Stumbling and Mumbling

The trouble with capitalism

Are the faults of capitalism curable, or are they instead symptoms of a chronic disease? This is the question posed by Martin Wolf:

What we increasingly seem to have…is an unstable rentier capitalism, weakened competition, feeble productivity growth, high inequality and, not coincidentally, an increasingly degraded democracy.

There is much to admire in this piece. But I fear it understates the problem with capitalism.

The Bank of England has given us a big clue here. It points out that the rising profit share (a strong sign of increased monopoly) is largely confined to the US. In the UK, the share of profits in GDP has flatlined in recent years. Few, however, would argue that UK capitalism is less dysfunctional than its US counterpart. Which suggests that the problem with capitalism is not increased monopoly.

So what is it? Here, I commend some brilliant work by Michael Roberts. Many of the faults Martin discusses have their origin in a declining rate of profit (pdf) – a decline which became acute in the 1970s but which was never wholly reversed.

The causes of this decline are many and debated: an over-accumulation of capital in the 1960s and again in the tech bubble; increased worker militancy in the 60s and 70s; greater competition both from overseas and internally (see for example William Nordhaus’s work); a slower rate of innovation in many sectors; an inability of shareholder-owned firms to exploit potential profit opportunities; weak aggregate demand; and so on.

Granted, actually measuring the rate of profit is fraught with difficulty, due to myriad problems in measuring the capital stock. But the fact that capital spending has been weak for many years (before Brexit) suggests that incentives to invest are weak – one plausible reason for which is low profitability.

The financial crisis was a symptom of this. Imagine there had been an abundance of profitable investment projects in the real economy in the early 00s. The savings glut and fall in bond yields would then have financed these so we’d have seen a boom in investment, jobs and incomes. But there was no such abundance, so the savings glut instead financed a bubble in housing and credit derivatives which ended in crisis.

Many of the things social democrats like Martin deplore about capitalism are in fact responses since the late 70s to this crisis of profitability. The assertion of management power – a symptom of which is high CEO salaries (pdf) – is a (successful) suppression of worker militancy.  Privatizations are an attempt to expand the realm in which capitalists can make profits. Financialization is the result of a shift away from low-profit activities in the real economy. And rent-seeking and cronyism reflect attempts to sustain profits in the face of competition and crisis.

Stagnant productivity tells us that these measures have not wholly worked, in part perhaps because the same inequality* they have generated tends to depress productivity growth.

If all this is true, or roughly so, then the problems Martin describes are not so easily cured. When Martin says that “fixing this is a challenge for us all” he is understating the case.

But is it true? The way to find out is to see if attempts to reform capitalism actually succeed. Mirabile dictu, there are even some proposals here that do not come from the left. Sadly, though, one effect of capitalism’s crisis has been, as Martin says, to so degrade democracy as to take intelligent economic policy off the agenda.

* Yes, UK inequality stopped rising a few years ago. But the damage it does is still with us. If a man has been hit by a bus, you do not restore him to health merely by stopping the bus. 

A start, or an end?

Sometimes, the simplest questions get overlooked. Just as we must always ask of any statistic “is that a big number or not?” so we must ask of any policy: is it the end or the start?

I ask because of a recent ComRes poll which found that 48% of voters agree with the statement “I “don’t really care whether or not or how the UK leaves the EU, I just want the uncertainty to be over.”

But of course, it is nonsensical to think a no-deal Brexit will end the uncertainty. Instead, as Tom Kibasi says, it will mean “a decade of Brexit, Brexit and more Brexit.” No deal is the start of a process, not the end.

There are other policies where we should ask the same question: is this the start or the end? For example:

 - Nationalization. Viewed as an end, this is just a way for the state to seize dividends. But we should instead see it as the start of the transformation of businesses. For the left, this means managing them in a (well-defined) conception of the public interest. For the right, by contrast, it raises the danger of sloppier management. A big criticism of the part-nationalization of Lloyds and RBS is that it missed the opportunity to change the way banks are run. It was an end, not a start.

 - Labour’s plan to give workers a 10% stake in the business they work for. Viewed as an end, this is small beer – a small dividend cheque for workers, a small dilution of current owners. It’s merit, however, lies in the hope that it is the start of something. Giving workers a stake might raise productivity, and lead to demands for a bigger stake and more control. As Tocqueville wrote:

Democracy does not give the people the most skilful government, but it produces what the ablest governments are frequently unable to create: namely, an all-pervading and restless activity, a superabundant force, and an energy which is inseparable from it and which may, however unfavorable circumstances may be, produce wonders. These are the true advantages of democracy.

 - Scrapping tuition fees. Viewed as an end, this is mildly regressive. It’s merit, however, lies in it being a start. It’s part of what James Meadway has called decommodification – an expansion of the realm in which market values do not dominate. And, over time, it could return universities to their traditional educative function and prevent them being mere consumer experiences wherein the customer is king.

 - Basic income. As an end, this is technocratic welfare reform of dubious merit. But as Guy Standing says, its value lies instead in it triggering longer-term cultural change:

People who have basic security become more altruistic and tolerant, and thus better citizens. Basic income also strengthens resilience to life’s shocks and hazards. In reducing feelings of stress…it not only improves health and thus frees up money for other purposes or needs, but it also leads to more rational and long-term decision-making.

This is why experiments on basic income, whilst valuable, don’t tell us the whole story, as they haven’t run for long enough, or been widespread enough, to capture such potential change.

This is not to say that all policies are starts rather than ends. One criticism of New Labour is that too many of its policies, whilst welcome in themselves, were ends rather than starts. Increased public spending did improve public services, but such improvements lasted only as long as the Labour government did. And whilst the “terror and targets” style of management might have had a few short-run efficiency gains, these stopped when people learned to game the system, and when hierarchical managerialism crowded out goodwill and intrinsic motivations.

My point here is to echo Derek Wall’s recent interpretation (reviewed here) of Elinor Ostrom’s work. For here, he writes, “a core goal of public policy should be to facilitate the development of institutions that help bring out the best in humans” – that is, ones that enable and encourage free cooperation.

And herein lies a paradox. Most people agree that institutions shape behaviour – be it righties complaining that welfare states create a dependency culture, lefties complaining that neoliberalism makes us mean and selfish, or McCloskeyites and Smithians describing how commerce fosters virtue. And yet despite this, there is little explicit political thinking about which policies and institutions might best be a way of starting a journey to a good society,

Of course, bounded rationality means there’s a (tight?) limit to what such thinking might accomplish. And as Ostrom’s work showed, the devil is in the detail and the context. But nevertheless, there is an alternative way of thinking here. There should be more to politics than mindless “customer is king” consumerism.

Doubting disaster capitalism

A report from Byline Media has prompted talk that Brexit is an example of disaster capitalism: it is supported by vulture investors who hope to profit from economic turmoil. I’m sceptical of this.

For one thing, I’m not sure the data supports this claim. Take, for example, the publicly-declared short positions taken by Crispin Odey’s firm, Mr Odey being one of Brexit’s biggest backers. These are not so much in firms that’ll be hard hit by Brexit but instead in those that are troubled already – such as Debenhams, Intu, Metro Bank and IQE. Betting against these isn’t especially clever or sinister. It’s just a bet on momentum – that past losers continue to lose money – and on a continuation of the pattern uncovered years ago by John Campbell, that distress risk doesn’t pay.

That Odey is using such humdrum strategies draw our attention to a big problem with the idea of disaster capitalism. It’s that fund managers are not evil geniuses. The performance of most hedge funds has for years been mediocre. Hedge Fund Research, for example, estimates that equity hedge funds have made only 4% per year over the last five years. And indeed, some of Mr Odey’s funds have done much worse than this: his Odyssey fund has lost a lot.

What’s true of hedge fund managers is true (pdf) of long-only ones too.  The FCA has concluded that these “did not outperform their own benchmarks after fees.” And City University’s David Blake (pdf) has found that "the vast majority of fund managers in our data set were not simply unlucky, they were genuinely unskilled."

Such evidence is a big problem for the “disaster capitalism” theory. Yes, it is likely that the uncertainty caused by a no-deal Brexit will cause some companies to be mispriced, just as the shock of the 2016 referendum result did*. And some people will make money from this, just as a few capitalists occasionally do well at any time.

But the idea that there’s a cabal of masterminds engineering Brexit in order to profit from such mispricings seems implausible. As every equity investor knows, there’s a world of difference between knowing that there are some mispricings out there and being able to profit from them. The record shows that fund managers lack the skills to do so.

Yes, some Brexiters have taken aggressive positions. But I suspect this is an example of correlation without causality. Support for a hard Brexit is an out-of-consensus position among financiers, most of whom back Remain. And people who take contra-consensus views on one thing are likely to take aggressive positions on other things. But this doesn’t mean they are right.

In truth, there’s a good reason why most financiers favour Remain. Fund managers make their money not so much from clever trading as from attracting clients. They are asset gatherers more than fund managers. The best way to increase funds under management is for the economy to do as well as possible, so that mugs potential clients have both the cash and risk appetite to invest in funds. Remain is in the interests of most fund managers. Not everything is a zero sum game.

* It might well cut the prices of many stocks but in most cases this will be because it reduces future earnings too.

On Tory paradoxes

There are two great paradoxes about the Tory party.

Paradox one is that whilst neoliberalism has triumphed, the Tories have lost their intellectual hegemony. Matthew Parris says Johnson is a symptom not a cause of the Tory meltdown. That echoes James Butler’s claim that “the Conservative Party is in a process of ideological decline” and Stian Westlake’s that the Tories “have stopped talking and thinking about economics.” This week, 82 academics wrote to the FT defending Labour’s economic policies. It is difficult to imagine a similarly large and eminent group defending Tory policies. The Tories’ picturing of Corbyn as a chicken is a great illustration – not of Corbyn but of their own lack of seriousness.

Paradox two is that this lack of intellectual vitality hasn’t much reduced Tory popularity: they still have a lead over Labour in most opinion polls.

To understand these paradoxes, let’s start by realizing that the dominance of neoliberalism poses a problem for the Tories. Whilst it has served the 1% very well, it has alienated many who might otherwise support the Tories. The financialization of the housing market has made property unaffordable for millions of young people, and managerialism has degraded the work of many professionals. Parts of the “middle class” have become proletarianized. And they vote accordingly.

Also, neoliberalism has caused productivity growth to stagnate. As Richard Seymour says, this has turned smaller capitalists from ardent Thatcherites into Poujadiste Ukippers. As Ben Friedman showed, stagnation leads to reaction and intolerance.

Osbornomics exacerbated these problems. In saddling graduates with huge debts, it merely proletarianized them further. And in depressing demand, austerlty exacerbated the squeeze on productivity and incomes; low interest rates have clobbered older people’s savings.

Faced with these trends, the Tories have only two responses. One is what Stian calls “home office economics” – the mindless authoritarianism of May. The other is that of the Britannia Unchained crew of Raab, Patel and Kwarteng - a doubling down on calls for deregulation. Neither is a viable strategy.

This leaves the Tories with a problem. If wealth and power are concentrated, how can you create widespread support for the party that defends the existing economic order?

The answer is to change the subject.

If the Tories talk about economics, it’ll remind people that their rents are astronomical, that they can’t afford a house, that they haven’t had a decent pay rise for years, that their business is struggling and that their savings income has shrunk to nothing. The solution, then, is not to talk about economics. As Philips Stephens says, Johnson wants to frame the election in terms of nationalism, xenophobia and “people vs parliament.” This is why Fiona Bruce was so quick to silence Emily Thornberry when she started to mention food banks; the Tories don’t want to talk about the economy. Their best hope is to shift the debate onto cultural and identity politics.

From this perspective, my second paradox isn’t a puzzle. The Tories are popular not despite their lack of economic ideas, but because of it. This intellectual vacuum is being filled by things that play to their strengths – populist demagoguery. The people have had enough of experts.

In this sense, the Tories need economic stagnation as it keeps alive atavistic nativist impulses. In France Poujadism melted like snow on a spring day as the French economy boomed in the late 50s and 60s. The Tories don’t want their brand of Poujadism to go the same way. Stagnation suits them.

This highlights another paradox about politics – that sometimes, failure succeeds. For example, anti-immigration politicians need to keep migration in the public eye, which means failing to control it. Politicians who use crime and terrorism to justify curbing freedom need to keep alive the threat of terrorism. Parties who draw their support from the poor need to maintain poverty. And so on.

The Tories, then, are beneficiaries of their own failure.

Capitalists for Corbyn

The Telegraph says some (a few) investment bankers would prefer a Corbyn government to a no-deal Brexit. There are good reasons for this.

This sounds a strange thing to say, given some of Labour’s rhetoric and their proposals for higher corporate and top income taxes; the nationalization of utilities; the dilution of current shareholders’ ownership; and strict restrictions (pdf) on property speculation. It’s also the case that finance has been very happy with the post-2010 mix of fiscal conservatism and monetary activism, which Labour will end.

Despite all this, a Corbyn government offers some things which look unlikely under Johnson.

One is a degree of stability. Of course, Corbyn cannot offer swift certainty about the course of Brexit. But he will take the worst-case scenario of no-deal Brexit off the table. And in trade talks with the EU he is likely to put greater weight than the Tories on economic interests than on conceptions of sovereignty. Johnson’s “fuck business” remark showed that he prioritizes nationalism over commerce. Corbyn won’t do this.

This matters. Uncertainty, as Nick Bloom has shown, is bad for investment, productivity and growth. And as I’ve said, it’s also bad for equity valuations. We’ve known for years that markets hate uncertainty, and that people will pay a high price to reduce it. For some capitalists, Corbyn is that price.

A second thing Labour offers is a degree of economic growth. It at least knows that productivity has stagnated for more than ten years and is thinking about how to react to this. We know from the experience of the 1950s and 60s and from recent European history that capitalist economies can thrive with highish personal taxes, a degree of co-determination, and big public sectors. Capitalism does not require small government or neoliberalism.

Of course, the experience of the US economy and S&P 500 since the 80s suggests that profit-led growth is best (pdf) for capitalists. But sometimes (pdf), this is not an option – if, like now, pro-capitalist policies fail to induce strong rises in capital spending. When this is the case, wage-led (pdf) growth (pdf) is a reasonable second-best. And Labour offers the chance – only chance – of this.

But there’s something else. Successful capitalism requires not just growth but also legitimacy. It’s not accident that, from the late 19^th century onwards, almost all capitalist states developed degrees of redistributive taxation and welfare states. These were necessary to buy off public discontent. Something similar might be needed today. High inequality, crumbling public services and the inflicting of uncertainty and harassment upon millions of residents risk undermining public support for the existing order. In tackling these, Labour will help shore up the legitimacy of some sort of capitalist system.

From this perspective, a Labour government offers capitalists a form of inoculation: a small illness to prevent a worse one.

Or, to change the metaphor, parasites need a healthy host. The more intelligent members of the capitalist class – who are perhaps under-represented in the media – are not hyperventilating hysterics and so can see this.

It tells us a lot about the degenerate state of the Tory party that it might be less able than Corbyn to offer capitalism what it needs.

What theft?

There’s some hyperventilating about Labour economic plans. At CapX Tim Worstall says that John McDonnell’s proposal to give private tenants a right to buy their home at a discount is “straight out theft.” And the FT says Labour plans to confiscate £300bn of shares*.

Such claims are, I think, an exaggeration.

Let’s take private tenants first. The problem here is that house prices are high in large part because of policy mistakes. We can disagree upon what the precise failure is – restrictive planning laws, promotion of financialization, inadequate public building or insufficient taxation of land. But both left and right would agree that high house prices are, at least in part, due to errors of commission or omission by successive governments.

Which poses the question: does anybody really have a right to profit from bad policy? I’m not sure. If they do, it requires some argument which Tim doesn’t supply. In the absence of such a right, there can be no “theft”. What McDonnell is instead proposing is a different sharing out of the profits of state failure.

This is not to say his proposal is a good idea. It’s not. It gives a windfall to a group – present tenants – which is just as arbitrary as the beneficiaries of state failure. And it’s not clear that expanding owner occupation is a good idea. Andrew Oswald and Danny Blanchflower have shown that higher rates of owner occupation are associated with higher unemployment and lower investment – because owner occupiers are less able to move to where there are jobs, and more likely to resist commercial and industrial developments in their area. And there’s also evidence that more mortgage lending – an obvious corollary of more owner occupation – can crowd out productive business loans.

Labour’s best proposals on land reform – Land for the Many (pdf) – did not propose a right to buy, and rightly so I think.

The FT’s claim that Labour would “confiscate” share is, I fear, an egregious error. What the party is proposing is a gradual dilution (of 1% a year) of existing ownership and corresponding expansion in worker ownership. This is not so much a confiscation as a transfer: the headline could equally well be “Labour to give workers £300bn windfall.” The FT is in this sense committing a common error – of describing something as a cost when it is in fact a transfer.

And, indeed, it’s possible that this won’t cost current business owners anything. We have good evidence that worker ownership (pdf) can boost productivity simply by giving employees more skin in the game. And Labour’s plan might in the long-run be especially successful in this as it would expand public support for business-friendly policies. More efficient companies would be in everybody’s interest.

If you want to make a coherent case against Labour’s plans, you shouldn’t talk about theft, but rather show evidence that worker ownership would not be as beneficial as I think.

In fact, in whining about Labour’s “confiscation” and “theft” distracts us from what is a bigger and more genuine destruction of wealth. My chart shows the point. It shows that there’s a strong correlation (0.56 since data began in 1997) between the dividend yield on the All-share index and global policy uncertainty, as measured by Nick Bloom and colleagues. The cliché is right: markets really do hate uncertainty. It means lower share prices.

Uncertainty now is unusually high, which is costing investors billions. If uncertainty were at its 1997-2015 average, the relationship in my chart implies that the dividend yield on the All-share index would be almost a percentage point lower than it is. Which means that share prices would be £700bn higher than they are**.

The uncertainty created by Brexit and by Trump’s trade wars is, therefore, costing people vastly more than Labour’ plans. If you must complain about theft and confiscation, complain about this instead.

*The original headline to that piece was Labour “would cost UK companies £300bn.” That was obvious drivel, and the FT has rightly amended it.

This calculation is very rough. On the one hand, it understates the cost of uncertain. If we had less of it, capital spending and economic activity would be higher, which would mean dividends would be higher. But on the other hand, there might be some omitted variables which help explain the link between uncertainty and equity valuations. To the extent that there are, I might well be over-estimating the impact of uncertainty on yields. Net, though, I very much doubt that the impact of uncertainty upon valuations is small enough to ignore, as Brexiters and Trumpites are doing.