liberty. We economists presume that people are selfish, lazy and corrupt. We are, therefore, instinctively opposed to giving powers to them to indulge their venality. New Labour, lacking this presumption, is more willing to extend such powers.

Now of course, it would be as daft to claim that people are 100% venal as it would be to claim that they are 100% altruistic. But as we’ve seen, a minority of security guards and policemen are abusers of power. And the damage they do can be great. That’s why we should err on the side of limiting their powers, not extending them.

One other thing. Why did Brown eulogize the “public [my emphasis] servants” for their behaviour on July 7? Sure, many acted heroically that day. But so did private sector workers like Stagecoach employee George Psaradakis. Why did Brown choose a phrase which excluded him – when he had rightly praised him earlier?

Brown could easily have claimed that it was trade union members, rather than public servants, who had acted heroically on 7/7.

But managerialist ideology rules out such a claim, even though it probably has as much (or more?) truth than the notion that public servants are unusually altruistic. This is yet another sign that New Labour is instinctively on the side of the bullies, not the workers. 

WEHT free speech?

Am I alone in finding this an outrageous over-reaction?

A hotel guest who showed an "abhorrent and shocking" video of an Iraqi hostage beheading to an appalled worker has been jailed for 60 days. Subhaan Younis, 23, showed Charlotte McClay the footage on his mobile phone while chatting to her in the shop where she worked at the Moat House Hotel in Glasgow.

Apparently, it was a breach of the peace. Looks like it's already an offence to glorify terrorism.
The beak said:

I struggle to understand why any decent individual would have images showing the degradation and death of another human being regardless of their race, political or religious persuasion.

So, that's every news organization in the world banged up.
And: Martin Stabe points out that there are many more like Mr Younis. And Tim Hicks points out some other examples of our police state.

Neoclassical economics versus capitalism

Are bosses stupid? Are capital markets much less efficient than they should be? These questions strike me, looking at the latest UK national accounts figures (pdf).
What leaps out from these is that companies' net lending - the excess of their retained profits over capital spending - is at a record high of £9.1bn, or 3% of GDP.
Intuition tells us this means companies are really pessimistic about the future, because they're reining in their spending. If you believe in the wisdom of crowds, this means bad times are on the way.
But history shows that this intuition is wrong. High net lending in fact leads to strong growth in GDP and investment. Indeed, in the last 20 years, net lending has been a fantastic predictor of business investment spending in the following two years; a correlation coefficient of 0.71 and R-squared of 49.6% are impressive, given how volatile both series are.
Orthodox neoclassical economics tells us this shouldn't be so. In theory, companies should invest when the marginal expected benefit of a project exceeds its marginal cost (subject to a big wrinkle involving real options).
In this view, companies' cash holdings should be irrelevant. Clearly, there should be no link between the true benefits of a project and cash balances. And if capital markets are efficient, companies can borrow and lend at the same rate, so the costs of a project are independent of firms' cash holdings.
The tight link between net lending and subsequent capital spending shows that this neoclassical view is wrong. Why? Two (non-exclusive) possibilities come to mind:
1. Firms don't appraise investment projects rationally*. Instead, they spend to budget. When cash positions are healthy, firms splash the cash, even on projects of dubious value. And when cash is tight, investment gets cut, even in profitable projects.
2. Capital markets are imperfect. Because outside investors - be they banks, bond or equity markets - cannot properly scrutinize firms, they charge a hefty risk premium on loans. The upshot is that cash balances are a much cheaper form of finance than external funds. So, high retained finance leads to high spending.
Whichever is the best explanation, one thing seems clear - that actually existing capitalism  works very differently from how orthodox neoclassical economics predicts. In particular, the agency problem - of how suppliers of funds can control companies - is a long way from being solved. 
* Rational, that is, from the point of view of their owners. What I'm describing is consistent with rational behaviour by managers, who seek to divert cash away from shareholders by expanding their own empires.

Coping with globalization

In his Conference speech, Tony Blair repeats a big New Labour theme:

In the era of rapid globalisation, there is no mystery about what works: an open, liberal economy, prepared constantly to change to remain competitive...The dam holding back the global economy burst years ago. The competition can’t be shut out, it can only be beaten. And the greatest error progressive politics can make, is, to think that somehow this more open and liberal world makes our values redundant, that the choice is either to cling onto the European social model of the past; or be helpless, swept along by the flow.

There is a problem with this. By one obvious measure, the "European social model of the past" is coping better with globalization than is New Labour's economy.
I refer to export growth. Figures from the OECD show that between 1997Q2 and 2005Q2 the volume of exports of goods and services grew twice as fast in Germany as in the UK - by 70.5% compared to 35.2%.
Yes. Whilst Gordon Brown has been Chancellor, Germany - sick man of Europe, out-dated social model - has seen its exports grow twice as fast as the dynamic and flexible UK.
Granted, some of this difference reflects the fact that, for some of the time (especially 2000-02), sterling has been stronger than the euro. And partly, it's because exports are, in Adam Smith's words, a "vent for surplus"; they are strong when domestic demand is weak.
But I doubt if these facts can explain all the difference.
Instead, there are two messages here. First, the big difference between the UK and German economies in recent years has been the strength (or not) of domestic demand, not exports.
Second, those German voters who rejected the idea that they need to abandon their social model to cope with globalization didn't have their heads completely in the sand. The link between globalization and abandoning old social models isn't quite as simple as Mr Blair pretends.
As an economic liberal, I find this a little awkward.

Alternative economic policies

David Aaronovitch scores a direct hit on the Left's weak spot:

There is a hole where any “left” alternative industrial and economic policy would sit. The poor would have to be protected, damsels rescued, folks given rights, spending increased and so on. But then what? How would wealth be created, jobs created, international competitiveness maintained? I am not joking when I say that, in years of reading left publications and attending left-of-centre meetings I have not once heard these questions tackled directly — other than by a minister.

He's right. But the problem is that the British left is unimaginative, economically illiterate, captured by vested interests and stuck in a 1970s statist timewarp*. It is not that there are no leftist economic policies. Here are a few:
1. Macro markets. These give workers insurance  against falling demand for their industry or occupation. This risk-pooling means workers who do suffer the adverse effects of globalization can share their losses with the winners. As globalization is a potential Pareto improvement, such markets help reconcile equality and efficiency.
2. A citizens basic income. I've advocated this before. Suffice to say here that this has the merit of increasing workers' bargaining power, thus making costly regulation such as minimum wages unnecessary, whilst also promoting equality.
3. Asset redistribution, for example via confiscatory inheritance taxes; none of you have convinced me that these are a bigger disincentive than incomes taxes.
4. Dismantling the corporate welfare state - the DTI and CAP. This promotes allocative efficiency whilst allowing cash to be transferred to the poor or to public services.
If we're being a bit bolder, we'd add measures to promote market socialism and/or to increase worker control of companies.
Sure, I've been very vague here. For evidence that the left and economics do mix, try here, here, here, here, here or here.
* Update: Tim provides perfect evidence of what I mean.

Racism and redistribution

Lawrence White draws attention to an embarrassing fact - that welfare states are larger in countries that are racially homogenous.
He cites this paper (pdf) by Erzo Luttmer:

Individuals increase their support for welfare spending as the share of local recipients from their own racial group rises...Welfare benefit levels are relatively low in racially heterogenous states.

And there's this (pdf) from Brucer Sacerdote, Alberto Alesina and Ed Glaeser:

Racial animosity in the US makes redistribution to the poor, who are disproportionately black, unappealing to many voters.

And we could add this (pdf) from John Roemer and Woojin Lee:

Racism among American voters decreases the degree of redistribution that would otherwise obtain...We numerically compute that during [the period 1976-92] voter racism reduced the income tax rate by 11-18 percentage points.

This looks like a consensus supporting David Goodhart's view that there's a trade-off between ethnic diversity and the social cohesion that underpins redistribution.
I think this is embarrassing for the "right" as well as the "left." For the right, it suggests they haven't won the argument against redistribution to the extent that voter numbers and (in)equality statistics suggest. That's because voter opposition to redistribution is based not just upon respectable libertarian arguments, but upon despicable motives.
For the left, it suggests we can't have two of our cherished ideals - a liberal immigration policy and redistribution - and this might be the price we have to pay for what little redistribution we do have.
Is there a solution here? Is it a counsel of perfection to hope to solve the problem by educating people out of racism? Would a citizen's basic income - paid to citizens but not immigrants - allow us to combine redistribution with free immigration? Or are we stuck with the nasty trade-off?