Stumbling and Mumbling

The recrudescence of New Labour

I had hoped that New Labour was a thing of the past, simply because today's problems are not those of the 1990s. I was wrong. It seems that the worst features of New Labour are still alive.

Ed Balls' advice to us to ask for receipts every time we pay £10 to get our hedge cut doesn't just tell us he has a very small hedge. If we read it alongside Tessa Jowell's piece in the Guardian, it reminds us that some features of the New Labour mindset are still with us - namely an attempt to change the character of ordinary people rather than challenge the structural forces that cause our economic problems.

Balls seems to be inviting us to believe that tax dodging by hedge-cutters is a big problem. Beermat maths tells us otherwise. According to latest figures from HMRC there are 5.5m self-employed who have an average declared income of £14654pa. Let's assume - heroically - that their undeclared income is as much again. This would mean they are dodging around £23.3bn of income tax and NICs. This is only around a quarter of this year's likely budget deficit - and rather less when we consider that if they paid this tax they'd cut their spending and so VAT revenues would fall. The deficit, then, isn't because we are paying cash to the self-employed.

Jowell's argument is similarly weakly rooted in facts. She attributes inequality to inequalities in education and in "cultural and personal capital that help some young people get on and leave others without the faintest idea of how they can." I agree that this is a problem. But it ignores an important fact. The income inequality that results from this is that between the unemployed and ordinary skilled workers or graduates. But this inequality - the sort that's captured by the Gini coefficient - hasn't changed since the early 90s. What has changed is the share of the 1%: this has risen from 9.8% to 12.9% since 1990. But this hasn't happened because the other 99% of us are unskilled or can't shake hands properly (her example - really): the skills of the top 1% aren't easily distinguished from those of the top 10%*.

Jowell and Balls are't just wrong. They are wrong in the same ways. Both are underplaying structural factors. In Balls' case, he's ignoring the fact that the deficit is due to a global savings glut and investment dearth - or, some say, to the fact that the rich have bought HMRC. And Jowell is blind to the fact that the rising share of the 1% is due to increased managerial rent-seeking, political power or winner-take-all markets. In this sense, they are making exactly the error of which Stuart Hall accused New Labour in 1998:

The Third Way is hot on the responsibilities of individuals, but those of business are passed over with a slippery evasiveness...The "Third Way" does observe accelerating inequality but refuses to acknowledge that there might be structural interests preventing our achieving a more equitable distribution of wealth.

Instead, both are doing what I accused New Labour of in my book. They believe that our economic problems can be solved by straightening out the crooked timber of humanity, apparently in the belief that if only we can become educated go-getters who are sticklers for the rules, the deficit and inequality will be eliminated; New Labour's illiberalism was an essential feature of its ideology. As Hall complained, New Labour "set about vigorously adapting society to the global economy's needs."

Twenty years of experience should have taught us that there are severe limits to this view. Balls and Jowell, however, look like French Royalists: they have learned nothing and forgotten nothing.

* Unless, of course, you define ability as the ability to be in the 1% - but this is wholly circular.

Origins of bad policy

In his excellent piece in the LRB, Simon points to the "ludicrous situation" in which the Labour party "now wants to portray itself as being just as tough on the deficit as the coalition*." Why this is?

Let's start from a different place, by considering another profession which has consistently disappointed its customers - the financial services sector. There's evidence from around the world that financial advice is worse (pdf) than useless and that fund managers (pdf) under-perform index trackers. Why is this? A new paper (pdf) by Robert Vishy, Adrei Schleifer and Nicola Gennaioli provides one reason. Advisors and managers, they say, try to win and sustain the trust of their clients. But it's difficult to win people's trust by telling them they are twats. Better to nod sagely, praise their judgment and give them what they want; people tend to trust people like themselves. "in many circumstances, managers have a strong incentive to pander to their investors’ beliefs" they say: this is one reason why funds invested in tech stocks in 2000, and why advisors directed clients into such funds.

Now, here's the thing. Politics is very much like fund management in this sense: the fund manager says "trust me with money"; the politician says: "trust me with power." Just as fund managers pander to stupid ideas to win trust, so too must politicians. An election campaign is no place for an economics tutorial. As Ronald Reagan said, "If you're explaining, you're losing."

But where do stupid ideas about the deficit come from? It might be because political reporting is inherently biased.

In focusing upon politicians' acts and words, such reporting - perhaps unintentionally - encourages the belief that government borrowing is under their control. A deficit therefore looks like a failure.

This is exacerbated by the fact that the very word "deficit" has negative connotations. The Oxford Compact Thesaurus offers as synonyms for it "deficiency", "shortage", "arrears" and "negative amount". In German "debt" and "guilt" are the same words, but the English language isn't wholly
different.

By contrast, from the economists' perspective the salient facts and ideas are the mix of the investment dearth, shortage of safe assets, corporate financial surplus and secular stagnation which have produced a worldwide long-term decline in real interest rates, and an under-utilization of resources in the west which has given us high unemployment and stagnantish real wages.

From this perspective, government borrowing is a good thing; it would be better to be renamed the private sector surplus. In focusing upon politicians rather than impersonal processes, however, political reporting downgrades this perspective. As I've said before, the news is not the truth.

My point here, perhaps, generalizes. Bad policy does not always arise from simple stupidity. It can also result from a combination of perverse incentives and the unconscious biases generated by the nature of journalism.

* Luckily, there is a difference between rhetoric and reality: Labour's actual policy is looser than the Tories. My fear, though, is that people who pretend to be mad eventually actually go mad.

Austerity, fear and bubblethink

Tim Montgomerie in the Times writes one of the wrongest things I've seen in a while. In trying to defend fiscal austerity he says:

For every green light on the global economic dashboard (eg falling oil prices) there are more red ones (the slowdown of China, the euro crisis, Russia's militarism). And if a crisis does strike again the national credit card we maxed out after 2007 is still pretty maxxed out.

This is horribly mistaken. What's maxxed out is not so much fiscal policy - the UK government's debt-GDP ratio is actually below the OECD average - but monetary policy. Sure, there's room for more QE. But with gilt yields so low already, this couldn't push them down much further. It's unlikely that QE - at least on the scale the Bank would be likely to undertake - could much stimulate the economy sufficiently to offset both more austerity and an adverse global shock*.

By contrast, in the event of such a shock, investors would probably step up still further their demand for safe assets, which would mean that extra government borrowing is easily affordable.

Tim is therefore 100% wrong. The gloomier is the global outlook, the stronger is the case against austerity. As Simon says:

The problem with further fiscal consolidation while interest rates remain at their lower bound is that it makes the economy much more vulnerable to downside risks.

If I were trying to defend austerity, I'd take the exact opposite line to Tim. I'd echo Mark Carney (pdf) in claiming that "global growth is expected to continue" and say that a sunny day is the right time to fix the roof.

Tim's error, though horrible, is not an isolated one. He is echoing something Cameron said a few weeks back.

When intelligent men say something very stupid, ideology is at work. But what is the ideology here?

Part of the answer is that Tim has been sucked into mediamacro bubblethink - a world in which talk of the "national credit card" is taken seriously rather than scorned as sub-literate cretinism. It might be no accident that one of the few prominent politicians to see things as they really are works outside the Westminster bubble.

But perhaps there's something else. As Nick Barlow said the other day, politicians no longer offer any hope. (This might be because of the triumph of neoliberal scepticism about the possibility of successful collective action). What they can do, though, is trade on fear - as Cameron did to the BCC on Tuesday. As Frank Furedi has written, "governments use fear to sustain their authority."

The problem is that, so accustomed has the ruling class become to using fear rather than hope, that they now use it even when it justifies policies which are the exact opposite of those they are advocating.

Whatever the reason, understanding support for austerity requires not an economist but a psychologist.

* OK, it's theoretically possible that the Bank could undertake trillions of pounds of QE, which would stimulate the economy. But would Tories really welcome such a possibility?

Created by history

Inequality is bad for economies in the very long-run. Here's a new paper:

In countries with higher levels of inequality in the 1700s and 1800s, businesses today are more likely to die young and create fewer jobs.

This could be because inequality means more people are credit-constrained and so cannot set up their own businesses, which in turn generates anti-entrepreneurial attitudes which are transmitted down the generations.

I don't say this to provide another reason to worry about today's inequality; it would be odd to reduce inequality now on the grounds that doing so will benefit people in the year 2300. I do so instead because this is yet more evidence that our social and economic attitudes are shaped by quite distant historical circumstances. To take a few examples:

 - Areas of Australia which saw men greatly outnumber women in the 18th and 19th centuries because of England's transportation of criminals have more sexist attitudes and gender discrimination today.

 - Areas of Germany which saw anti-Jewish pogroms after the Black Death tended (pdf) to be more supportive of the Nazi party in the 1930s.

 - British people's attitudes to immigration today are "significantly (pdf) more positive when the respondents live in a constituency that was home to a medieval Jewish immigrant community."

 - "The (pdf) descendants of societies that traditionally practiced plough agriculture today have less equal gender norms, measured using reported gender-role attitudes and female participation in the workplace, politics, and entrepreneurial activities.

 - Stanley Engerman and Kenneth Sokoloff show (pdf) that one reason why south America grew more slowly than the north is that their higher inequality entrenched the power of the rich which allowed them to block economic development.

 - Nathan Nunn has found "a robust[in Africa] negative relationship between the number of slaves exported from a country and current economic performance." This could be because the slave trade heightened mutual distrust and led to weak and corrupt states.

The precise mechanisms in these stories differ. Sometimes, the transmission from past to present operates via institutions, sometimes via culture - though of course the two interact. You can read Greg Clark's work (pdf) showing that wealth persists through the generations as individual-level evidence for the latter.

All this suggests that, contrary to simple-minded neoclassical economics and Randian libertarianism, individuals are not and cannot be self-made men. We are instead creations of history. History is not simply a list of the misdeeds of irrelevant has-beens; it is a story of how we were made. Burke was right: society is "a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born."

One radical implication of all this is Herbert Simon's:

When we compare the poorest with the richest nations, it is hard to conclude that social capital can produce less than about 90 percent of income in wealthy societies like those of the United States or Northwestern Europe. On moral grounds, then, we could argue for a flat income tax of 90 percent to return that wealth to its real owners.

Wages: the collective action problem

Does David Cameron understand the purpose of politics? I ask because of his claim that "it's time Britain had a pay rise."

We must distinguish here between the interests of a specific individual business and the collective interests of all businesses.

It might be in the interest of an individual business to increase pay because doing so might motivate staff and reduce turnover; this is what Cameron meant when he told the BCC: "it's good for you to have happier and more productive staff."

However, it's also possible that higher wages are in businesses' collective interests. This might be because, as wage-led growth advocates say, they would give a net boost to aggregate demand. Or it might be because, as Cameron believes, higher wages would create a feel-good factor and so increase the chances of the re-election of a pro-business government*.

Herein, though, lies the problem. If higher wages were in firms' individual interests, they would already have raised wages. If, on the other hand, they are in firms' collective interests, we have a collective action problem. Even if each individual firm thought that it was in everyone's interests to raise wages, it would not do so for fear that others would not follow with the result that it would have higher costs with no offsetting benefit in the form of higher demand or pro-business public opinion.

In either of these cases, Cameron's speech is pointless. If a pay rise is in firms' individual interests, it would have raised pay already. And if it is in their collective interests, each firm needs more than words to convince them to raise pay. For this reason, serious advocates of higher pay, such as the TUC, have called (pdf) for policy measures to force pay up, such as stronger union rights, full employment policies or a higher minimum wage.

What then, is Cameron doing?

One possibility is that he's just playing the old trick of raindance politics. He's demanding something which might happen anyway - so when it does happen he can claim to have been in control of events.

There is, though, another possibility. Cameron is committing an error which, as I've said before, is a consistent theme of this government - a blindness about the collective action problem.

We see this in its welfare policy. Whilst it is likely that a clampdown on benefits would force any individual benefit recipient** to seek work and possibly get it, this cannot be true to the same extent for all recipients, because labour demand is constrained by the state of the economy.  

We see it too in fiscal policy. It might be rational for you to pay off your credit card, but if we try to pay off "the nation's credit card", the rise in desired saving merely reduces aggregate demand and so deficit reduction proves to be counterproductive.

Which brings me to my initial question. The purpose of politics is to ameliorate problems of collective action: if individual interests always coincided, there'd be no need for politics. A politician who doesn't understand this doesn't grasp the very basics of his profession. Perhaps being Prime Minister is just an ego trip before Mr Cameron begins a serious career.    

* Uncertainty about EU membership and the risk of recession because of overly tight fiscal policy are of course in businesses' interests.

** Is it just me, or does the word "claimant" have ideological undertones?

Heading for extinction?

Are our main political parties like banks in 2007? I'm prompted to ask because of the widespread belief that they are insufficiently differentiated. Seamus Milne complains that "only the narrowest range of policies is acceptable" and - from a different perspective - Nick Barlow bemoans the uninspiring "politics of non-differentiation":

If all you can do to distinguish yourself is claiming ‘slightly different than X and Y, but not by too much!’ then is it any wonder no one wants to pay attention to you?

Not everyone shares this view: Simon points out that the two main parties do differ significantly on, for example, the EU and inequality. But let's, for the sake of argument, run with the Barlow-Milne view.

There's a rational economic basis for what they are complaining about. It was described by Harold Hotelling in 1929.

To see his point, imagine ice-cream sellers setting up stalls on a beach, along which sun-bathers are scattered. The first seller would place his stall half-way along the beach, as this minimizes how far customers must walk to get to him. But where does the second seller put his stall? Hotelling proved that it was next to the first's. And the third and fourth sellers also go for the middle of the beach. Buyers, concluded (pdf) Hotelling, "are confronted everywhere with an excessive sameness."

This helps explain why our towns are full of almost identical coffee shop chains, why most lager tastes the same (or cider, as Hotelling complained): and why pop music is mostly indistinguishable sub-Rn'B pap. And it is just what happens in politics. The cliche that "elections are won in the middle ground" and the well-known median voter theorem are expressions of Hotelling's principle of minimum differentiation. He himself saw this. His idea, he wrote, "is strikingly exemplified" in politics, where "each party strives to make its platform as much like the other's as possible."

From Hotelling's perspective, minimum differentiation is maximally rational.

Or is it? Let's return to the beach analogy. What happens if there's a bad summer? Or if the beach becomes inaccessible because of a landslip? Or if people decide to no longer take beach holidays?

All our ice cream sellers would then go bust. The only survivor would be the apparently irrational seller who set up his stall inland.

If there is environmental change, apparently rational Hotelling-type strategies can lead to mass extinction. For example, in 2007 most banks (pdf) were pursuing similar strategies. When the environment changed, there was a mass wipe-out.

Hotelling-type strategies eliminate ecological diversity. But such diversity might be the only way of surviving environmental change.

Hence the question I began with. The rise of nationalists, Ukip, Greens and voter apathy might represent the sort of environmental change which cause Hotelling-type strategies to fail.

The standard response to this possibility is along the line of Seamus's - to advise Labour to shift left (and the Tories rightwards): it's a neat coincidence that the recommended move just happens to be always towards the writers' preferred position.

But is this always feasible? Return to our ice-cream sellers.If they have emotional or financial attachments to the beach, it might not be easy to move. This is true for many companies: they have vintage organizational capital which locks them into specific ways of doing things and makes radical change very difficult. And the same might be true of political parties. They too are trapped by history and brand; for example, ethnic minorities don't vote Tory in part because of the legacy of Enoch Powell.

Advice such as Seamus's under-estimates the sheer difficulty of changing*.  

It's possible, then, that the main parties are heading for something like extinction and yet they cannot do much about it.

* You might object that Thatcher and Blair both transformed their parties. But they were exceptional leaders. And a glance at the trends in party membership under their leadership suggests even they were not wholly successful.

Why not worker ownership?

Diane Coyle asks: why is profit-sharing not more common, given the evidence (pdf) that it increases productivity (pdf) and profitability (and well-being)?

To some extent, the premise behind the question is wrong: there are many more worker-owned firms than there are ones quoted on the stock market. Shared ownership is the norm for law, accountancy and medical practices - although they become less egalitarian as they get bigger. And in other cases, substantial worker-ownership is not feasible; I'm not sure workers should own their own oil rigs, for example.

Let's, though, grant the premise - which I think we should. There are several possible answers.

One is ambiguity aversion. The cost of profit-sharing is obvious and immediate, but the benefits are less salient and longer-term; more motivated workers, less staff turnover and so on. Given the cautiousness of many owners, this militates against shared ownership.

In other cases, such ownership is unnecessary. Yes, ownership motivates workers to either work hard or keep their hand out the till. But there is an alternative way of achieving this - direct oversight. And power biased technical change means this is more feasible in many work-places: containerization, tachographs, CCTV and computerization allow capitalists to control workers directly without the incentives of a profit share. It might be no accident that interest in shared capitalism peaked in the 70s and early 80s, before such technology became so available.  

In yet others cases, there's simply no desire for it. On the one hand, some firms are happy to pay peanuts and get monkeys: just compare service standards at John Lewis to those in quoted retailers. And on the other hand, many workers don't want it. If you want a job where you can skive off for a sly cigarette, you're ill-advised to work at John Lewis where everyone is a boss.

In this context, Diane hints at an overlooked cultural change. She notes, rightly, that a pioneer of paying good wages to improve corporate profits was Henry Ford.What she doesn't say, however, is that he had to do so to reduce horrific staff turnover. The great Harry Braverman quotes Keith Sward:

The turnover of his working force had run, [Ford] was to write, to 380% for the year 1913 alone. So great was labour's distaste for the new machine system that toward the close of 1913 every time the company wanted to add 100 men to its factory personnel, it was necessary to hire 963. (Labor and Monopoly Capital, p 149)

Since then, however labour has accommodated itself to drudge work, so there's less need to buy off discontent. And learned helplessness - or a desire for an easy life - means there's little demand for worker control. The fact that preferences are in part endogenous is a truth that mainstream politics cannot acknowledge.

Yet another reason for the lack of worker ownership or control is path dependency. Hierarchical capitalism made sense when companies had huge capital requirements and were staffed by illiterates - as was the case in the early phase of the industrial revolution. It makes less sense when capital is plentiful but when workers are highly skilled, as Luigi Zingales pointed out (pdf). However, it's often the case that ideas persist after their material justifications have disappeared. Hierarchical capitalism might therefore be an example of an idea that's outlived its usefulness.

Finally, one reason for a lack of worker ownership or control is simply capital constraints. Workers cannot afford to take a stake in their workplaces, and the first rule of investing - don't put all your eggs into one basket - urges them not to. The John Lewis Partnership was formed not by workers, but by a gift of shares from John Spedan Lewis. Few employers are so generous.

It might therefore be that the prevalence of hierarchical capitalism is a form of market failure.

Another thing: you might think my support for worker ownership and control is a Marxian idea. I'm not sure. It's also founded in a Hayekian scepticism about the efficiency of centralized knowledge and control, economics' agency theory and the mathematical diversity trumps ability theorem.

Dead ends or building blocks?

Labour seem to have failed to enthuse its supporters. Polly Toynbee says we might - yet again - have to hold our noses when we vote Labour, and Sunny complains about the party's "lack of clarity...on multiple levels".

In one sense, this is inevitable. There are countless constraints upon any leftist party - not least of which is a lack of public support for socialism. This poses the question: how can we tell whether Labour is doing the best it can, within these constraints? In this context, Erik Olin Wright makes a brilliant point. We should, he says, distinguish between ameliorative reforms and real utopian transformations.

Real utopian transformations consist of innovations which are building blocks towards a socialist society, whereas ameliorative reforms - whilst desirable in themselves - might be just dead ends.

For example, the new public management described by Chris Cook was an ameliorative reform. It might have improved school quality temporarily. But insofar as it leads to gaming the system and to hierarchical managerialism, it is a dead end.

Similarly, increasing spending on public services is merely ameliorative. Even those of us opposed to austerity know that the share of government spending in GDP can't rise forever.

On the other hand, policies which might not otherwise have much to commend themselves might be building blocks. A few tweaks to universal credit or to Labour's Jobs Guarantee scheme could lead to a genuine basic income and to real full employment.

For me, this distinction gives us a way of testing Labour. A good Labour government would put in place building blocks - policies which might seem innocuous but which could be expanded later.

Take, for example, Jonathan Portes' point that the next government has a choice: "We can have either higher taxes, more private provision, or much worse services." Now, private provision might merely be a way of cutting wages and staffing levels. But it needn't be. If preferred bidding status were given to worker or consumer coops, privatization and outsourcing might be a building block towards socialistic structures. So too might tax breaks for cooperative firms.  

I'd apply this test to all Labour policies: are they dead ends or building blocks (or worse still policies that risk a backlash)?

We are not going to get a liberal socialist society merely by electing the right government: the Independent's otherwise fascinating "If I were Prime Minster" series misrepresents the nature of politics. But it is possible to gradually - perhaps even imperceptibly shift towards one. We've got ourselves a plutocratic managerialist society without consciously choosing one. Maybe we can get ourselves a socialist one the same way.

Anti-business

There's a point being missed in the debate about whether Labour is anti-business - that there is, in fact, a good case for being anti-business.

I don't just mean that business dodges taxes and pays low wages. Such talk of unfairness distracts from the fact that, in recent years at least, business has simply failed.

For one thing, the greatest economic disaster of the last 80 years was a failure of business - the collapse of banks in 2007-08.

And for another, business has failed to invest in real assets despite making big profits. Since 2000 non-financial businesses' retained profits have exceeded investment in equipment and inventories by a cumulative £478.7bn*. In this sense, business has become an extractive institution, taking more money out of the economy than it has been putting in.

The fact that we're talking about secular stagnation shows that business is failing.

Business - at least in the UK - has become very good at extracting corporate welfare in the form of cushy government contracts, but much less good at riskier innovative ventures. Indeed, one could easily argue that the implicit subsidy to banks per banker is greater than spending on the welfare state per recipient.  

In this context, we must distinguish between business and markets. Business is about hierarchy and control; markets are about dispersing power. Markets are about competition, whereas business tries to suppress competition and seek monopoly power; the last thing big business wants is creative destruction. A pro-business government would seek to protect incumbents through red tape that strangles small firms; tough copyright laws; generous outsourcing and procurement policies; and tax breaks. A pro-market government would do the exact opposite, and do everything it could to promote competition. Governments can - and should - be anti-business but pro-market. 

All this poses the question: why, then, is Labour scared of being seen as anti-business? The Times gives us the answer. It quotes Tony Blair:

If chief executives say it is Labour that will put the economy at risk, who does the voter believe? Answer: the cief executives. Once you lose them, you lose more than a few votes. You lose your economic credibility.

But why do bosses have such influence? Partly, it's because politicians have so little credibility. But there are also two other reasons.

One is that the media - and the BBC is as guilty as anyone - sets up bosses as being general purpose experts: their opinions on the wider economy are often reported as authoritative in the way that others are not. This, though, misses the point that businessmen are at best experts only at running their own businesses - or in Stefano Pessina's case, inheriting them - and often not even that. As fans of many football teams will tell you, an ability to run one business often doesn't imply an ability to run another.

Also, bosses have managed to mythologize themselves as heroic, risk-taking leaders. But as we saw when Citylink collapsed, this is a fiction: it is workers and small contractors who bear risk, not big businessmen.

"Business leaders" are rather like corrupt medieval clergymen: they use an ideological fiction as a means of extracting wealth and power. What we need is a Martin Luther or Thomas Cromwell.

* I stress retained profits: these are the profits left after taxes, interest payments and dividends.

WEHT free market pessimism?

Where are there so few free market pessimists? A post by David Henderson raises this question. Responding to Noah's claim that fossil fuels will run out, he says:

As the price of an energy source rises, entrepreneurs have a strong incentive to invent, develop, and produce alternate sources.

This is a longstanding and common position among supporters of the free market - that the market will help us overcome, or sidestep, energy shortages. And it has been correct for many years. As David says:

Every single time someone has predicted that they we will run out of oil, that person has been wrong. What reason is there to think that prediction today will be right?

However, this logic isn't watertight. The fact that things have happened in the past does not guarantee they'll continue to happen. As Bertrand Russell famously said:

The man who has fed the chicken every day throughout its life at last wrings its neck instead, showing that more refined views as to the uniformity of nature would have been useful to the chicken.

Which brings me to my question. Although David's optimism is about humankind's ability to overcome resource constraints is often associated with free market ideas, there is no necessary reason why this should be. One can, coherently, argue that whilst free markets are necessary to bring forth innovation, they are not sufficient. In fact, it's quite possible that it is now harder to make innovations than it was before, simply because we've already discovered the easy ideas.

Such pessimism is quite compatible with a belief in free markets. One could argue that, if economic growth is harder to achieve, then allocational efficiency becomes more important; if we can't produce more from existing resources, we should at least ensure those resources are put to best possible use. And a lack of growth makes it more important to incentivize entrepreneurs to exploit the few ideas there are.

It's entirely logical to believe both in free markets and in the view that diminishing returns will eventually overcome technical progress. This is especially true given that the pace and direction of technical change is largely unpredictable. In fact, it was pretty much what David Ricardo believed. And if it was good enough for him, it'd good enough for us.

Hence my question. Given that free market pessimism seems such a tenable view, why, AFAIK, is it so rare? Why does optimism about human potential seem to be more correlated with a belief in free markets than I'd expect?

I was going to suggest that free marketeers tend to have a more optimistic disposition than their critics; a lot of egalitarianism is founded upon Rawls's maximin principle, which is an ultra-pessimistic decision rule. But this seems inconsistent with research which shows that  political conservatives (pdf) tend to be more risk-averse than lefties.

You could retrieve my hypothesis by arguing that a belief in free markets isn't politically conservative - but I fear you might struggle; the two are closely associated in the US at least.

Which leaves me with a genuine question: why has free market pessimism almost disappeared, despite being so reasonable? My more partisan readers might say it's because the free market right has become anti-scientific. Even if there's some truth in this, I'm not sure it's a complete explanation. For me, then, there's a puzzle here - and, given the virtue of cognitive diversity, something to be regretted.