Stumbling and Mumbling

Five books that made me

Because this is my last post before Christmas, I thought I’d write about my favourite subject – me. Or, which might be of slightly broader interest, the five books which have perhaps most shaped me. As with all my ideas, this is not original: I’m following Miles Kimball. These aren’t necessarily my favourite books, or ones I’d most recommend. But they have been influential for me. And because we are most malleable when we are young, they come disproportionately from my teenage years.

Middlemarch, by George Eliot.

There was a time when I thought about studying English at university. It was this that put me off. I found it long-winded, dreary and tediously earnest, like Polly Toynbee at her worst.

Some books, though, speak to us at different ages. Maybe Eliot is one of those: older readers appreciate her whilst teenagers are underwhelmed – a sort of reverse Ayn Rand. I tested this recently by reading Daniel Deronda. And I’m sorry, but I still agree with the teenage me.

I appreciate that many wise readers will be appalled by this. They might well be right. For me, though, Eliot is like religion or Star Wars – something other people get but I don’t.

In fairness to her, though, she saved me a bullet. I’m not sure I could have spent years reading Spenser and Saussure.

Auto da Fe, by Elias Canetti.

This is the story of an eminent but reclusive German scholar who is tricked into marriage in the vain hope of changing his illiterate housekeeper and who in doing so loses everything, including his mind. It’s an allegory of the rise of Nazism.

For me, it raises the question of the relationship between intellectuals and the world, at both a personal and social level. It shows both that it is not possible for intellectuals to live in isolation, and yet dangerous for them to hope to change people. (Yes, it has become relevant again). The purely intellectual virtues are not sufficient. We must be, in Robert Heilbroner’s nice phrase, worldly philosophers*.

And no, I never married.

A History of Political Theory, by George Sabine.

I read this whilst doing A level politics. More than any other book, it opened my mind to the fact that there are many different ways of thinking about the world, and to the excitement of discovering new things.

I’m not sure this ever left me. I still prefer learning to teaching and would much rather be a dilettante than an expert who confines himself to one narrow field. Yes, we need the latter. But we also need binmen, and I’d rather not be one of those either. One reason why I’m looking forward to retiring is that I’ll have more time to read and learn.

Selected Essays in the Dynamics of the Capitalist Economy, by Michal Kalecki.

I did not always intend to become an economist. I did A level economics, but skived off a lot of lessons to play snooker. I found the subject too divorced from what I saw as the economic reality in Leicester in the early 80s of soaring unemployment, poverty and factory closures. I therefore sympathize with Unlearning Economics and the authors of Econocracy.

I pitched up at Oxford to do PPE intending to drop economics in my second year. What changed was that I had the good luck to be taught economics by the great Andrew Glyn. Whereas many “economists” seem to think the subject is a way for second-rate mathematicians to pretend they are clever, he showed me that it is a way of understanding the world.

In this context, Michal Kalecki is a model economist. He uses maths only insofar as it clarifies his analysis and no further, shuns unempirical concepts (such as “natural” rates), and pays attention to the facts – even though macroeconomic data was primitive in his time. Selected Essays is, in these senses, far superior to Keynes’ General Theory.

And yet Keynes got all the acclaim whilst Kalecki was ignored, even though he said much the same as Keynes and said it better and clearer. One reason for this, I suspect, is that Keynes effaced some of the ideas that are  embarrassing for capitalism and its apologists - class, power and profits - whereas Kalecki did not. Another reason is that Keynes was part of the elite whilst Kalecki was an outsider, an immigrant. Kalecki’s genius reminds me that we must always look outside of the canon and the Establishment. (One of my all-time favourite songs is Jolie Holland’s Periphery Waltz).

When I worked in investment banking I found Kalecki far more useful than any other dead economist simply because he had ideas about short-run fluctuations in aggregate profits that Keynes and the neoclassicals did not.    

Making Sense of Marx, by Jon Elster.

The virtue of this book, and of the analytical Marxism project generally, is that it saved Marxism from the obscurantism and sectarianism to which Marxists are prone.

In retrospect, I’m not sure I now fully subscribe to all his views: I think there’s more to be said for the labour theory of value than analytical Marxists claimed, and I suspect Elster’s stress upon methodological individualism underplays the importance of complexity. Nevertheless, he showed that it is possible to be both a Marxist and an orthodox social scientist. Subsequent developments have vindicated this. Today’s world fits the Marxian perspective well.

It was through Elster that I first learnt of the work of Daniel Kahneman. He is an example of what I mean. His work on cognitive biases has massively influenced me in the day job as it was the basis for the field of behavioural finance. But we can easily treat his cognitive biases research as being evidence for – and a foundation of – Marx’s theory of ideology. In this sense, there is a unity between my day job and my Marxism. You can’t have one without the other – or at least, you won’t.

* A good economist should be like a good novelist, in that both should successfully put themselves in another’s shoes. Both should give good answers to the question: what are this character’s beliefs, preferences and constraints, and what are the consequence of him acting upon them? Some Brexiters might have forgotten this.

Big Facts in economics

Unlearning Economics has a nice piece on the limits of sophisticated empirical techniques and the virtues of eyeball econometrics, reminiscent of Dave Giles’ advice “Always, but always, plot your data.” One extension I’d make to this is the importance of Big Facts. Sometimes, it’s more important that a theory explain a single important fact – or at least be consistent with it – than a range of small facts.

Take, for example, the efficient markets hypothesis. Researchers have found countless small facts that seem to refute this – well over 100 anomalies at the last count. All these, however, run into the Big Fact – that fund managers do not beat the market. This is not inevitable: they could in theory out-perform at the expense of retail or overseas investors. So why don’t they?

It might well be because the anomalies are not, in fact, that strong. They might be just non-replicable patterns in noisy data (pdf). Or it might be that once traders learn of them, they get bid away – something that seems more true in the US than Europe. Or it might be that high dealing costs mean the anomalies can’t in fact be exploited in the real world. And perhaps those anomalies that are robust are in fact a reward for taking risk: the defensive (pdf) anomaly, for example, exposes fund managers to benchmark risk, the danger of losing their jobs because they under-perform in a bull market.

The Big Fact, then, alerts us to the possibility that the EMH is mostly true in at least one sense – though of course the market can be both “micro efficient” and “macro inefficient”.

Here’s a second example. A Big Fact is that the unemployed are significantly less happy than those in work. This is inconsistent with ideas that unemployment is voluntary: people should be happy if they’re on holiday. It thus refutes labour market-clearing real business cycle theories.

A third Big Fact is that mainstream economic forecasters have consistently failed to predict recessions – something which pre-dates the 2008 crisis – and in fact are much worse recession predictors than the simple yield curve. This might tell us that recessions are inherently unpredictable. Or it might tell us there’s something wrong with orthodox macroeconomics (and not just DSGE models). Whatever your story, it must fit this Big Fact.

A fourth Big Fact is that a significant slowdown in productivity and GDP growth has followed an increase in inequality (in the sense of the share of income going to the 1%). This might tell us that increased inequality has caused slower growth – perhaps because it’s the wrong sort of inequality, Or maybe something independent of inequality caused growth to slow. Whatever it is, we have a Big Fact which defenders of inequality need to confront.

No doubt you can add other examples.

My point here should be a trivial one. Not all facts are equal. And given that no theory in the social sciences fits all facts, I’d rather they fitted the big ones than the little ones. One useful thing to do when reading any theory is to ask: what is the biggest fact that supports this claim, and what is the biggest that is inconsistent with it?

Saving capitalists from themselves

The biggest threat to capitalism is not Marxists but capitalists themselves. That’s the thought which struck me from reading Ann Pettifor’s claim that a Corbyn government could be good for business.

I’m thinking here of two analytically separate mechanisms.

The first arises from a simple identity, that the aggregate profit rate can be increased in one of two ways – either by increasing the share of profits in output, or by raising the output-capital ratio. Thatcherism tried the former – for example by weakening workers’ bargaining power. Post-war social democratic Keynesianism tried the latter: it hoped that full employment would keep the capital-output ratio high and hence maintain profit rates and therefore incentives to invest,

Ann’s point is that a Corbyn government would also try the latter; looser fiscal policy would raise the output-capital ratio and hence profit rates. “Falling incomes and spare capacity have not been good for business” she says.

The second mechanism lies in the fact that the success of capitalism rests upon two things: accumulation and legitimation. On the one hand, capitalists need high profits and incentives to invest such as a favourable tax regime. On the other hand, though, the system must possess a minimum of legitimacy so that people support it.

These two conditions can sometimes conflict. Take, for example, high house prices. On the one hand, these help sustain capitalism. High rents and mortgages force people to work long hours thereby giving capital a quiescent workforce. As David Harvey writes, “barriers of private property in land…[are] needed to ensure an adequate supply of exploitable wage labour for capital.” On the other hand, though, if people feel they have no chance of acquiring property, they’ll see no hope of getting a stake in the system and this will undermine its legitimacy. As Thatcher recognised, a property-owning democracy shores up support for capitalism.

High inequality can also undermine legitimacy. If people feel the rich are ripping them off – for example by not paying their “fair share” of tax – there’ll be a backlash against capitalism.

Intelligent Tories – yes, there are some if you look hard enough – recognise this problem. Sebastian Payne in the FT quotes Nick Boles:

Roosevelt’s key insight was that capitalism in the 1890s in the US was becoming its own worst enemy,” he says. “It had been captured by robber barons and monopolistic groups. It was destroying the interests of the small businessman, the small farmer and the consumer. He worked out that if those who believed in capitalism didn’t reform it, then the populists would sweep it away.” 

Again, Labour might be the saviour of capitalism here. Its plans to reduce house prices, raise the living wage and increase corporate taxes might increase the legitimacy of the system.

From this perspective, we can regard the function of the state in capitalist society as being to solve a collective action problem – the fact that what is in the short-term interests of individual capitalists might not be the longer-term interests of capitalists as a class.

For example, each individual capitalist wants wages to be as low as possible, compatible with sufficient recruitment and motivation. But if wages are low, the market for consumer goods will be weak*. Or each individual capitalist might want tax breaks and rigged markets in his favour but these undermine the legitimacy of the system.  (This might be the eventual effect of Trump’s tax plan.)

It’s possible that a Corbyn government would solve these collective action problems.

But only possible. It’s not clear that there is as much spare capacity as Ann thinks: the OBR and Bank of England think there isn’t. If there’s not, then looser fiscal policy might lead to higher interest rates rather than a higher output-capital ratio. Maybe higher corporate taxes would lead to more tax-dodging or less investment. Or perhaps a higher wage floor would, at some point, cost jobs. And wage-led growth might not work.

The difference between Marxists such as me and social democrats such as Ann is, I suspect, that we are more sceptical than she is of governments’ ability to fix capitalism.

This, though, is a comradely debate for another day. My point here is that it’s possible that Labour will save capitalists from themselves. The narcissistic over-entitlement of the stupider capitalists, however, means they cannot see this.

* This dilemma can be overcome by allowing workers greater access to credit, as Thatcher did. But this might not be a permanent fix.

Inequalities that matter, & don't

Jamie Whyte asks:

A rich man finds it easier to buy a car than a poor man does; a witty man finds it easier to seduce a woman than a dull man does. If the former is an unfair inequality of power, why isn’t the latter?

This question might (with a caveat I'll come to) have some force for the sort of egalitarian who believes that all inequalities are bad in themselves - what Derek Parfit calls (pdf) telic egalitarians. But there are other sorts of egalitarian - those who believe that inequalities are bad for other reasons, say because they arise from injustices or have undesirable effects.

This distinction, of course, isn’t confined to egalitarians. It’s also true of libertarians; you can favour libertarianism for consequentialist reasons or because you think liberty a good in itself.

Our second type of egalitarian has obvious answers to Jamie. One is that inequalities of wit have, overall, no adverse consequences. In fact, the opposite: the witty man is good company (Jamie calls him a friend). Inequalities of wealth, on the other hand, are not so benign. They undermine the democratic ideal of equality of respect and perhaps even democracy (pdf) itself. They weaken trust (pdf) and social capital. And they are quite possibly bad for the economy. (I'd add that high inequality also undermines support for free markets.)

Of course, I’d expect Jamie to disagree with these empirical claims. My point is that they provide a big difference between inequalities of wealth and of wit.

Egalitarians also object to wealth inequalities because, in some (many?) cases they arise through unjust processes such as exploitation and domination or through the capture of the state by the rich. As Joe Stiglitz said, inequality is a policy choice; evidence for this is that different countries have had different trends in it*.

This cannot be said of inequalities of wit. Justice, said Rawls, is a virtue of social institutions, not of nature. Here’s Parfit:

Consider, for example, the inequality in our natural endowments. Some of us are born more talented or healthier than others, or arc more fortunate in other ways. If we are deontic egalitarians, we shall not believe that such inequality is in itself bad. We might agree that, if we could distribute talents, it would he unjust or unfair to distribute them unequally. But, except when there are bad effects, we shall see nothing to regret in the inequalities produced by the random shuffling of our genes**.

And injustices of talents often don't have bad effects: it's a good thing that some people are beautiful, intelligent and witty. (I know; I met one once). 

Sure, if we lived in a society like Iain M. Banks’ Culture in which we could easily change people’s appearances we might consider it an injustice that some men look like Olivier Giroud whilst others look like Michael Gove because such an inequality would be remediable. But we don’t.

To many egalitarians, then, there is no equivalence between the rich man and the witty one. Jamie’s analogy fails.

But even telic egalitarians have a reply to him. Here’s Larry Temkin:

Equality is not all that matters. Nor is equality the only ideal that would, if exclusively pursued, have terrible implications. The same is true of justice, freedom, utility and virtually every other ideal. (Inequality, p282).

Handicapping the witty man, as in Kurt Vonnegut’s Harrison Bergeron, or demanding that his sexual partners pay a fine as Jamie suggests, would be too invasive of liberty. And liberty is also a value. (Egalitarians contend, reasonably I think, that taxation is less a restriction upon freedom than are Vonnegut’s interventions).

I am, therefore, unconvinced by Jamie’s question. 

In this sense, I don’t know what to make of his argument. One the one hand, I’m grateful to him for posing the question of why inequality matters thereby making us think. But on the other, as a former professional philosopher he must know all these arguments and that he wouldn’t persuade egalitarians. I fear, then, that he was writing not for his opponents but merely preaching to his own side; who does he hope to persuade by saying that “socialists have always proved willing to translate their theoretical absurdities into practical atrocities”? In doing so, he’s given us another example of how politics is becoming increasing tribal and polarized, with neither side wishing to properly engage with the other.

 Update: rewritten in light of Chris Bertram's comment. 

* A different form of this argument is that some inequalities are unjust because we would not have consented to them has we had a chance to do so behind a veil of ignorance.

** In fact, UK institutions go further than this. We give free education to all to increase their wit, and the NHS tries to ameliorate inequalities in health and even appearances.

On technological regress

The FT reports that thousands of cash point machines might close. One of the very few worthwhile financial innovations of my lifetime might therefore be about to go into reverse. This poses the question: shouldn’t we take the possibility of technical regress more seriously?

Certainly, it was common before (pdf) the industrial revolution; plumbing, for example, was better in parts of India around 2000BC than it was until quite recently in the west. The dark ages weren't wholly misnamed. But we have also seen it in our lifetimes.

For example, it takes longer now to fly across the Atlantic than it did in the 80s when we had Concorde – especially if you consider longer check-in times and time spent getting through airport security.  Equally, some train journeys take longer now than they did years ago. And of course, men are no longer travelling to the moon.

It’s not just in transport that we’ve seen regress. Older readers might remember that we used to get two postal deliveries a day, one of them before lunch. Paul Romer has claimed (pdf) that macroeconomic research has seen intellectual regress. The fact that companies have for years built up cash piles suggests that banks are no longer as good at financial intermediation as they were – not that they ever (pdf) much improved (pdf) in the first place - perhaps because the rise of intangible assets deprives firms of collateral against which they can borrow. Newspapers used to keep readers well-informed with numbers of foreign correspondents and detailed parliamentary reports. (Brendan O’ Carroll, for example, managed to track down his grandfather’s killer by using newspaper reports at the time). Today, they prefer to flatter readers’ prejudices. Most worryingly of all, antibiotics are becoming less effective which might cause a general regress in medicine.

You might object that we still know how to do most of these things, but it’s just that the costs of doing so have risen prohibitively, For my purposes, this is irrelevant. BITD we spoke of the socio-technical conditions of production: we knew that we cannot separate technology from the social circumstances that facilitate or not its use.

Regress, then, is a real possibility.

This can help explain cyclical downturns. If we combine Xavier Gabaix’s point (pdf) that recessions can start from large individual firms getting into trouble with Daron Acemoglu’s description (pdf) of how network effects can amplify such fluctuations, we have a story of how regress can cause recessions. This, I think, was true of the 2008-09 recession. Banks’ ability to produce credit declined. That technical regress caused a collapse the effects of which are still with us. What’s daft about real business cycle theory is its conception of labour markets and use of representative agents, not its identification of the cause of downturns.

This poses the question. What possible mechanisms might give us longer-term regress. Here’s a non-exhaustive list:

 - Baumol’s disease. Where productivity cannot improve, relative costs increase over time as wages rise. This might render some services unprofitable. This is probably the story of postal services.

 - Intangibles. We used to think that one route through which technology improved was that failing firms’ assets would be bought by better firms. This may well be true of physical assets. But is it so true of intangible ones? If a firm’s know-how consists in organizational capital, it’s demise might cause knowledge to be lost. And as Luigi Zingales has said (pdf), “a temporary shock such as financial distress may have very long-term consequences.”

 - Path-dependence. Brian Arthur has described (pdf) how a poor technology might gain a temporary advantage over a good one because of a lucky accident. Producers then continue piecemeal improvements in the inferior technology with the result that a potentially better technology is abandoned. This might be the story of steam-powered cars, or perhaps economic research.

 - Incentives. If there are big incentives for rent-seeking rather than innovation, we’ll get less of the latter. Worse still, fighting over shares of income can reduce that income. This is the story, in different ways, of the natural resource curse and John Kay’s marvellous parable of the ox.

Perhaps a bigger danger, though, is simply the rise of anti-intellectual and anti-scientific attitudes – of the sort we see variously in opposition to vaccinations, the belief in a post-truth world and the attack on universities.

Progress is more fragile than we suppose. We must ask how we can shore up the  material and intellectual preconditions of it.

In defence of the labour theory of value

Lucius has been poorly recently, which has required some trips to the vet and therefore a bill of a size that only David Davis could negotiate*. This has made me wonder: is there more to be said for the labour theory of value than we like to think?

For a long time, I’ve not really cared about this theory one way or the other. This is partly because I’ve not bothered much with questions of value; partly because, as John Roemer has shown, we don’t need (pdf) a labour theory of value to suggest workers are exploited; and partly because the main Marxian charges against capitalism – for example that it entails relationships of domination – hold true (or not!) independently of the theory.

As I approach retirement, however, I’ve begun to change my mind. I think of major expenses in terms of labour-time because they mean I have to work longer. A trip to the vet is an extra fortnight of work; a good guitar an extra month, a car an extra year, and so on.

When I consider my spending, I ask: what must I give up in order to get that? And the answer is my time and freedom. My labour-time is the measure of value.

This is a reasonable basis for the claim that workers are exploited. To buy a bundle of goods and services, we must work a number of hours a week. But taking all workers together, the hours we work are greater than the hours needed to produce those bundles because we must also work to provide a profit for the capitalist. As Marx put it:

We have seen that the labourer, during one portion of the labour-process, produces only the value of his labour-power, that is, the value of his means of subsistence…During the second period of the labour-process, that in which his labour is no longer necessary labour, the workman, it is true, labours, expends labour-power; but his labour, being no longer necessary labour, he creates no value for himself. He creates surplus-value which, for the capitalist, has all the charms of a creation out of nothing. This portion of the working-day, I name surplus labour-time.

For Marx, value was socially-necessary labour time: David Harvey is good on this.

From this perspective, exploitation and alienation are linked. Workers are exploited because they must work longer than necessary to get their consumption bundle. And they are alienated because this work is unsatisfying and a source of unfreedom.

Now, I’ll concede that many people hate the labour theory of value. One reason for this is that many discussions of it quickly become obscurantist – as if “value” is some mystical entity embodied in commodities.

This, though, certainly was not Marx’s intention. Quite the opposite. He intended his theory to be a demystification. He wanted to show how what looked like relations between things – the exchange of money for goods or labour-time – were in fact relations between people. And unequal ones at that.

What’s more, the charge of obscurantism against Marx is an especially weak one when it comes from orthodox economics. Much of this invokes unobservable concepts such as the natural rate of unemployment, marginal productivity, utility, the marginal product of capital and natural rate of interest – ideas which, in the last two cases, might not even be theoretically coherent.

In fact, the LTV is reasonably successful by the standards of conventional economics: we have empirical evidence to suggest that it does (pdf) a decent (pdf) job of explaining (pdf) relative prices – not that this was how Marx intended it to be used.

You can of course, think of counter-examples to the theory. But so what? in the social sciences, no substantial theory is 100% true.

I suspect that some of the animosity to Marx’s use of LTV arises because of a resistance to the inference that Marx drew from it – that workers are exploited. This issue, however, is independent of the validity of not of the LTV. For example, Roemer thinks workers are exploited without believing in the LTV, and Smith believed the LTV without arguing that workers were exploited.

By the (low) standards of economic theories, perhaps the LTV isn’t so bad.

* He seems to be recovering now. The vet is also expected to make a full recovery eventually.

Entrepreneurs vs bureaucrats

“The interests of Arron Banks are not those of Lloyd Blankfein” says Simon. This highlights what I suspect is an under-appreciation distinction between two types of character, albeit ones that occasionally co-exist in the same person: bureaucrats and entrepreneurs.

A bureaucrat is one who manages an existing operation; an entrepreneur creates one from scratch. And their characters are very different. The bureaucrat values rules and convention whilst the entrepreneur scorns them: an entrepreneur, by definition, does something different. And the bureaucrat hates uncertainty whilst the entrepreneur is comfortable with it. It’s no accident therefore that the businessmen who are keen on Brexit tend to be entrepreneurs - Banks, Dyson, Martin – whilst those who oppose it, like Blankfein, are bureaucrats.

In making this distinction, I’m echoing Joseph Schumpeter. He argued that business would become more bureaucratic and in doing so would displace the true entrepreneur:

Rationalized and specialized office work will eventually blot out personality, the calculable result, the “vision.” The leading man no longer has the opportunity to fling himself into the fray. He is becoming just another office worker—and one who is not always difficult to replace…The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and “expropriates” its owners, but in the end it also ousts the entrepreneur (Capitalism, Socialism and Democracy (pdf), p133-4)

This, I think, is an under-rated forecast. I suspect – though cannot prove – that one reason for secular stagnation is that the over-optimism of the entrepreneur has been displaced (to a degree) by the cautious rational calculation of the bureaucrat with the result that innovation and investment has declined*.

One upshot of this is that, despite all the talk of disruption and new technologies, the pace of creative destruction has slowed. John Haltiwanger has documented this in the US (pdf). And whilst data is less clear in the UK, the fact that job-to-job flows are smaller now than in the early 2000s suggests something similar has happened in the UK.

As creative destruction has drained from the economy, however, it has entered politics. Brexiters such as Arron Banks fancy themselves as disruptors of conventional politics. This is perhaps most apparent in Dominic Cummings, one of the very few interesting intellectuals on the right. He’s written:

The reason why Gove’s team [in the Department of Education] got much more done than ANY insider thought was possible – including Cameron and the Perm Sec – was because we bent or broke the rules…I increasingly think there is a chance that a handful of entrepreneurs could start a sort of anti-party to exploit the broken system and create something which confounds the right/centre/left broken mental model that dominates SW1.

This is the mindset of the entrepreneur, not the bureaucrat.

Which brings me to a curiosity. From the late 70s to the 00s, the established wisdom in economic policy-making was that governments must provide a stable framework in which creative destruction could be encouraged and channelled. Thatcher and Brown, in their different ways, both agreed upon this. This consensus has now been broken: and as Cummings shows, the desire to do so isn’t confined to Brexit. We used to think that politics should be a realm of stability and business of innovation. Today, it seems as if the opposite is the case: we have disruption in politics and secular stagnation in business. (The causality between the two, if any, is another matter.)

This is consistent with a point made by the brilliant Corey Robin – that conservatives have never really been the lovers of stability which Oakeshott claimed them to be:

Far from embracing the cause of quiet enjoyments and secure attachments, the conservative politician has consistently opted for an activism of the not-yet and the will-be (The Reactionary Mind, 2^nd ed, p63)

The upshot of this is that policy instability – as measured by Baker, Bloom and Davis – has been extraordinarily high recently. Economists believe this is bad for growth – a fact reflected in both private and official forecasts.

Most of us, I suspect, think this is a temporary aberration. But what if it’s not?

* Returns to innovation have always been low generally, as William Nordhaus has shown, which suggests it was motivated by overconfidence.

Save Democracy-Abolish Voting: A review

In an important post, Simon writes:

When politics becomes the whims and mad schemes of a small minority that only listen to themselves, unmodified by the normal checks and balances of a functioning democracy, it should be treated by the non-partisan media for what it is, not normalised as just more of the same. If we treat a plutocracy as a democracy, democracy dies. 

This poses the question: what can be done about this? A brilliant new book by Paul Evans, Save Democracy – Abolish Voting, has some ideas.

To see the issue here, suppose you were charged with a crime you didn’t commit. You would think yourself ill-used if the jury disregarded relevant evidence or if a rich man who irrationally disliked you bought his way onto the jury or bribed them with false promises. And yet this sort of behaviour is accepted as the norm in politics. We apply much lower standards to the making of laws than we do to the application of them.

Our political system does little to ensure that voters are well-informed or careful. Paul says:

If we wanted to design a system in a way that helps wealthy and charismatic people con everyone easily, we could barely design anything better than electoral politics.

Not only does the system take little care about the information that goes into a vote, it is also careless about the information that comes from it. Take the Brexit vote. What sort of Brexit did people want? Was it a desire for Brexit at all or a protest against the “elite” or a call for immigration controls? If it was the latter, is this because such controls are desired for social/cultural reasons or as a (mistaken) way of increasing wages? If voters did want Brexit, was this for intrinsic reasons (national sovereignty) or as a means of achieving something else and if so what?

The referendum told us nothing about these questions. As Paul says, "the vote is such a feeble instrument of control." On such an important issue, people conveyed less information to the government than they do in the most quotidian trip to Tesco.

What we need, then, are ways both to equalize political power and to make government more sensitive to the people’s wishes. Paul’s proposal here is to give everyone a “personal democratic budget” which they could spend on all the possible forms of political influence - lobbyists, thinktanks, journalists and so on. People could spend this directly, or they could delegate it to syndicates of professional buyers. Political parties would then compete to appeal to these influencers.

I prefer to think of this as a thought experiment, an answer to the question: what is required to have a democracy in which people have both equal say and can convey information to their rulers? The fact that the proposals seem outlandish just shows how far we are from a well-functioning democracy.

Although this is a slim volume, it poses some deep questions which deserve far more attention than they’re getting, such as:

 - Isn’t there a trade-off between liberty and democracy? Liberty requires that plutocrats can buy influence via the media, thinktanks and lobbyists. As Simon says: “freedom is in reality just a freedom to sustain a plutocracy.” Democracy, by contrast, requires that we all have equal political say which requires tight limits on plutocrats’ power. Paul hopes that personal democratic budgets will compete away such influence thanks to being given tax breaks. This might not be sufficient.

 - How do issues get onto the agenda? The remarkable thing about Brexit is that the arcane obsession of a few rich older men has become the dominant political issue, whilst other issues (such as worker democracy) are off the table. This reminds us of what Steven Lukes said – that inequality of political power manifests itself in part in what becomes an issue and what doesn’t. Do Paul’s proposals do enough to ensure a more diverse agenda?

 - Who actually wants democracy? Paul stresses the difference between democracy and politics: democracy entails an equal say; politics is about us getting what we want. I fear that politics has become like a football match in which everybody wants their side to win but nobody cares about the quality or honesty of the game. The constituency which wants a better democracy is a small one.

 - Should politicians serve our preferences or our interests? Paul acknowledges that democracy will sometimes require acceding to irrational preferences. In a well-functioning democracy, such cases should be limited because debate should wise people up. But it won’t always do so. This poses Jason Brennan’s question: what is so valuable about democracy?

 - What (if any) material economic conditions must be in place to ensure we have a well-functioning democracy in which politicians serve us all rather than the 1% (pdf)? Obviously, plutocrats will oppose any move towards equalizing political power. It might therefore be that democracy is only possible under greater economic equality than we currently have.

Even if you think Paul has the wrong solution, he is at least asking the right question. And given that so few are doing even this, he's done a massive public service. 

Why Hammond's wrong

Philip Hammond is copping flak for blaming the productivity slowdown on disabled workers. He said:

It is almost certainly the case that by increasing participation in the workforce, including far higher levels of participation by marginal groups and very high levels of engagement in the workforce, for example of disabled people – something we should be extremely proud of – may have had an impact on overall productivity measurements.

The problem with this is not that it’s offensive, but that it is mostly wrong.

The ONS estimates that since 2013 the number of disabled people in work has risen by over 20%, from 2.9m to 3.5m. This means they’ve increased from 9.7% of all workers to 10.8%.

What impact might this have had upon aggregate productivity?

Let’s say – for the sake of argument – that these additional 595,000 disabled workers are only one-third as productive as average workers.

Yes, I’m picking a number out of the air here. One the one hand, this is a very low estimate: you can work as well at a desk in a wheelchair as you can if you’ve got the use of your legs. But on the other hand, it might be that the extra disabled workers are unproductive and have been cajoled into work by the threat of benefit sanctions.

I don’t think, though that the gap can be very much greater than this. For this to be the case, one or both of two things would have to be true: that the able-bodied are massively productive; and/or that the newly-employed disabled are very unproductive. The former cannot be true because wages aren’t that high (unless you want to argue they are heavily exploited which I don’t think Hammond does). And the latter cannot be, because it would imply that employers have hired tens of thousands of people whose marginal product is below the minimum wage.

Let’s, then, run with that number just to get a Fermi estimate. If we do, then it implies that the additional disabled workers have reduced productivity by 1.2% over the last four years, or 0.3 percentage points per year.

During this time, total productivity has grown 0.35% per cent per year. That compares to average growth of 1.7% per cent per year in the 40 years. So there’s a productivity growth shortfall of 1.35 percentage points, of which increased employment of the disabled accounts for 0.3 percentage points. That’s just over one-fifth.

Which of course means that fourth-fifths is due to something else. We have countless candidates here (pdf): austerity, the legacy of the financial crisis in dampening animal spirits and investment; the slowdown in world trade which has slowed the rate of increase in the international division of labour; a slower rate of innovation, or a slower rate of diffusion of those innovations due to weak competition; and so on.

All these different explanations, though, have something in common: they attribute the productivity slowdown to either bad policy or to features of capitalism.

Which brings me to what is really wrong with Hammond’s claim. First, it reveals a lack of feel for numbers: any ball-park rough estimate attributes only a small fraction of the productivity slowdown to increased employment of the disabled. And secondly, it deflects blame for that slowdown away from where it really lies and onto our weakest and most vulnerable citizens.

The first fault is hard to forgive in a chancellor. The second is hard to forgive in a human being. And Hammond is supposed to be one of the more sensible members of this government.

Update: Jonathan Portes points out that, on average, disabled people earn 10% less  than the able-bodied. Even if we assume that the productivity gap is greater than the wage gap, and that the newly-employed disabled are less productive than the previously-employed ones, this suggests that my calculation errs on the side of being too kind to Mr Hammond. Which of course only reinforces my conclusion.