Stumbling and Mumbling

Is the centre-left dead?

Branko Milanovic raises a question: is liberalism (or centre-leftism) dead?

There’s a precedent here. In the 1970s the combination of rising inflation and high unemployment killed off post-war social democracy in much of the west: Marglin and Schor’s The Golden Age of Capitalism provides a great analysis of this. The precise date of the death varied from country to country. In France it came in Mitterrand’s “austerity turn” in 1983. In the UK it perhaps came with Callaghan’s claim that you can’t spend your way out of recession in 1976. Whatever, the fact is that in much the of the west old-style social democracy was killed off and it took Clinton and Blair to reincarnate it in rather different form.

Does liberalism/centre-leftism today face a similar threat?

There are reasons to think not. It’s not inconceivable that the Democrats, UK Labour party and French Socialists will one day find electable candidates. And some of the centre-lefts flaws – imagined or real – can be easily fixed. The identity politics and elitism that has devalorized working class experience is remediable; class politics and identity politics are to some extent at least complements not substitutes. It is technically possible to spread the benefits of globalization more widely through better redistributive policies. And the likely failures of Brexit and Trumponomics might well cause some kind of backlash.

There is, however, a more pessimistic reading.

For one thing, we might not see the sort of backlash we want. If or when immigration controls and protectionism are seen to fail to increase jobs and wages, nativists won’t realize the errors of their ways and repent. Instead, they’ll double-down and claim that claim that their policies didn’t go far enough.

And in this they might win public support. The victories of Trump and Brexit, and rise of the National Front in France and AfD in Germany all vindicate Ben Friedman’s point that economic stagnation makes people meaner. It causes a rise in right-wing extremism, not leftism.

Also, there are at least two flaws in liberalism/centre leftism that aren’t so remediable, at least without transforming its essential character.

One is that it has been managerialist. Perhaps Blair’s greatest fault – shared perhaps with US Democrats - was his faith in top-down leaders. This had many baleful effects, among them stagnant productivity in public services, the legitimation of the increasing wealth and power of the 1% and the Iraq war. It also generated a backlash against the “liberal elite” and a demand to “take back control.”

The other is that the centre-left took economic growth largely for granted. New Labour believed that if it could provide stable macroeconomic policy and an attractive location for investment then growth would follow. That might have been the case in the 90s. But it isn’t true in our new era of secular stagnation. We need supply-side socialism.

I think it’s possible for there to be a left which is open, liberal, non-elitist and economically efficient. We might hope that such a new left will eventually emerge from the ashes of centre-leftism and populism. My fear, though, is that by the time this happens there will be a terrible lot of ashes.

On soft commerce

Montesquieu was right. That’s my reaction to Trump’s ban on people from some Muslim countries entering the US.

The thing is that, as the Washington Post has pointed out, the ban does not apply to nations where Trump has business interests, such as Saudi Arabia, Egypt and Turkey – despite the fact that these countries are no strangers to terrorists.

What we’re seeing here, then, is vindication of Montesquieu’s claim (pdf) – recently revived by Deirdre McCloskey – that commerce “polishes and softens barbaric ways”. Trump’s barbaric ban is tempered by his commercial interests.

You might say this is just fascism mitigated by greed. But I’d prefer this to unmitigated fascism.

This poses the question: how exactly does commerce soften barbarism? Roughly speaking, there are two mechanisms.

One – which we see in Trump’s decision – is pure self-interest. If we are trading with people, it’s in our interests that they are prosperous and that they regard us favourably. We therefore try not to hurt them.

In this sense, there’s an echo of Bretton Woods II (pdf) in Trump’s actions. In this system, westerners invested in Chinese factories and China invested in western bonds. This promoted a mutual self-interest in respecting others’ property rights: the risk of westerners being expropriated by the Chinese government is tempered by the fact that such an act would be met with sanctions against China’s western investments.

Another mechanism, though, is that commerce brings people together and so humanizes them and breaks down antipathy. One big way in which racism was diminished in the 70s and 80s, for example, was through the emergence of black footballers; increased commerce between white fans and black players broke down racism.

Thinkers such as Karl Polanyi have objected that market economies break down communities, replacing strong communal ties with the weaker ties of trade. There is, though, an upside to this. Strong homogenous communities can be insular and hostile to outsiders: the League of Gentlemen were right to see that there’s something sinister in the question “are you local?” It’s no accident that the vote to leave the EU tended to be strongest in areas where there were fewer migrants. And it might be no accident that, in a wider historical perspective, the growth of the market economy has coincided with a decline in violence.

It’s in this context that we should worry about Trump’s protectionism. I agree with Tyler Cowen that the macroeconomic damage of border taxes might be limited. Instead, their danger is cultural.

For one thing, protectionism rests upon the idea that trade is a zero-sum game – that “their” win is our loss – rather than an arrangement that benefits both parties*. This validates and encourages anti-foreigner sentiment. And for another, if there are fewer trade links between nations there’ll be fewer meetings between different nationalities and hence in the longer-run less tolerance and goodwill.

In this sense, what Trump is promoting is a form of feudalism. The idea that wealth creation is zero-sum is a feudal idea. And immigration controls are feudal, in the sense that they use force to ensure that those born into poverty stay poor.

Today, it’s not enough to be anti-capitalist. We must also be anti-feudalist.   

* You might object that there’s some truth in the zero-sum conception of trade as some people have indeed lost out through globalization. I’m not so sure. Capitalism is a mixture of soft commerce and hard exploitation and it is the latter that is most responsible for workers’ losses (pdf) – both in the sense that factors such as the decline of trades unions and power-biased technical change have harmed workers, and in the sense that we’ve not had the policy responses that would ensure that globalization did benefit everyone.

Why Corbyn's wrong on Article 50

Jeremy Corbyn wants to impose a three-line whip on Labour MPs to compel them to vote in favour of triggering Article 50. I think this is wrong, for the following reasons.

1. Even if we grant that Brexit is the “will of the people”, it doesn’t follow that Brexit on the terms proposed by May is. Some voted leave in the hope of staying in the single market, others for a liberalish Brexit that wasn’t focused on migration controls. There’s a case for opposing triggering Article 50 until it’s clearer that we really want May’s hard Brexit.

2. May’s Brexit means harder times for workers, simply because leaving the single market would hurt the economy by more than any free trade deals with non-EU firms would benefit it. It would also be bad for both potential immigrants and those already here, to the extent that, ahem, nativists regard migration controls as a legitimation of their own prejudices. This would be especially the case if the Tories use Brexit to turn the UK into a low-tax, low-regulation economy in the hope of attracting global capital. Labour should oppose this path, and one way to do so is to do so from the off. Or at least, if there’s a path from May’s Brexit to a healthy socialist economy, Corbyn should tell us what it is.

3. Most Labour MPs voted remain, and nothing much that’s happened since June suggests they were wrong to do so. To support Article 50 now therefore means that, as Paul says, MPs “will be behaving like a delegate and not a representative.” If Burke was wrong to say that an MP owes us “not his industry only, but his judgment”, why was he?

4. Many Labour MPs not only oppose Brexit themselves but represent constituencies that voted remain. What sort of model of democracy is it that requires MPs to abandon both their own judgment and the will of their constituents? Are MPs to become just the slaves of national opinion polls?

5. I’m not sure that a three-line whip would be electorally successful. For one thing, the fact that some MPs would defy it will increase the perception that Corbyn is weak. For another, voters respect people who stand by their principles. And for a third, any leave supporters won over by Corbyn’s stance might be offset by remainers defecting to the Lib Dems or Greens. Yes, Tom Quinn is right to say that Labour needs to win leave voters in marginal seats in the North and the Midlands. But it can do so by arguing for policies that really would improve jobs and living standards.

Now, I accept that there’s no easy answer here. Labour does risk being divided between liberal metropolitans and older workers in poorer areas who (wrongly) see Brexit as a hope for meaningful change. Perhaps the best way of managing this potential split is to allow a MPs free vote whilst trying to unite them around economic policies that really would improve prospects for people in left-behind areas.

Tom Quinn says this would mean Labour having “no collective position on the most important issue in British politics for a generation”. But Brexit is an important issue largely because it represents a threat to workers. Labour should be trying to diminish its importance by asserting the priority of serious economic policies.  I agree with Philip Collins that Labour’s best hope is to “change the subject as often as possible.”

Let’s remember that Brexit is the Tories’ mess. Labour should try to rise above it.

(Not) escaping alienation

Laurie Penny wants people to crowd-fund her work. This highlights problems with the labour market, some old and some new.

By most standards, Ms Penny is in a strong position. Whatever you think of her talents – not that it matters because journalism isn’t a meritocracy - she has 157,000 Twitter followers. And yet she can’t parlay these into a fulfilling career in mainstream journalism.

In one sense, she faces a longstanding problem most of us have had – that capitalism thwarts self-actualization. Most of us have had to compromise our ideals and aspirations to some extent to earn a living. As a great man put it, “they sentenced me to twenty years of boredom for trying to change the system from within.”

We’ve all had different solutions to this dilemma. I really admire Ms Penny’s desire to find one that doesn’t entail retreating into dull trade journalism or writing fascist lies for billionaires. I would caution her, though, that alienated work has its compensations: it doesn’t hurt so much when you fail.

It’s long been the case that radical journalism doesn’t pay. Even in the mid-20^th century when top journalists were relatively well-paid, there were others who, in Orwell’s words, would hear “the heavy boots of his creditors clumping up and down the stairs”.

This problem, though, has become more acute recently. Ms Penny’s claim that “journalism is an industry in trouble” echoes Nick Cohen: “Jobs are disappearing everywhere, and every journalist views the future with alarm.” We see this in the decline of resource-intensive journalism such as investigative reporters and foreign correspondents and the rise of clickbait, churnalism and being expected to work for nothing.

But here’s the problem. It’s not just in journalism that we’re seeing a decline in erstwhile "middle class" jobs. Academics are struggling with casualisation and oppressive managerialism, and even bankers and lawyers face soul-destroyingly long hours doing what is often tedious work. As Holmes and Mayhew have said (pdf):

Many apparently good non-routine occupations…appear closer to mid-range jobs than top jobs.

Herein, though, lies a question to which I don’t know the answer and which I fear is neglected: could it be that class differences in job satisfaction have narrowed in recent years?

What I mean is that it’s possible that “middle class” jobs have deteriorated relative to “working class” ones. Yes, call centres and warehouses can be horrible, but I’m not sure they’re worse than factory lines and mines: no miner wanted his son to go down the pit. The factory workers in Corrie seem happier in their work than, say, Arthur Seaton was. I don’t have much empirical evidence on this, but I can point to work by Alex Bryson and George MacKerron who have found that the less well-paid are actually happier at work than the better-paid – though they’re all quite unhappy.

You can read that finding in one of two ways. One is that it suggests you can’t escape from unsatisfactory work by finding “better” jobs. This might vindicate Ms Penny’s decision to partially opt out. Another is that equality, in one under-rated dimension, might have increased in recent years.

Brexit: the right's consistent error

All the speculation about whether the UK can strike good free trade deals outside the EU raises a question: is the right guilty of a long-standing and consistent error?

I ask because, to me, such talk misses the point – that even if UK exporters do get good opportunities to trade, they won’t necessarily take them.

We know that UK firms aren’t taking the export opportunities that exist within the EU: Germany exports far more than the UK. And we know too, thanks to the work of Monique Ebell, that free trade agreements don’t stimulate trade much.

There are good reasons for this. There are countless determinants (pdf) of trade other than legal opportunities: distance; home bias; uncertainty about policy, credit, and exchange rates; firms’ ability to manage supply chains; skills; investment; path dependency and so on.

Which brings me to the right’s consistent error. It has long over-estimated the dynamism and flexibility of the economy, and has assumed that if only the right legal framework can be put in place, capitalism’s dynamism would be unleashed. Such a view under-estimates the non-policy factors that stop resources shifting as quickly as basic textbook economics predicts. As Nick says, "goods don't just export themselves."

What we see in Brexit optimism is an echo of Britannia Unchained’s call for labour market deregulation. Such calls ignored the empirical evidence that deregulated labour markets don’t necessarily increase employment or competitiveness and can be associated with high and volatile joblessness.

Just as Brexiters assume that free trade laws will greatly boost UK exports, so deregulators assume that free labour markets will greatly boost employment. It’s no accident that the same people are generally in both camps. Both, however, under-estimate the amount of sand that’s in the wheels of the market mechanism. And just as the UK economy isn't prospering greatly because of deregulation, so it might not do so because of free trade deals.

I’m old enough to remember the same assumption in the 1980s. Back then Patrick Minford – now a leading Brexiter – supported pit closures on the grounds that the redundant miners would find work elsewhere. He was, to a large extent, wrong*. He made the same mistake then he might be making now: he’s over-estimating how flexible the economy is.

In this context, I fear that the amateur Kremlinology about whether the UK will reach good free trade deals distracts us from a more fundamental question: is the economy sufficiently flexible to respond well to such deals? On this question, the right has a long history of paying too much attention to ideologized elementary economics, and not enough to empirical evidence.

* Ironists might note here that insofar as employment in the former coalfields has risen, it’s been partly thanks to support from the EU.

In praise of dullness

Simon Kuper makes a good point: we need, he says, to “bore ourselves with important stuff.” This point generalizes beyond the context he discusses.

It’s true in investing. “Split your money between cash and tracker funds and then forget it” gets you at least four-fifths of the way. But it’s boring. By contrast, great stories can be horribly misleading for investors: MoneyWeek’s "end of Britain” report was a more interesting story than “shares will probably rise a little because they normally do” – but it was much less true. And “exciting” growth stocks should usually be avoided unless they are just momentum plays: corporate growth is in fact largely random (pdf) – a boring but important fact.

It’s also true in economics. Economics should not – for the most part – be about bigthink and new paradigms but a dull interrogation of the facts: the gravest flaw with the simple-minded pro-market theories that many people mistake for mainstream economics is simply that they often don’t fit the facts. It’s a matter of debate about how far economics actually has become more empirical, but I agree with Tim that economists should be like plumbers.

And here’s the thing. Politics should also be boring. I don’t just mean this in the clichéd sense that “may you live in interesting times” is a curse. I mean that political debate should be dull.

This is partly because facts should perhaps play some role in politics. For example, amidst all the pompous waffle about Trump’s inauguration speech, hardly anybody bothered to point out the dull fact that his talk about crime and lob loss was inconsistent with the facts that crime has been falling and employment rising for months – a juxtaposition which of course poses the big question of why so many people believe Trump.

To take another example, I saw in the gym today that one of those speak your branes TV shows was asking “does prison work?” It’s a good question. But it should be answered by a dull investigation of the empirical evidence, not by talking heads.

The question posed by the dull Andrew Tyrie to the “charismatic” Boris Johnson was a great one that must always be asked: “This is all very interesting, Boris, except none of it is really true, is it?”

This is especially the case because so much politics is about administration. Brexit and a citizens’ income have a big thing in common – that their success or not hinges upon the dull grind of them being implemented well.

Of course, values also matter. But these must be investigated by philosophy seminars, not by people shouting at each other in TV studios. There should be no place in politics for gobshites like your Youngs, Morgans and Hartley-Brewers. One of the banes of our age is the belief among TV executives that politics programmes should reach a big audience. In fact, they shouldn’t appeal to any more people than those who buy books on history, philosophy and social science – which is at best a few tens of thousands. Yes, people should engage in politics – but after thinking, which is dull. I suspect the left would, in the long-run, be in better shape if people spent less time demonstrating and more time reading (say) Sam Bowles or John Roemer.

There is, therefore, much to be said for being boring.

But here’s the problem. Con-men know this. Bernie Madoff’s schtick was to look like a dull middle-aged man offering clients stable returns. And for years this boring appearance hid the fact that he was a thief.

And there are far more Madoffs than you might think. There are thousands of Very Serious People in finance, politics and business who project a boring image in the hope – often correct – that people will mistake this for competence: I suspect Theresa May pulled of this trick at the Home office. If you use etiolated technocratic language on the rare occasions you break your silence, you can get away with all sorts of daft ideas: journalists are easy to fool.

Being boring can be a sign of competence: think of Geoffrey Boycott’s batting or the great Arsenal back four. But it can also be a trick.

What we need, perhaps, is less appearance of dullness and more genuine dullness.   

Shareholder value & innovation

Shareholder value, said Jack Welch, “is the dumbest idea in the world.” I was reminded of this by Tim Worstall’s reply to Liam Byrne’s demand to “reject once and for all the tired and increasingly flawed orthodoxy of shareholder value.” Tim says:

Increasing income, and/or wealth, is driven by technological advances that lead to greater productivity. And only societies which have had some at least modicum of that shareholder capitalism have ever had that trickle-down which drives the desired result.

This, however, overlooks an important fact – that shareholder-owned firms (in the sense of ones listed on stock markets) are often not a source of technological advances. Bart Hobijn and Boyan Jovanovic have pointed out that most of the innovations associated with the IT revolution came from companies that didn’t exist (pdf) in the 70s. The stock market-listed firm is often not so much a generator of innovations as the exploiter of innovations that come from other institutional forms – not just private companies but the state (pdf) or just men tinkering in garages.

This fact seems to have become more pronounced in recent years. David Audretsch and colleagues show that innovative activity has come increasingly from new firms rather than listed ones. And Kathleen Kahle and Rene Stulz show that listed companies today are older, less profitable and more cash-rich than those of years ago. They say:

Firms’ total payouts to shareholders as a percent of net income are at record levels, suggesting that firms either lack opportunities to invest or have poor incentives to invest.

There are, of course, many possible reasons for this lack of investment. One might be that outside shareholders are so short-termist that they discourage firms from investing (though personally I doubt this). Alternatively, they might be too ill-informed to distinguish between good and bad projects and so often err on the side of caution.

A third possibility is that both investors and bosses have wised up to a fact pointed out by William Nordhaus – that innovation yields only scant profits because these get competed away*. It might be that Schumpeter was right: innovations tend to come from over-optimism and excessive animal spirits and that the listed firm, in replacing buccaneering entrepreneurs with rationalist bureaucrats, thus diminishes innovation.

From this perspective innovation is against the interests of the shareholder-owned firm, as it threatens their market position: the creative destruction of which Schumpeter wrote is by definition bad for incumbents. It’s no accident that the most successful stock market investor, Warren Buffett, looks not for innovative firms but ones that have “economic moats” – some kind of monopoly power that allows them to fight off potential competition.

Tim might therefore be taking too optimistic a view of shareholder capitalism: shareholder value might now be a restraint upon technological advances more than a facilitator of them**.

I don’t say this merely to criticise Tim, but to highlight a mistake made by many of capitalism’s cheerleaders – that they fail to see that the threat to a healthy economy comes not so much from lefties with silly ideas (or perhaps even from presidents with them) but from capitalism itself. For many reasons – of which the pursuit of shareholder value is only one – capitalism has lost some dynamism. In underplaying this, capitalism’s supporters are making the mistake of which Thomas Paine accused Edmond Burke: they are pitying the plumage but forgetting the dying bird.

* Apple is a counter-example here: Steve Jobs genius was not so much in fundamental innovations as in the ability to create products so beautiful that they had brand loyalty and hence monopoly power.

** The strongest counter-argument here might be that the prospect of floating on the stock market (often at an inflated price) incentivises innovation by unquoted firms.

Economic policy after Brexit

One of my biggest gripes with Brexit is that it is stealing cognitive bandwidth; it’s distracting us from proper economic policies. This is an especial problem for Labour as the party is showing few signs of having much cognitive bandwidth to spare.

There is, though, a big question here: assuming we get a hard Brexit, what should post-Brexit economic policy look like?

Here, we must admit that Philip Hammond’s threat to turn us into a low-tax Singapore-type economy at least answers a good question: how can the UK attract and retain business given that we’ll be offering less good access to the single market than EU nations?

The fact is that we cannot compete on price: Bulgaria and Romania have labour costs which are only one-fifth of the UK’s (pdf).

We could and should, however, compete on labour quality. Post-Brexit, the importance of an educated and trained workforce will be even more important: this means not just university education, but investment in vocational training and early years. We should emulate Singapore in having an educated workforce. In this context, the closure of Sure Start centres should be seen as an act of vandalism, a destruction of the future capital stock.

Hammond might also have point in seeing the need for lower business taxation. However, the answer here might not be so much blanket cuts in taxes and spending but rather a shift in taxation – perhaps from profits and incomes to land (pdf). As the Mirrlees review said (pdf), “there is a strong case for introducing a land value tax.”

It’s also important to encourage the growth of home-grown businesses. In this context, Labour might well press the case for a state investment bank, and for more state involvement in encouraging research and innovation along the lines suggested by Mariana Mazzucato.

A second angle here is that Brexit is likely to compound a massive pre-existing problem – that the UK’s productivity has stagnated. Slower trade growth will probably mean slower productivity growth (pdf): it’s no accident that the two have slowed down together since the financial crisis.

In this context, policies to increase productivity will become even more necessary. This too requires encouraging education, capital investment, innovation and new business formation: a lot of productivity growth comes not from incumbent firms upping their game but from new ones entering markets.

The traditional rightist answer to these issues – to cut taxes and regulation and so release capitalist dynamism – is not sufficient. The fact of secular stagnation tells us that capitalism (perhaps temporarily) has lost its mojo. This points to a need for more interventionist policies.

Thirdly, Labour should acknowledge the power of Vote Leave’s slogan: “take back control”. However, rather offer the merely formal and legalistic sovereignty that Brexit offers, Labour should consider policies to give people real control. These might include devolution; greater consumer say in public services (pdf); and more worker democracy. The latter, of course, should also be a means of raising productivity.

Finally, we should recognise that there is an economic base to demands for immigration control. Stagnant real wages and faltering public services have hardened people’s hearts to migrants. One solution to this is a reversal of austerity: more spending on public services would raise GDP and real wages, thus eventually increasing toleration of migrants; and it would diminish perceptions that migrants are putting a burden upon public services. And, of course, the continuation of sharply negative real gilt yields means that such policies are feasible and sustainable at least for a few years.

Most of these policies, of course, were good ideas before Brexit - and indeed Labour was thinking along such lines. The point is that, in threatening to depress economic growth, Brexit makes it even more imperative to introduce other growth-enhancing policies. Supply-side socialism should become even more important.

And this should be something Labour can unite around: the right can emphasise the need for better education and training policies, the left co-ops and anti-austerity. Yes, Labour is confused and divided. But there is no logical reason why it must be.

In praise of tribalism

Tribalism in politics isn’t always a bad thing.

I’m prompted to say this by the fact that at least one decent Leaver thinks May’s Brexit strategy is wrong. Pete North calls it “unhinged lunacy” and a “clueless gamble.”

Some of us, though, had an inkling of this months ago. This wasn’t because we had greater powers of foresight. Instead, what strengthened my antipathy to Brexit was simply that many of the people who supported it were racists and charlatans. Of course, not all Leavers were by any means. And they had some good arguments, not least about the sclerotic nature of EU institutions. But the fact was that pretty much all racists favoured Brexit. For some of us, this set off the klaxons.

May is interpreting the leave vote as a vote against immigration because that’s what it was for many of the noisiest Leavers. And for some of us, this was precisely the reason to vote remain.

I don’t think that in thinking this way I was committing the “poisoning the well” fallacy. The fact that so many Brexiters were racists and buffoons was, to me, indicative of the sort of Brexit we’d get.

Instead, I was being tribal: I didn’t want to be part of a tribe that had a disproportionate number of people I despised. I was using a form of the social proof rule of thumb. I was allowing the numbers of others making their choices to guide mine. The fact that decent people tended to favour remain (with of course counter-examples on both sides) strengthened by support for the cause.

Sometimes, this rule of thumb is good. For example, if you are in a strange city wondering where to eat, the fact that one restaurant is full whilst another is empty might well be a decent guide to their relative merits. In other cases, though, it can be dangerous: asset price bubbles can occur because of the mistaken belief that other people know what they’re doing.

Social proof is an unreliable rule of thumb. What we have in this case, however, might be another example of how biases can cancel out. Had Pete, and other decent Leavers, used this rule of thumb in the way I did, it might have offset their wishful thinking – the belief that Brexit would turn out as they hoped. As Gerd Gigerenzer has shown, apparently irrational rules of thumb often lead to the right decisions (pdf).

My point here is of course not about Brexit at all but about the nature of decision-making. In a complex world, our individual rationality can be unreliable. To paraphrase Burke, rather than trade upon our own private stock of reason, we should sometimes avail ourselves of the general bank and capital of nations and of ages. When rid of the toxic assets of racism and dishonesty, that bank and capital told me to favour remain.

On Brexit solipsism

Imagine the following scenario. I give you and a stranger an envelope each, one of which contains twice as much money as the other. I then say you can swap envelopes if you give me £1. Do you do so?

You might think: yes, for the following reason. Let’s say my envelope contains £10. Then the other contains either £5 or £20. So I have a 50-50 chance of losing £5 or making £10. This has an expected value of £2.50. For moderate levels of risk aversion – or for those who gamble (pdf) with the house money! -  it makes sense to pay to swap.

But having swapped, the same logic suggests you should swap again. And again. And again. And each time, I make a pound out of you. I’ve got me a money pump.

In fact, though, there’s a simple way to protect yourself from this mistake. You should put yourself in the shoes of the stranger with the other envelope. He’s reckoning – by the same logic – that he should swap envelopes. But if he wants to swap with you, you should reject the offer, because his gains are your losses.

Putting yourself in the other guy’s shoes can therefore save you from losses that can arise from apparently good thinking.

This is no mere abstract thought experiment. One of the strongest stock market anomalies – in both the US and UK (pdf) – is the tendency for newly-floated shares to do badly in the months after flotation. Investors pay too much for new companies.

One reason why they do so is that they make the same mistake we see in the envelopes problem. They fail to consider the other guy’s position. They don’t ask: “if this business is worth buying why is the owner – who presumably knows more about it than me – so keen to sell?” Asking this would alert investors to the possibility that the company is over-priced and its owners are trying to cash out at the best time.

In both situations, the same mistake is made. David Navon calls it the egocentric framing error – then tendency to consider problems only from our point of view rather than the other guy’s.

To put this another way, it’s the failure to distinguish between parametric and strategic rationality. Parametric rationality asks: how can I maximise utility, given particular parameters? Strategic rationality, however, recognises that the parameters aren’t fixed, and that your choice depends upon the choice of the other fellow.

I say all this because I fear that some people might be making the same mistake about Brexit. Looking at much of the reaction to May’s speech yesterday makes one suspect that the UK is the only actor in this drama. But this, of course, isn’t the case. The UK’s demands and strategy is only half the story. We shouldn’t overlook the EU’s position – such as discontent with the UK’s “cherry-picking” and a desire to ensure that a nation can’t be better off outside the single market than in. In calling May’s position solipsistic, Martin Sandbu is right: she’s looking at it solely from a UK perspective.  

In this respect, the tendency towards the egocentric framing error is exacerbated by our traditional insularity (“Fog in the channel: continent cut off”) and monolingualism. As Simon Kuper says:

Foreign countries are opaque to mostly monolingual Britons and Americans. Foreigners know us much better than we know them. This asymmetry probably helped Russia get its favoured candidate into the White House, and it will handicap Britain in the Brexit negotiations.

Perhaps, though, I’m missing the point. Maybe May wasn’t speaking to Europe yesterday so much as to right-wingers here: she’s trying to placate Ukip. In this, she’s continuing a long tradition of treating UK relations with the EU as a by-product of internal Tory party politics.