Stumbling and Mumbling

The other deficit

I suspect there's a long list of things which are not election issues but which should be. On this list should be: what to make of the fact that the UK's current account deficit last year was 5.5% of GDP, the biggest peacetime deficit since at least 1816*?

First, let's put this into a context. One of the big developments of recent years has been the near-disappearance of the non-financial corporate sector's financial surplus. Since 2011, it has fallen from £69.9bn to £1.1bn, its lowest level for 14 years. This could be tremendously good news. It means that capital spending has risen relative to retained profits - which could be a sign that the dearth of investment opportunities is fading.

However, there's one notable effect this hasn't had. It hasn't led to a big decline in government borrowing.

The point here is simple. Financial balances MUST sum to zero: if one sector is a net lender, another muct be a net borrower. In the past, swings in the corporate sector's surplus have been mirrored by swings in the government's deficit. For example, corporate surpluses in the early 90s and late 00s were accompanied by government borrowing, and corporate deficits in the late 80s and late 90s were accompanied by government surpluses. To put this in more familiar terms, strong capital spending means a strong economy and hence buoyant tax revenues.

However, the fall in the corporate sector's surplus recently hasn't greatly reduced government borrowing. Instead, its counterpart has been an increase in the current account deficit: as the UK domestic sector (which includes households and financial companies as well) has gone from surplus to deficit, foreigners' financial surplus has risen.  

Hence the question I began with: what to make of this?

One possibility is that this shows that the UK lacks capacity in tradeable goods and services. As capital spending and hence economic activity generally has picked up, we've sucked in imports. Our incomes have, in effect, leached overseas rather than to the taxman.

One could therefore argue that we do indeed have a structural government budget deficit, in the sense that there's a big deficit even when the private sector is running a normal financial balance.

This provides a better justification for a tight fiscal policy than the Tories are offering. Such a policy means - given the inflation target - a low path for interest rates which should weaken sterling and so boost competitiveness; think of the standard Mundell-Fleming story. Sadly, this argument is weakened by the Meese-Rogoff puzzle. But one could revive it: to the extent that the external deficit/foreigners' surplus is the counterpart of the government deficit, maybe austerity is needed to reduce the current account deficit and so prevent a disorderly adjustment in which sterling collapses.

There is, though, another interpretation. Maybe the exogenous variable is foreigners' desire to save - due to the Asian savings glut and government and private sector retrenchment in the euro area. If foreigners want to save, someone has to borrow. And that someone has been the UK government.

Financial markets seem to believe its the latter: falling index-linked yields and a strong pound tell us as much.

Which brings me to a hunch. This might be changing. Signs of a recovery in the euro area have been accompanied by a fall in the UK's trade deficit, the biggest part of our current account deficit. This could mean that the foreign sector's surplus is falling. If this happens as the same time as the domestic sector continues to run a deficit, then the government deficit will shrink.

Given that what passes for economic policy debate is often just an application of the post hoc ergo propter hoc fallacy, this might mean that the next government - whoever it is - will be able to claim success in reducing borrowing.

* Based on B.R.Mitchell's British Historical Statistics. Data since 1830 are in this Excel file from the Bank of England.

Competition & working conditions

Tyler Cowen argues against (pdf) Elizabeth Anderson's view (pdf) that capitalist bosses exert oppressive power over workers and, implicitly, against my view that capitalist work is alienating. This, I suspect , is one of the many issues in the social sciences where both sides are right to some extent.

Tyler is right that competition for workers can drive up working conditions, and it is surely true that those conditions are vastly better in the west now than they were in the early days of the industrial revolution.

Nevertheless, I fear that Tyler might be claiming too much.

First, though, some facts. The evidence that capitalist work is oppressive doesn't consist merely in extreme cases of bosses' tyranny. Alex Bryson and George MacKerron have measured people's experienced happiness during 39 different activities, and found that paid work comes 38th of 39; only being ill causes more unhappiness.

This is consistent with the unemployed having lower life-satisfaction than the employed. Life-satisfaction is a different thing from experienced utility. It consists (in part) in having a role in life and being unemployed removes a source of this role - even though it is painful to fulfill it.  

I reckon there are four reasons why the mechanisms Tyler describes aren't strong enough to sufficiently improve the working environment.

The most obvious is mass unemployment. Even after years of recovery, the wider measure of US unemployment is still high, at 11% of the workforce. And in the UK on top of the official 1.9m unemployed there are 2.2m "inactive" wanting a job and 1.3m part-timers wanting full-time work. That's a total of 5.4m or one in six of the labour force. This means that the labour market is a buyers' market, which allows many employers to drive down standards or at least not worry sufficiently about improving them.

Secondly. I fear that Tyler is under-rating the importance of job-specific human capital. We know that this is widespread simply because workers who lose their jobs earn less (pdf) when they return to work. This in turn means that workers lack bargaining power to get better conditions because they are locked into their employer. This might help explain one of Bryson and MacKerron's findings - that better-paid workers are no happier in work than worse paid ones. It could be that such workers, having more job-specific human capital, feel that they lack bargaining power.

In this context, perhaps Tyler (and everyone else!) is misdescribing monopsony. Maybe monopsony is a feature not so much of firms but of transactions: a firm might have monopsony power with respect to workers with job-specific human capital, but not with respect to those with more portable skills*.

Thirdly, the wheels of competition don't grind very finely. Nick Bloom and John Van Reenen show (pdf) that there is a long tail of badly managed firms. If competition doesn't drive out bad management, why should we assume that it drives out poor working conditions?

A final problem is one of a lack of ecological diversity. Imagine if most countries in the world were communist dictatorships in which people were free to emigrate. Competition to retain people would alleviate the harshness of government. But nobody would pretend that it maximized well-being, simply because of the lack of attractive alternative governments.

Maybe a similar problem afflicts capitalism. Managerialism, short-termism, hierarchy and theory X are so widespread that it's hard to escape them: for example, Marina Warner's complaint about managerialism in universities applies to many universities, not just to one or two.

Now, it might be that there is nothing much that can be done to lessen the alienating and oppressive elements of capitalism: maybe work really is Adam's curse. But we should at least investigate this question. Although I disagree with Tyler about the extent to which there is a problem here, I have a much stronger complaint against those who don't even want to consider the issue - which includes pretty much all politicians.

* A caveat. Job specific human capital might create a bilateral monopoly; the firm needs the workers' specific skills as much as the worker needs the firm. I suspect, however, that in many cases the firm's second best option is better than the worker's, which gives the firm bargaining power.

The Clarkson problem

Imagine if Ant and Dec had racially abused a colleague before lamping him. Would there be a big political campaign and a million-strong petition to save them? I'm not sure. This tells us that Clarkson's popularity isn't based solely on the fact that he's a talented TV presenter.

Equally, though, I'm not sure that its due simply to the fact that he is (or plays at being) an obnoxious racist bully; whilst he has the support of many prominent arseholes, his popularity isn't confined to bigots.

Instead, I suspect James is right: Clarkson is popular because he's a "rebel." When he uses words like "slope" or "nigger", his supporters don't cheer his racism but the fact that he's rebelling against then"PC brigade." Many men believe as Bruce does: "we are not allowed to think or say what we want to any more, the thought police have taken over." To them, Clarkson is a hero not because of his racism so much as his fighting for freedom.

How did we get into a position where a millionaire public school racist bully can be seen as someone who speaks for the underdog?

There are two things going on. And I don't like either of them.

One is white male resentment - a tendency for some men not to see their privilege and instead to wallow in a fictitious victimhood.

But on the other hand, there is a big dose of illiberalism on the left - seen, for example, in its policing of language; the urge to ban things; and in New Labour's creation of thousands of new criminal offences (something which the coalition continued). And there is a particular type of careerist who uses feminism and "political correctness" to sustain their own narcissistic self-righteousness and ambition: for example, when Greg Dyke complained that the BBC and then FA were too white, he did not see either as a reason to resign himself in favour of a black person.

These twin positions are in danger of crowding out a third. This is a leftism which believes in free speech - which accepts (grudgingly) Clarkson's right to use retrograde language but also others' rights to call him a cunt for doing so: a leftism which worries about real, substantive inequalities more than about language; and one which wants not so much to get women or right-thinking men into positions of power and wealth but rather to abolish such positions.  

In these ways, the Clarkson affair has highlighted the poverty of much political discourse.

Alienation: the non-issue

Matthew Syed in the Times gives us a wonderful example of Marxist thinking. He asks why marathon running is so popular, and says it's because it satisfies a desire for self-improvement which we cannot get from paid labour:

We live in a world where the connection between effort and reward is fragmenting. In our past, we hunted, gathered and built...We could observe, track and consume the fruits of our labour. We could see the connection between our sweat and toil, and the value we derived from them. In today's globally dispersed capitalist machine, this sense is disappearing.

This is pure Marxism. Marx thought that people had a desire for self-actualization through work, but that capitalism thwarted this urge*. In capitalism, he wrote:

Labor is external to the worker, i.e., it does not belong to his intrinsic nature; that in his work, therefore, he does not affirm himself but denies himself, does not feel content but unhappy, does not develop freely his physical and mental energy but mortifies his body and ruins his mind. The worker therefore only feels himself outside his work, and in his work feels outside himself.

Jon Elster claims that Marx "condemned capitalism mainly because it frustrated human development and self-actualization."

Marx was right. The fact that we spend our leisure time doing things that others might call work - gardening, DIY, baking, blogging, playing musical instruments - demonstrates our urge for self-actualization. And yet capitalist work doesn't fulfill this need. As the Smith Institute said (pdf):

Not only do we have widespread problems with productivity and pay, as well as growing insecurity at work, but also a significant minority of employees suffer from poor management, lack of meaningful voice and injustice at work. For too many workers, their talent, skills and potential go unrealised, leaving them less fulfilled and the economy failing to fire on all cylinders.

This poses the question: why isn't there more demand at the political level for fulfilling work?

The question gains force from two facts. First, autonomy at work is a big factor in life-satisfation. Politicians who want to improve well-being - as Cameron once claimed to - should therefore take an interest in working conditions. Secondly, workers who are happy - less alienated - are more productive. Less alienation should therefore help to close the productivity gap between the UK and other rich nations, which in turn should raise real wages.

Despite all this, working conditions are barely on the agenda at all in this election. Politically, the workplace is, as Marx said, a "hidden abode."

One reason for this is that politics has largely ceased to be a vehicle for improving lives. It is instead a form of narcissistic tribalism and low-grade celebrity tittle-tattle: when will Cameron resign? Who'll replace him? What does Miliband's kitchen look like?

And in this way, politics serves the interests of the boss class and not workers. Capitalist power is exercised not just consciously and explicitly, but by determining what becomes a political demand and what doesn't. Here's Steven Lukes:

Is it not the supreme exercise of power to get another or others to have the desires you want them to have - that is, to secure their compliance by controlling their thoughts and desires?...Is it not the supreme and most insidious use of power to prevent people, to whatever degree, from having grievances by shaping their perceptions, cognitions and preferences in such a way that they accept their role in the existing order of things?

* His ideas are explained here by Gillian Anderson. I might be gone some time...

Banning cash

Ed Conway in the Times endorses Ken Rogoff's suggestion (pdf) that we should abolish cash. This seems to me completely infeasible, in at least three different ways:

 - It is a grossly illiberal measure - the banning of capitalist acts between consenting adults, to use Robert Nozick's expression. I can't see voters tolerating this, especially as the move would be a means (pdf) of imposing a tax upon bank deposits: negative interest rates are analogous to a tax.

 - Some 700,000 people don't have bank accounts. Many more use cash as a means of controlling how much they spend. For these, a cash ban would be a massive inconvenience.

 - It wouldn't work. As John Cochrane says, people could get round the ban (and avoid the inconvenience of negative rates) by various measures such as buying gift cards or prepaying taxes and utility bills.

Despite all the talk of the growth of virtual currencies and digital payments, cash remains popular: notes and coins in circulation have been growing steadily for years, suggesting that the public has a use for them.

Banning cash, therefore, strikes me as one of the most impractical ideas I've heard - and seeing as I was a teenage Trot, that's a big claim.

Now, when intelligent men have silly ideas, ideology is often to blame. And it's not hard to see the ideology in this case. The main argument for banning cash (other than to inconvenience tax-dodgers, which is no stronger an argument now than it has been for years) is to facilitate sharply negative interest rates. But if you want to stimulate the economy - which might be a more pressing requirement come the next downturn rather than now - there's an obvious alternative: looser fiscal policy.

The only reason to suggest something as outlandish as banning cash is that you believe this alternative to be impossible.

Now, I don't believe this for a moment. In our world of negative real interest rates and a shortage of safe assets a bond-financed fiscal expansion is possible. And if it isn't, a money-financed one - a helicopter drop if you like - would be. Surely, either of these are more politically feasible than a ban on cash. To believe otherwise - given the difficulties of the latter - is, I suspect, to have an ideological animus against fiscal policy.

But let's say I'm wrong. Let's suppose that there are circumstances in which we are at the ZLB and in which fiscal policy is ruled out and in which we then face some sort of shock so bad as to require sharply negative interest rates and a ban on cash. (I leave the reader to judge how easy it is to imagine such a world.) Would such a world really vindicate the worldview of those who prefer monetary to fiscal expansion? Or would it instead be better evidence for the Marxian claim that capitalist economies are dangerously unstable? 

Insincere apologies

Should politicians make false apologies? I ask because of Janan Ganesh's claim that Labour has been "monstrously incompetent" in failing to apologize for its fiscal policy before the crisis:

Had the Labour party owned up to its profligacy in office during the previous decade, it would now have the moral licence to mock [Osborne's] failed deficit target...
Instead, Labour will not even concede that it was wrong to run a structural deficit in the years leading up to the crash, by which time Britain was a decade and a half into an economic expansion. A party that is still borrowing in those circumstances will never see a reason not to borrow.

The economist in me disagrees with this. I sympathize with Simon's retort that allegations of profligacy are "nonsense." I say so for four inter-related reasons.

First, there was no boom before the crisis of 2008. Quite the opposite. The IFS said:

The last decade as a whole was characterised by a very poor performance for average incomes. Between 2002–03 and 2009–10, no single year saw an increase in median income of  more than 1.0%.

It estimates that in the five years to 2007-08 median real incomes rose just 0.5% per year. This is the sort of stagnation which might justify counter-cyclical fiscal policy.

Secondly, in the mid-00s the corporate sector was running a large financial surplus: because of what Ben Bernanke called a dearth of investment opportunities, its savings far exceeded capital spending. As Frances says, sectoral balances must sum to zero. A corporate surplus thus requires someone to run a deficit. With foreigners also loath to borrow, that someone was the UK government. To put this another way, had the government tried to tighten fiscal policy against a background of the investment dearth, we'd simply have had even weaker economic activity*.   

Third, given the inflation target, tighter fiscal policy means looser monetary policy. That might have led to even worse speculation and malinvestments by banks.

Fourthly, bond yields were falling during the 00s; from 2001 to early 2007, ten year real yields fell from over 2.5% to under 2%. That tells us that financial markets were not worried about "profligacy" but were concerned about weak real growth.

And even George  Osborne at the time agreed. In 2007, he promised that a Tory government would match Labour's planned spending increases.

I'm pretty clear, then, that it would be bad economics for Labour to apologize for its fiscal policy**.

But would it be bad politics? Here, I'm not so sure. On the one hand, doing so would play into the silly Tory narrative that they are cleaning up Labour's mess. But on the other hand, a false apology might serve the same function as apologies for other historical misdeeds such as the slave trade. As Theodore Dalrymple said, insincere guilt can be a form of moral self-aggrandizement. And because people tend to take others' self-assessments seriously, this might give Labour a better basis for criticizing Osborne's failure to to cut the deficit by much. Politically, therefore, Janan might be right.

The issue here, though, extends beyond fiscal policy. Labour says it "got things wrong on immigration in the past." If I vote Labour in May, it'll be because I believe that apology to be insincere. In a polity in which the media is biased and the public irrational and ill-informed, there might - just might - be place for lies in politics.   

* As I've said, it wasn't the case that fiscal policy in the 00s crowded out capital spending: the investment dearth was exogenous to fiscal policy.

** I don't say this to exonerate Labour. You could argue that looser fiscal policy should have taken the form of tax cuts rather than spending increases. And you can certainly argue that its spending was unproductive. 

The productivity policy paradox

"Nearly all future growth depends on a productivity resurgence" says Martin Wolf. This being so, Simon is right to deplore the fact that George Osborne never mentioned the productivity stagnation in his Budget.

This, though, raises a paradox - that whilst there seem to be lots of possible policies which might raise productivity, neither of the main parties seems to be taking much interest in them: even Labour seems keener to talk about the symptom of low productivity - low real real wages - than about the causes and solutions to it.

Here's what I mean. Policies to raise productivity (pdf) might reasonably include some mix of the following:

 - Infrastructure investment. Workers aren't productive if they are waiting for a train or stuck in traffic.

 - Facilitating learning. Nick Bloom and colleagues have estimated (pdf) that over a third of the gap in total factor productivity between the UK and US is due to inferior management. Some of this gap might be closed if only managers were more aware of best practice. In this context, the very fact that the UK's productivity is lower than the G7 average is, in a sense, encouraging. It means we don't need new innovations to boost productivity; we simply need to learn what the French, Germans and Americans are doing. This also requires...

 - Better vocational skills. Translating existing ideas into actual productivity requires skilled workers.

 -  More worker democracy. "shared capitalism seems to boost productivity" say Bryson and Freeman. Sharing profits encourages people to work harder. It also encourages them to find the small marginal gains that can cumulate to raise efficiency.

 - A better financial system. A lot of productivity growth (pdf) comes from efficient firms entering markets and inefficient ones leaving. However, with bank lending still falling (pdf) whilst zombie firms are struggling along, this entry-exit process is clogged up and needs fixing. Some might say this requires the encouragement of venture capital and private equity, others a state investment bank.

 - Stronger competition policy. The threat of losing market share to rivals should stimulate efficiency improvements.

 - Better planning regulations. A hefty chunk of US productivity growth in the 90s came (pdf) from the growth of big box retailing. Do UK planning laws really facilitate such innovations?

 - Higher aggregate demand. January's CBI quarterly survey showed that half of UK manufacturers cited uncertainty about demand as a factor limiting capital spending. Higher aggregate demand might also boost productivity by reducing unemployment, thus forcing firms to find ways of getting workers to work better rather than simply hire more staff. Verdoorn's law tells us that strong demand raises productivity. History tells us the same: UK productivity grew much faster during the 1947-73 long boom than at any other time.

- Increased equality. There are reasons to believe that inequality reduces productivity - perhaps by reducing trust (pdf), or by encouraging the rich to invest in protecting (pdf) property rights rather than in innovation.

Whilst this list isn't comprehensive, it's pretty long. There's a reason for this. The precise causes of relatively low productivity will differ from place to place and firm to firm - hence the need for a multi-pronged attack.

And here's my paradox. All of these ideas, except perhaps the last, should lie within the Overton window - though lefties and righties might reasonably disagree about the weights upon them. We have, therefore, a reasonable agenda for raising productivity.

And yet neither main party is putting anything like as much stress upon this as, I guess, most economists would like. This is yet another example of how there has emerged a big gulf between politicians and economists.

A caveat: It's possible that I'm being too optimistic. This paper claims that "there are few, if any, feasible policies available that have a significant effect on long run growth rates". However, it might be possible to raise productivity in the shorter-term (by which I mean several years). And what's wrong with testing their hypothesis? Anyway, I very much doubt that this paper explains politicians' lack of interest in raising productivity.  

On believing Osborne

What is George Osborne up to? This is the question posed by what the OBR's Robert Chote calls (pdf) a "roller-coaster" path for public spending. He foresees current departmental spending falling by 9% in nominal terms between 2014-15 and 2018-19 - a cut of over 15 per cent in real terms - but then jumping by 7% in 2019-20.

Simon and Atul say that this jump has a cynical political purpose: it's intended to kill off Labour's claim that the Tories plan to cut the share of spending in GDP back to 1930s levels. Simon says:

Maybe there has been a clear plan all along: to reduce the size of the state over a ten year period, using the deficit as cover.

I've never been convinced by this: why use a lousy argument about the deficit as cover for a more respectable one, the desireability of a small state?

Instead, might it be that Mr Osborne doesn't have a hidden agenda? That jump in spending is consistent with what he says he believes - that cutting spending will no longer be necessary by 2020 because the deficit will have been eliminated: he foresees a surplus on PSNB of £5.2bn in 2018-19.

I have four reasons for suggesting this:

1. If he's so keen to avoid that "back to the 30s" jibe, why did he give Labour the chance to use it back in December? Could it be that, back then, he didn't have the projected benefits of asset sales and lower debt interest costs and so felt the need to cut the deficit through spending cuts?

2. If he sincerely believes, as genuine small staters do, that governments can do more with less, why not say so and not bother projecting a big rise in spending in 2020? Could it be that he's forecasting it because he fears small government is unsustainable?

3. Much of his speech yesterday was not that of a small-state free marketeer. His talk of building a "northern powerhouse" and supporting "insurgent industries" had more in common with Harold Wilson's "white heat of technology" (pdf) than Friedrich Hayek.  

4. He has not prepared the political ground for a permanently smaller state. For example, he's not especially encouraged economic research on the merits of small government, nor promoted studies of how (say) South Korea delivers decent public services at low cost, nor has he obviously encouraged those who want entire government departments shut down.

What I'm suggesting here is something radical. Maybe we should take Mr Osborne at face value. Perhaps there's less to him than meets the eye and he really does believe the guff about the necessity of austerity.

Media deference

Chris Bertram said yesterday:

When David Cameron announced that the Tories would reduce net migration to "the tens of thousands" it was obvious to anyone remotely well-informed that the policy was (a) bound to fail and (b) attempts to implement would result in illiberal nastiness on an unprecedented scale, divided families, stigmatization of minorities etc. Yet I don't recall broadcasters asking tough questions, treating him with derision etc. And this was a policy likely to be implemented by a party with a serious chance of power. Compare this with the snorting incredulity with which broadcasters treat, say, the Greens. It is almost as if those with a lower chance of power are held to higher standards of argument and evidence.

His point generalizes way beyond immigration policy. Whilst broadcasters seem obsessed with the non-existent "costs" of opposition policies such as housebuilding and cuts in tuition fees, they have grotesquely understated the costs of fiscal austerity.

The issue here isn't simply a partisan one. Mr Cameron has betrayed a confidence of the Queen; jeopardized the union: presided over a diminution of Britain's role in world affairs and kowtowed to the neo-racist far right. In all these respects he should have earned the contempt even of conservatives.

And yet this is not how he is portayed in the media.Why not?

The answer is only partly due to the economic illiteracy of mediamacro and bubblethink; these don't explain the easy ride Cameron has had in other policy areas.

Nor is it simply due to right-wing tribalism. For one thing, John Major was regularly portrayed as weak and incompetent - despite perhaps possessing more estimable personal qualities than Mr Cameron. And for another, leftists misdescribe Cameron. Even hostile cartoonists typically picture him as a heartless toff rather than a hapless sap who is out of his depth. And even even our most "leftist" newspaper can ask: "has Ed Miliband got what it takes to be Prime Minister?" without noting that the standard is now so low that any reasonable person could meet it.

Instead, I suspect that what we're seeing is simple deference, in two different senses. One is that Cameron's background, if not his conduct, means he is "officer class" material. He looks like a Prime Minister, even if he doesn't act like one.

The other is that, simply by virtue of having succeeded in acquiring power, Cameron attracts admiration. This is not just true for political reporters: just look at how football reporters have cringed supinely towards Alex Ferguson and Jose Mourinho. Adam Smith described the media - including the BBC - beautifully 255 years ago:

We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent.

The self-centred bias

The film critic Pauline Kael is reputed to have said after the 1972 election: "I don’t know how Richard Nixon could have won. I don’t know anybody who voted for him." The quote is apocryphal, but it captures a widespread error of judgement - our tendency to exaggerate the extent to which others agree with us. A new paper by Eugenio Proto and Daniel Sgroi shows just how common this tendency is.

They show that students at the University of Warwick tend to over-estimate the numbers of fellow students: who are as happy or sad as themselves; who share their political orientation; and who own the same brand of mobile phone as themselves. More remarkably, they over-estimate the numbers who are of similar height or weight to themselves, even though height and weight are easily observed: fat people over-estimate the number of lardies and tall ones the number of beanpoles. They say:

Self-centred perceptions are ubiquitous, in the sense that an individual’s beliefs about the rest of the population depend on his or her own position in that distribution. Those at the extremes tend to perceive themselves as closer to the middle of the distribution than is the case.

This self-centred bias, which is related to the false consensus effect, might have numerous effects:

 - It can contribute to an obesity epidemic. If fat people over-estimate what is a normal bodyweight, they are less likely to take the effort to lose weight.

 - It can lead to bad investment decisions. If we exaggerate the extent to which others value an asset as much as us, we'll be more likely to pay a lot for it - leading to the winner's curse and to price bubbles.

 - It can contribute to the middle England error - the tendency for politicians and journalists to over-estimate the numbers of people from posh backgrounds or with high incomes simply because they themselves are posh and rich. This can contribute to policies being biased towards the rich in the mistaken belief that they are "middle class."

 - If we exaggerate the extent to which others share our beliefs, we'll tend to have excessive confidence in those beliefs. We'll think: "if so many of us think the same way, we must be right.

 - We'll become less tolerant, because beliefs and behaviour which are different from ours will be seen as aberrant. This might have contributed to the closing of liberal minds of which Tim Lott complains.

 - It can contribute to behaviour which is later regretted. I suspect the MPs expenses "scandal" occurred because MPs thought tweaking expenses was normal and so under-estimated how bad it would look in public. Similarly, HSBC bosses might have thought collusion with tax-dodging was tolerable simply because their fellow bankers thought so - and forgot that the public thought differently.

For me, one implication of this is that we should go out of our way to seek out cognitive diversity - to remind ourselves that our ideas might be minority ones. This is why the creation of "safe spaces" in universities is to be regretted.

However, this bias isn't always a costly one. Quite the opposite. The entrepreneur who thinks "I reckon this is a good idea, so others will too" is more likely to give us new products and companies than the man with a clearer-minded view.

Cognitive biases aren't always bad things - which, given their ubiquity, is just as well.