Stumbling and Mumbling

Blairism vs the left

The difference between Blairites and the left isn't merely one of policy prescriptions. It's also about the diagnosis of capitalism. John Rentoul's response to my post yesterday alerts me to this fact.

Here's what I mean. To a large extent, New Labour's thinking was founded in large part upon a belief in the dynamism of capitalism. It thought that capitalism would increase investment and productivity if only governments could provide (pdf) the right policy framework, such as the macroeconomic stability required to give firms the confidence to invest. It thought capitalism could create good jobs; Blair's talk of "education, education, education" arose from the idea that skill-biased technical change would increase the demand for skill labour. And it thought it could improve the efficiency of public services by importing management practices from the more dynamic private sector.

However, many of us now doubt this premise. Investment has declined as a share of GDP as firms prefer to build up cash. Productivity growth has slumped. And job polarization, the degradation of erstwhile "middle class jobs" and migration of workers to insecure and poorly-paid self-employment all suggest that capitalism is no longer providing satisfying work.

Quite why all this has happened is a separate story. But you don't need to be a Marxist to believe it: those economists who are most vocal in discussing secular stagnation are leftist social democrats rather than Marxists.

This raises the question: how can Blairites deny the facts which seem to me to speak of a loss of capitalist dynamism?

There are low-level quibbles one can have with the data; maybe some business investment is counted now as consumer spending, such as spending on laptops. Maybe innovations have raised consumer surplus rather than measured output; the fact that books, music and journalism are now available for free does nothing for GDP. But I doubt these explain away all of the facts suggestive of stagnation.

It's also possible that what we're seeing is just a temporary malaise. Maybe a revival of animal spirits will raise investment and productivity. However, the fact that the future is unknowable means we shouldn't put much weight upon this possibility.

There is, though, a more promising way of denying that capitalism has lost its oomph. It could be that all the symptoms of a loss of dynamism are in fact the result not of a secular crisis of capitalism but of weak aggregate demand. Such weakness has depressed productivity (via Verdoorn's law), interest rates, employment and capital spending. If we had more expansionary fiscal policy - not just in the UK but around the world - what looks like secular stagnation would disappear.

This, though, leads me to a paradox. If this is the case - and I don't know whether it is or not - then it is Blairites who should be most hostile to austerity. They should be complaining not only that austerity is destroying jobs but that it is also undermining faith in capitalism by leading folk like me to mistakenly attribute to capitalism what are in fact the results of bad policy. By contrast, we lefties should be slightly less hostile to austerity. Sure, we agree that it is bad for workers. But we suspect that even if we had sensible macroeconomic policy, many of capitalism's faults would remain.

But of course, this is exactly not what we're seeing. The million mask march was not dominated by Blairites. In fact, it is they who have actually been accommodating of austerity, even to the extent to failing to oppose Osborne's imbecilic fiscal charter.

What explains this paradox? The most obvious possibility lies in a difference of priorities. I want to try to understand the economy whereas Blairism is essentially about trying to win elections - and these are two different and perhaps even irreconcilable objectives.

* That spike in my second chart in 2005 was because of a reclassification of investment in the nuclear power industry, which uglifies the chart but doesn't change the story.

Limits of the profit motive

I've noted before the paradox of Blairism - that people who were so keen that Labour should modernize in the 1990s are now themselves out-of-date. Philip Collins' piece in the Times today shows what I mean.

He contends that the profit motive and business are forces for good. Like many claims in the social sciences, this is very true up to a point. My problem is that the extent to which it is true is less widespread now than it was a few years ago. I mean this in three senses.

First, as Akerlof and Shiller have pointed out, the profit motive doesn't only incentivize good things such as the creation of jobs, products and services but also bad ones such as fraud:

Competitive markets by their very nature spawn deception and trickery, as a result of the same profit motives that give us our prosperity (Phishing for Phools p165)

I suspect that this problem has increased in recent years because of two trends. One is secular stagnation: if it's harder to make money legitimately firms will turn to shadier means. The other is a decline in moral restraint. Philip is entirely right to say that markets have always been "regulated by a moral sense". But this regulation has diminished - perhaps because of the decline of religion, the rise of "neoliberalism" or because lower top tax rates have tipped the balance of incentives towards money-grubbing and away from maintaining self-respect. Whatever the reason, it might be no accident that the examples Philip gives of "capitalism for the common good" come from the 19th century rather than the 21st.

Secondly, the profit motive doesn't just incentivize innovation and investment. It also disincentivizes it, if firms believe it won't make a profit. Again, this problem might be more pressing than a few years ago. Firms might have wised up to the old fact that innovation has always had low returns, and their lack of investment might be due to a fear that future technical progress and creative destruction will render current investment unprofitable. In his speech this week Liam Byrne complained (pdf) this week about capitalists' short-termism without considering the possibility that such short-termism might be a rational response to uncertainty about the pace and direction of creative destruction.

Thirdly, if capitalism does overcome the problem of low investment - perhaps through a burst of animal spirits - we face a new danger. This is that robots and AI might make many of us redundant (pdf), leading to a world of massive wealth for robot owners and poverty and demoralization for millions of others. Personally, I suspect this is a small danger - but the small risk of a horrible outcome cannot be ignored.

My point here is not to decry the profit motive. It has a place. But that place must be circumscribed not only by the regulation of predatory capitalism but also by greater socialization of investment to exploit and develop new technologies and by a more widespread ownership of capital - via worker ownership, a sovereign wealth fund or more widespread participation in equity markets.

Now, I would like to think that my beef with Philip is one of those glass half-empty/half-full arguments. But I fear it might not be. In failing to see the limits of the value of the profit motive, Philip might be embodying the vice of the Blairites - a tendency to live in the past and fail to see that social democracy must, again, be modernized.

Grit beats talent

The later Nobel laureate James Buchanan used to advise his graduate students: "keep your ass in the chair". Woody Allen claimed that "80% of success is showing up." And Gary Player used to say: "The harder you work, the luckier you get." Some recent experiments show they are right.

Leonie Gerhards and Christina Gravert got subjects to solve anagrams, paying them for each one they got right. Subjects could pay to skip a hard anagram or to switch to easier less well-paid ones. They found that subjects that did not skip or switch earned much more than those who did - even controlling for ability, as measured by the number of anagrams they had solved earlier. "Grit trumps talent", they conclude.

This finding, I suspect, has external validity. Among people with high IQs, there is little correlation between intellectual ability and career success. Beyond a certain point - attained by most readers of this blog - what matters is not so much intellect as personality traits such as stickability. This chimes with my personal experience. The most materially successful of my university contemporaries aren't generally the most intellectually gifted ones, but ones who had perseverance - in large part, perhaps, because they found careers they enjoyed.

Indeed, what looks like talent is in fact often the product of grit. Dennis Bergkamp, for example, is generally regarded as one of the most talented footballers of recent years, but:

There, a worn-out brick wall still stands testament to the innate footballing mind, maturity and drive present even in an 8 year old Dennis. He spent countless hours practising, kicking the ball against it, experimenting with different ways of how to control it, seeing how it bounced and how many times, how that affected how it came back … things that still don’t occur to most professional footballers. It was here that his technique was refined to such precision that he would aim for a corner of a particular brick, each time with different pace, power and spin to see how the ball’s trajectory changed.

This sounds to me like deliberate, mindful practice - which is the key to success, as Anders Ericsson has written (pdf):

Many characteristics once believed to reflect innate talent are actually the result of intense practice extended for a minimum of 10 years.

It is this that gave rise to the 10,000 hours rule, as immortalized by the Greatest Living American*.

One under-rated reason for this, I suspect, is that ability is context-specific, so immersing oneself in a particular context for a long time is pretty much the only way to succeed.

Now, I don't say all this to suggest that talent is irrelevant: one reason why people practice football or music for long periods is that they feel they might be good at it - although this feeling isn't sufficient for success.

Instead, I say it to reinforce something I said recently. I suspect that most jobs - maybe not all but most - are like Gerhards and Gravert's anagram task; they require grit at least as much as talent. And, therefore, perhaps intellect is over-rated.

* I find Matthew Syed's account of this more persuasive than Malcolm Gladwell's.

Talent or toxicity?

"Talent management" - the attempt to attract, retain and motivate the best employees  - is one of the buzz phrases of bosses. But it might be distracting them from a bigger problem - that of bad workers.

Michael Housman and Dylan Minor estimate (pdf) that "toxic workers" cost companies twice as much as superstars benefit them. The rogue trader who costs a bank billions or the groper who attracts a big sexual harassment suit can do more damage to a firm than a decent employee does good. Companies should, they say, do more to screen out such workers.

But here's the thing. "Toxic workers" can look attractive; in fact they might be indistinguishable from the "talent" that firms are so keen to attract. For one thing, say Housman and Minor, such workers - those who would be later fired for fraud, violence or sexual harassment - claim to be honest: they are more likely than average workers to tell surveyors that it's important to always obey rules.

What's more, they are often overconfident about their abilities - and we know from experimental evidence that overconfidence is attractive to hirers because they often confound it with actual ability.

Such confounding, though, contains a germ of truth. Housman and Minor also found that toxic workers are more productive - in the sense of working quickly if not well - than others. This is consistent with two other findings. Francesca Gino and Dan Ariely show that creative people tend to be more dishonest (pdf) than others. And in a study of bank managers Douglas Frank and Tomasz Obloj have found (pdf) that those with higher firm-specific human capital are not only better at generating new business but also better at gaming incentive systems to get themselves big bonuses, with the result that such apparently skilled employees are actually a net cost to the bank.

For these reasons, "toxic workers" can not only stay in an organization for some time, but actually thrive - until they actually cause a big loss.

All this fits in with two other findings. One is from Nick Bloom ands John Van Reenen, who show that there is in most countries a long tail (pdf) of badly managed firms - which is what we'd expect if firms can't distinguish between good employees and bad ones. The other is from Luigi Zingales and colleagues who have estimated that one-in-seven US companies is defrauding its shareholders in some way. If you're wondering which firm will be the next VW, there are lots of candidates.

This sounds like a narrow management thesis. It's not. There are two broader points here.

First, there is a great deal of ruin not only in a nation but in companies. Market forces don't necessarily quickly and efficiently weed out bad hires. In fact, as I've said in a different context, they might sometimes actually select for them.

Secondly, what appears to be a narrow technical function is often in fact an expression of ideology and power. Firms' obsession with "talent management" might appear to be motivated by a desire to increase efficiency and "shareholder value." But if these are what matter, then firms should in fact be more concerned with managing "toxic workers" - many of whom will be in positions of influence. So why aren't they? It might be that "talent management" is in fact not (just) a means of increasing efficiency but a cover for rent-seeking - a justification of big salaries at the top of firms.

Intellect in politics

How important is intelligence and education to politicians?

I ask because of Martin Amis's jibe that Corbyn is "under-educated" and "slow-minded" and Tristram Hunt's claim that it is the responsibility of the brightest 1% to "take leadership going forward." Both men seem to presume - without adducing evidence - that intellectual ability is desirable in politicians.

I'm not at all sure of this, for four reasons.

- Ability and knowledge can lead to overconfidence. For example, a study of German mutual fund investors found (pdf) that "sophisticated investors do not earn higher risk-adjusted returns." This is because they over-estimate their ability to spot good fund managers and so waste money on fees, thus offsetting other advantages that can accrue to higher intelligence. I suspect this is relevant to politics because politics, like investing, is about making judgments about an inherently complex and uncertain world on the basis of partial information. One can argue that overconfidence is a common and fatal flaw in politicians: think of Thatcher and the poll tax or Blair and Iraq. 

- A high IQ can cause one to be out-of-touch with voters. Or, just as badly, it allows the media to present one as being out-of-touch. To a biased media, intellectual ability will be reframed as geekiness.

- Success in politics - and in fact in other occupations - requires more than intelligence. It requires qualities such as doggedness and an ability to get on with people - talents which aren't necessarily positively correlated with formal smarts.

- Basic ideas can work better than complex ones. As Gerd Gigerenzer has shown, simple rules of thumb (pdf) can work (pdf) at least as well as fancy theorizing. The Bank of England has suggested that this is true for financial regulation. It might well also be true in foreign policy: Corbyn's simple heuristic, "don't start wars in the middle east" isn't obviously catastrophic. And I suspect it's also true in welfare policy: a simple citizens basic income might well be superior to complex alternatives.

We don't need to look far for historical evidence here.Winston Churchill was no intellectual, but he is widely regarded as our best prime minister in large part because his simple heuristic - defeat the Nazis - was better than the more sophisticated ideas of his cleverer peers. More mundanely, Thatcher was the intellectual inferior of several "wets", but proved the more successful politician*.

All that said, there is a crucial distinction here, between ability and one's beliefs about one's ability. I would rather have second-rate politicians who know they are duffers than ones who believe they are brilliant.

Now, I don't say this with much certainty. Maybe the humble genius - if one could be found - would be an even better politician than the humble duffer. What I'm doing is posing the question to Amis and Hunt: why should one assume that intellect is a virtue in politics? Because it's not obvious.  

* One could list many succesful politicians - Bevin, Major, Callaghan etc - who lacked degrees. However, in many cases this was because of a lack of opportunity, not ability, so they are not relevant to my argument.

Another thing: I am, of course, ignoring the possibility that Corbyn would have better ideas if only he were cleverer: the idea that people would all agree with us if only they were as smart seems to me to owe more to narcissism than to evidence.