Stumbling and Mumbling

Creating markets

Simon Jenkins' and James Kirkup's proposals to privatize lions to protect them has been derided by some as "peak Telegraph" and knowing the price of everything and the value of nothing. This, I fear, highlights the poverty of debate about the use of markets generally.

Simon's and James' thinking derives from the conventional economics of the tragedy of the commons. This says that if wildlife is unowned, nobody has a material incentive to conserve it and there will therefore be a tendency to over-hunt it. If, however, lions could be owned and hunting permits sold, the owner would have an incentive to protect lions from poachers. Privatization is, therefore a possible solution to the tragedy of the commons - though as Elinor Ostrom (pdf) showed, only one possibility.

There are, however, problems here. Not least is: can such private property rights be created and enforced?

One danger here is a re-emergence of the natural resource curse: if governments grant a valuable property right, people will fight over it, possibly impoverishing the country.

Another issue is whether such rights can be enforced. As Terry Anderson has shown (pdf), the emergence of property rights requires among other things that technology permits a lowish-cost enforcement of those rights. But in the case of migratory (pdf) species, this might be absent. There's also a principal-agent problem. Landowners might not be able to prevent poachers bribing rangers to let them kill the animals or to tempt them off the protected land: it's alleged that this happened to Cecil.

My point here is a simple one. Whether effective markets and private ownership can be created depends upon particular institutional and technical conditions.

This is, of course, a variant on Coase's famous point (pdf) - that there are costs to market transacting. These costs must be weighed against the costs of other forms of economic organisation - be it the firm or state control.

This applies to issues much nearer home. Whether public sector services should be privatized depends upon precise institutional detail: is it possible to write contracts which ensure a high quality of service without excessive rent-seeking? In Coasean terms, is the cost of market transacting lower than the cost of in-house production?

The answer will vary from service to service and place to place.

And herein lies my beef. In the case of lions and the NHS, this point is overlooked in favour of ideological soundbites: "Markets - yay!" "Neoliberalism - boo!" In fact, the issue is more technocratic than that. It all depends upon subtle details.

On Corbynomics

Jeremy Corbyn's economic policy deserves more attention than it's getting.

It seems to me that this comprises two necessarily related elements. One is higher corporate taxes: he wants to "strip out some of the huge tax reliefs and subsidies on offer to the corporate sector" - which he claims to be £93bn a year. This would depress investment, by depriving firms of some of the means and motive to invest. However, this would be offset by "people's quantitative easing" - a money-financed fiscal expansion:

The Bank of England must be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects.

This amounts to what Keynes called a "socialisation of investment":

It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. (General Theory, ch 24)

This is a response to a genuine problem - low capital spending. The share of business investment in GDP has (in nominal terms) been trending downwards since the mid-70s.

Quite why this has happened is unclear: I suspect it owes more to fundamental problems of a lack of monetizable investment opportunities than to short-termism, but this doesn't much matter for current purposes. Corbyn's view seems to be that, if private enterprise won't invest, the public sector should.

I don't have much problem with the diagnosis here. But I do with the remedy, for three reasons.

First, how exactly will the public sector investment projects be chosen? One reason why the Bank of England didn't conduct QE through the corporate bond or equity markets was that it didn't think it had the expertise to pick companies. So how can it appraise energy and digital projects?

One answer to this is to have a National Investment Bank. But again, where will its expertise be drawn from? I fear this is a form of managerialism - a faith in central managers.

The second question is: who will do the actual investing? There's a case for the state to invest in infrastructure. But we also need corporate investment, to raise private sector productivity.

It's possible that the higher aggregate demand created by people's QE will stimulate private sector investment via accelerator mechanisms. Maybe high expected demand will overcome higher corporate taxes. Or maybe not.

My third problem is raised by David Boyle: where are the mutuals? Corbyn's world seems to comprise just two actors: the state and capitalist corporations. There seems insufficient emphasis upon decentralized forms of economic control, be they Robin Hahnel's participatory planning, Roemerian market socialism or workers' control.

Granted, Corbynomics might be a building block towards these. But as it stands, it looks to me like replacing one set of bosses with another - which isn't as egalitarian as it could be.  

Nevertheless, Corbyn is at least asking the right question - how to stimulate investment - which is, sadly, more than his rivals are doing.

On centrist utopianism

Here are some things we've seen recently:

 - Andy Haldane says shareholder capitalism is too short-termist, without asking whether it is possible to change this, or whether short-termism might in fact be a rational response to massive uncertainty about technical change and creative destruction.

 - There's a warning that the rising minimum wage might cause a "catastrophic failure" in home care. Apparently, higher wages have a cost: who'd have guessed?

 - Alan Milburn seems scandalized by the fact social mobility is blocked by parents' urge to help their kids.

There's a common theme here. It's centrist utopianism - the idea that moderate and feasible tweaks within capitalism can generate big improvements. Haldane seems to think we could see much higher investment if only capitalism could be reformed*; minimum wage advocates might be underplaying the costs of the policy; and supporters of social mobility fail to appreciate that human nature is itself a massive obstacle to greater equality of opportunity.

Here are some other examples of centrist utopianism:

 - The idea that macroeconomic policy can stabilize economies. This runs into the problem that recessions are inherently unpredictable and so policy cannot be changed in advance of downturns; the Bank of England didn't begin QE until 12 months into the recession. It also assumes that governments would want to stabilize the economy if only they could. But as Kalecki famously pointed out, this is dubious.

 - The idea that structural reforms can quickly and significantly increase growth. This is in fact pretty much impossible.

 - The pretty much unquestioned faith in managerialism and command and control techniques; the response to pretty much any organizational failure is a demand for "better leadership". This ignores the possibilities that "leaders" lack the knowledge and rationality to control complex organizations, or that such leadership has costs in terms of facilitating rent-seeking and demotivating employees. This ideology isn't confined to organizations. For a long time, there's been a divide in Labour between those who think change can be achieved merely by winning elections, and others who think there must be broader social and cultural change.

 - The notion that public sector bodies, including the BBC, can increase efficiency by shedding waste. This fails to appreciate a basic lesson of public choice - that bureaucrats look after themselves, and so wasteful layers of management can become entrenched.

I say all this as a counterweight to a longstanding prejudice - that centrists and moderates are realistic and hard-headed whilst we leftists are utopian dreamers. Of course, this accusation applies to some on the left - anything is true of someone - but for me the opposite is the case. I'm a Marxist because I'm a pessimist. It is those who think that (actually-existing) capitalism is easily reformable so that inefficiencies and injustices can be eliminated who seem to me to be the dreamers.

* I might be doing him a dis-service. Maybe he believes that low investment is an ineradicable feature of capitalism.

Another thing. You might object that capitalism has seen huge improvements in workers' well-being. However, just because something has occurred in the past doesn't mean it will continue to occur. Maybe reformers have picked the low-hanging fruits. And if we are in secular stagnation, then the economy becomes a zero-sum game - which reinforces my pessimism.

"Demography is destiny"

Talking about the "glass floor" which limits social mobility, Alan Milburn says:

It’s a social scandal that all too often demography is still destiny.

This is true in a far bigger way than Mr Milburn means. There's a policy which suppresses social mobility and ensures that demography is destiny for millions of people.

I refer, of course, to immigration controls.

If you support social mobility you must, logically, favour open borders. For example, someone migrating from Zimbabwe, where GDP per head is barely $2000 per year, to a minimum wage job in the UK would see their income rise tenfold. That's massive upward mobility. And yet far from wanting to encourage such mobility, most people in the UK want to suppress it: a letter in the Telegraph today calls for water cannon to be used against migrants.

However, a world without immigration is one in which demography is destiny. People born in the UK will be at least ten times as rich as those born in Zimbabwe, regardless of merit or ability. This is a form of feudalism. Just as feudalists thought that people's fate should be determined by the station they were born into, so anti-immigrationists think our fate must be tied to the country we were born into.

This seems odd. If it's a "scandal" that demography is destiny then immigration controls must be scandalous. So why don't people believe they are?

I don't think the answer lies in conscious racism - that we want upward mobility for Brits but not Zimbabweans: I doubt that three-quarters of the British people are that racist.

One possibility is that one might favour open borders in principle but believe that they are simply impractical - especially for a single small country to adopt on its own. This, I think, is a reasonable position. But I'm not sure how widespread it is. I've not heard a politician say "I support open borders in principle; the problems are merely practical."

Another possibility is that some advocates of social mobility desire it not as a way of improving individuals' life-chances but as a way of justifying inequality; if everyone has a chance of success, then, it is thought*, inequalities are legitimate - as long as you don't think about poorer countries.

I suspect, though, that in most cases something else is going on. People just don't think what social mobility really means. Just as they don't appreciate that equality of opportunity requires a massive limitation of freedom - for example, banning private tuition - so they just don't see that social mobility must mean free migration. They are like those 18th century people who thought they were devout Christians but who kept slaves. It's easy to sustain two contradictory positions simply by not thinking.

* Very dubiously - but leave that aside.

On welfare incentives

A loyal reader has chastised my defence of welfare benefits for ignoring incentive effects. This deserves a reply.

The issue here is not about Osborne's welfare cuts, simply because these haven't, net, made much difference to incentives. On the one hand, the rise in the "living wage" relative to Universal Credit will increase incentives to work. But on the other hand, this won't affect under-25s (who aren't covered by the wage floor); cuts to in-work tax credits reduce work incentives; and the higher taper rate reduces incentives to work longer. Overall, says the Resolution Foundation's David Finch:

These changes will do very little to improve the incentives for low paid families to find a path into work and then to progress.  

Instead, the issue is a fundamental trade-off facing any benefit system - that of incentives versus risk reduction. Low out-of-work benefits sharpen incentives for the unemployed to find work. But they also mean that people losing their jobs face a bigger cut in income, which could deepen any recession.

I'll concede that the incentives argument has some merit. Some of the unemployed do reject job offers because they'd prefer to stay on benefits. And  Barbara Petrongolo has shown that a tougher benefits regime does incentivize job-finding. The question is: how strong is this argument?

Let's do a back-of-the envelope estimate. If we could move 300,000 people - almost all those who have been unemployed for more than two years - from unemployment to full-time minimum wage work GDP would rise by around £5bn: this is £3.8bn of wages plus around £1.2bn of extra profits from employing them. This is around 0.3% of GDP. However, a serious recession could easily cost 5% of GDP. A generous welfare state, being a strong automatic stabilizer, would save a big fraction of this.

Which should we prefer? It depends on many issues:

1. How sensitive is job-finding to unemployment benefits? I doubt if many people think: "my benefits have been cut, so I might as well stop watching Jeremy Kyle and take up that offer of a professor of maths." I suspect many of the voluntarily unemployed are borderline unemployable and so not very amenable to incentives. This is consistent with evidence that the 2010-15 welfare reforms, such as the benefit cap, did not greatly increase job-finding. 

2. What's the mechanism whereby the demand for labour increases to meet the increased supply? One possibility is that wages get bid down. But this channel is silted up by a rising minimum wage. Another possibility is that vacancies get filled faster, which makes firms more efficient. But Ms Petrongolo shows that those who are incentivized to find work by benefit cuts are less likely to stay in work - which suggests that low benefits lead to worse job matches, which is bad for firms.

3. Can macro policy be used to stablize the economy? If the answer's yes, then there's less need for a generous welfare state as a stabilizing device. My view, though, is that recessions are unpredictable and so policy cannot prevent them.

4. Do recessions have permanent effects on GDP? In my example, the benefits of getting the unemployed into work - subject to the above caveats - are long-lasting, whereas the benefits of stabilizing recessions come only once every few years. However, if recessions have long-lasting adverse effects upon future growth, then it becomes more important to cushion ourselves from them.

5. How important is it to punish those who violate the norm of reciprocity? The issue here is not merely one of economics, but ethics. Many people hate the idea that some of the unemployed are getting something for nothing at the expense of the rest of us. How much weight does this preference have?

6. How should we weigh false positives against false negatives? A tough welfare regime punishes "scroungers", but also the "deserving poor" - those unlucky to lose their jobs, whilst a more generous welfare state is kinder to both.

Many people's attitudes to these issues are based in part upon ignorance - an overestimation of benefit spending. Nevertheless, in the fact-based world, reasonable people will disagree here. But let's be clear: I am not ignoring incentives, but merely doubting how much weight we should put upon them.      

Yes, Labour must change

Tony Blair's speech this week, paradoxically, reminded us of the need for new, radical economic policies. He said:

The most important characteristic of this world is: the scope, scale and speed of change. Change defines it.

Let's leave aside the obvious snark that one thing that hasn't changed is Blair's talk of change. He was talking about the "breathtaking pace of change" 20 years ago*. As Alan Finlayson wrote (pdf), the rhetoric of modernization has been a key element of Blairism.

Instead, my point is that it is because the world has changed that New Labour is no longer relevant. For example:

 - New Labour worried that the "bond market vigilantes" constrained fiscal policy. That was a reasonable concern when real interest rates were four per cent. But now they are negative a loose fiscal policy is more feasible.

 - New Labour thought that if governments could provide the right conditions - such as macroeconomic stability - then businesses would invest. But (nominal) investment-GDP ratios have fallen since then. This suggests governments need some other policies to raise investment - perhaps more more interventionist ones.

 - In the 90s, labour productivity was growing nicely. Now it's not. Productivity policy is thus more important.

 - The sort of inequality that troubled New Labour was the gap between the moderately well-off and the poor; it thought increased education was one way of tackling this. This gap, however, has declined recently. Instead, the most salient inequality is now the income share of the top 1%. This requires different policies.   

 - The productivity slowdown might be evidence that managerialism and the target culture have limits. Perhaps a better way to raise productivity is to increase worker control.

 - The Great Recession has reminded us that recessions are unpredictable. This means that macro policy cannot adequately stabilize the economy and that we need instead a generous welfare state as an automatic stabilizer. As Blair says, it is a means to protect those "disadvantaged by the changes whirling round them."

However, party politics has changed as well as the economy. The left-centre-right dichotomy might no longer be so important. Ukippers, for example, want immigration controls but also nationalization and price controls: are they rightists or leftists, or do the old labels no longer apply? And the wipe-out of Lib Dems and rise of Ukip and SNP might suggest that those who claim to be centrists fare badly against those who attack, or pretend to attack, the centre.

Now, I'll concede that Blair might have a point when he says that some forms of radical leftism can be reactionary. Sometimes, I fear that some leftists' demands for high corporate taxes and nationalization are a relic of the 1970s beliefs that capital is immobile and top-down hierarchy desirable and feasible.

There is, though, another form of leftist policy - one that recognizes the need for a generous welfare state, worker empowerment and well-functioning markets. This requires that Labour abandons not just relics of the 1970s, but relics of the 1990s too.

* New Britain: My vision of a young country, p203

Corbyn's success, Labour's shame

When Graham Dilley went out to bat in the famous 1981 Headingley test match, Ian Botham told him that "we wouldn't survive long just blocking, so we might as well have a swing." This same reasoning, I suspect, explains Labour members support for Jeremy Corbyn.

If the choice were between an election victory under, say, Andy Burnham or a defeat under Corbyn, most Labour members - though perhaps not all - would support Burnham. But that's not necessarily the choice. Maybe Labour will lose under any leader. If so, they might as well follow the Botham principle and have a swing. As Paul Bernal says. "If the Labour world is going to end, let it end with a bang, not a whimper."

And Corbyn is the only candidate offering a bang. Neil Schofield, James Bloodworth and Richard Murphy all agree that his popularity reflects a disaffection with the "mainstream" candidates who prefer to collaborate with the Bubble than talk about principles.

What's more, there is a chance - not high, but maybe better than 500-1 - that Labour could win under Corbyn. Voters agree with some of his positions, for example on higher top taxes and renationalizing the railways. His unpoliticiany ways could appeal to those many voters who are antipathetic to Westminster and appreciate people who talk their minds. And remember the old adage: oppositions don't win elections; governments lose them. Maybe dissatisfaction with austerity, Tory splits over Europe or an economic downturn would hand Labour victory under anyone.     

In this context, I'm not sure Sunny is right to say that Corbyn would repel Ukip voters. Ukippers have quite "leftist" attitudes in some ways. As Matthew Goodwin points out, most of them agree that there's one law for the rich and one for the poor, and most support (pdf) nationalization and price controls; they want control of immigration because they want control of much of the economy. There's potential support there for Corbyn.

Which brings me to my problem. What strikes me about Corbyn is just how uninspiring his economic programme is. I fear his proposed austerity for the rich and for companies will prove as macroeconomically self-defeating as the Tories version of austerity has been*. And there's disappointingly little about worker ownership or what to do about stagnant productivity, job polarization, the threat of robotization (pdf) or the possible transition to post-capitalism.

If this is the best Labour can do, then the party really has run out of intellectual resources.

* That said, there might well be a case for abolishing corporate tax relief for debt (pdf) interest payments - one of the tax reliefs of which Corbyn complains.

Reality vs the Bubble

Last night's vote on the Welfare Bill shows that Labour is divided. The division though, isn't so much between left and right as between reality and the Bubble.

The Bill will cost the poorest (pdf) families hundreds of pounds per year, increase homelessness and child poverty (pdf) and create insecurity for many low-paid workers who are at high risk of losing their jobs*. And its motives are based in large part upon myths - that welfare spending is a burden, that there's a pressing need to cut the deficit, and that there are distinct groups of workers and claimants rather than constant movement between them.  

What we have, then, is a divide. On the one hand, there is the reality of increased misery for hundreds of thousands. On the other, there is the Bubble of Westminster politics which has created economic lies and which regards cuts to welfare merely as a political game between Osborne and Labour. The poor have no place in this Bubble and thus no voice**.

No Labour MP, who has the foggiest idea of what the party is for, could in good conscience, possibly do anything other than oppose the Bill.

But there's the rub: "good conscience". The case for abstaining is that sometimes bad conscience is necessary. Labour, it's said, must obey the rules of the Bubble by appearing "moderate" and not the party of welfare.

I happen to agree with Simon that this is bad strategy. If the debate is framed in Bubble terms in which welfare is a burden rather than insurance, Labour will always appear "weaker" than the Tories. And there is a big danger that Labour will actually come to believe its own lies and so lose any vestigial reality-based principles.

This, though, is the issue. There can be no question that from any left-of-centre view, the Welfare Bill is terrible - and its ally, cuts in tax credits, even more so. The reality is clear. What's not so clear is whether reality matters any more.  

* The big cuts in workers' incomes because of Osborne's cuts to tax credits are not part of the Bill.

** Compare the debate about welfare cuts to the Labour's proposed mansion tax. Whereas the potential losers from the latter were high-profile, the losers from the former are largely nameless. This matters, because the mere act of communication increases sympathy.

Labour's economic narrative

I like Paul Bernal's description of Blairites as like Elvis impersonators who only impersonate the old, fat conservative rather than the younger radical man.

I'd add that one way in which this is true is that the young Blair had a distinctive economic narrative. Globalization and technical change, he said, were transforming the economy and required new policies - such as more education because low-skilled jobs were disappearing overseas, and macroeconomic stability to attract and retain investment.

This narrative had its faults. But it was an act of genius compared to the fiction that dominate politics now - the pretence that all was well with the economy until Labour "over-spent."

What Labour needs is a new economic narrative. It should consist of a diagnosis and solution to five problems:

1. Secular stagnation. The refers to the combination of slower innovation, low investment and weak productivity growth that have given us slower growth in real incomes: the IFS says median real incomes have risen only 0.4% per year in the last 10 years compared to 2.2% per year in the previous 40. Any serious economic policy would have ideas about what to do about this - be it more state intervention to encourage investment, or serious policies to raise productivity.

2. Job polarization. Middling-income jobs are in decline - and might continue to be as robots replace (pdf) people. This makes social mobility even harder - because some rungs of the ladder are missing - and means that better jobs might not be a way out of in-work poverty.

3. The rise in the share of incomes going to the top 1%. Is this a problem? If so, what to do about it?

4. Limits of managerialism. Between 1997 and 2010 public sector productivity stagnated. This suggests that top-down management and targets might not be sufficient to raise efficiency. Which poses the question: what are the alternatives? Given that there are already signs that austerity has gravely deteriorated some public services, this question might become increasingly important.

5. Decorporatization. The numbers of self-employed have risen sharply in recent years. Is this a sign of the failure of mainstream employers to offer satisfying work? If so, is this temporary or long-lasting? Or is it the start of an "interstitial (pdf) transformation" towards post-capitalism? Given that this process threatens to squeeze profits and hence capitalist investment - as spending shifts to the non-corporate sector - should it be encouraged or not?

FWIW, my answers to these questions comprise supply-side socialism - such as a citizens income and worker-ownership and Brailsfordism. But that's not my point. My point is that an intelligent Labour party would need to tackle these issues. The right of the party needs some kind of narrative to resist the rise of Jeremy Corbyn. And the left needs to see that an economic policy must do more than merely oppose austerity.

The Cushnie principle

There is, understandably, a backlash against the government's proposal that women who want to claim tax credits for a third child must prove they have been raped. For me, this highlights the importance of the John Cushnie principle.

Mr Cushnie was a star of Gardeners' Question Time whose reply to many questions was: "it's not worth the bother."

This answer applies to a lot of the welfare state. Maybe it is a good idea to limit tax credits to two children. But is it worth the bother, in terms of bureaucracy and intrusion and bad PR? Maybe you think claimants should prove they are seeking work. But is it worth the huge cost of finding out? Maybe benefits should be sensitive to variations in need? But again, is it worth the administrative cost?

Perhaps your ideal welfare state would entail many complicated gradations of need and desert. But these run against the Cushnie priniciple: it's not worth the bother. For me, one virtue of a citizens' income is that it avoids the deadweight cost of administering so many fine distinctions.

Of course, the Cushnie principle broadens. It's one reason why I advise my readers to hold tracker funds. Granted, it's possible that momentum, value, defensive and quality stocks would, over time, out-perform. But it might not be worth the bother of complicating one's investments so much.

Readers will recognise the Cushnie principle. It's an expression of Herbert Simon's theory of satisficing. We often lack the knowledge and rationality to maximize, he said, so why not make do with reasonable simple rules? But the Cushnie principle goes a little further, by seeing that an attempt at maximization might not just be impossible, but counter-productive. For example:

 - There's the unnecessary labour in gardening or investing, policy-makers equivalent of which is the cost of bureaucracy. Of course, true maximization would take account of these costs. But it's easy to under-estimate them - thanks to the planning fallacy - as Iain Duncan Smith discovered with universal credit. How often do politicians say: "the cost of this scheme has come in way under budget"?

 - In politics, the pursuit of the best policy might lose one political capital, which would be better expended upon higher priorities.  

 - Trying to maximize can make us vulnerable to cognitive errors. One virtue of tracker funds is that they protect us from the countless biases that worsen investment performance.

 - The best can be the enemy of the good. In that wonderful film Whiplash Terence Fletcher's pursuit of genius destroys the lives of musicians who would have had perfectly decent careers. Similarly, investors who chase high returns end up over-paying for poor performing lottery-type stocks. And as John Kay has shown, attempts to maximize shareholder value can lead to corporate failure, for example by demotivating employees and encouraging corruption.

In these ways, the Cushnie principle has many applications. There's more wisdom in gardening than in politics.