Stumbling and Mumbling

The power of recall

The other day, I heard the Stranglers’ Strange Little Girl for the first time in ages, prompting me to recall having an Indian takeaway in a friend’s Morris Oxford somewhere off the Clarendon Road on a sunny evening in 1982. I wonder: does this help explain why older people are more hostile to the Labour party than younger ones?

My response to that particular song was of course idiosyncratic. But it is nevertheless typical. All of us have Proustian madeleines – cues that prompt us to recall some memories. We all, I suspect, have songs which we associate with specific people and places. This is why “trigger warnings” are sometimes necessary: traumatic memories can indeed be triggered. As Daniel Levitin writes:

The brain is not like a warehouse; rather, memories are encoded in groups of neurons that, when set to proper values and configured in a particular way, will cause a memory to be retrieved and replayed in the theatre of our minds. The barrier to being able to recall everything, we might want to is not that it wasn’t ”stored” in memory, then; rather, the problem is finding the right cue to access the memory (This Is Your Brain on Music, p165)

In a new paper Jessica Wachter shows that this process colours our financial decision-making. Take for example the finding of Erin McGuire and Stefan Nagel and Ulrike Malmendier (pdf), that economic conditions in our formative years influence how much we invest in equities even decades later. From one point of view, this seems absurd: expected returns are the same for all of us. So, how can it happen? Simple. The questions “should I buy shares?” or “What is the economic outlook?” trigger particular memories. For some, these are memories of the bear market of the 70s. For slightly younger people they are memories of the 80s bull market. And these generations invest accordingly.

A similar thing, says Professor Wachter, explains why shares fell so far – in hindsight by too much – when Lehmans collapsed. This triggered memories of (reading about) the Great Depression and hence alarm.  (Luckily, though, it also reminded the Fed of the Great Depression, so it knew what not to do).

I suspect a similar process contributes to older people’s greater opposition to Labour. Remember that it is not inevitable that young people should be predominantly left-wing: in 1987, for example, more of them supported the Tories than Labour. So why are things different today?  

One reason, of course, is that older people own houses and younger ones don’t.

But it could be that different memories are involved. If you are in your mid-50s or older, talk of a left-wing Labour party cues memories of the Soviet Union and of the 1970s – and of the more salient aspects of the 70s such as strikes rather than less salient ones such as the fact that most workers got better real-terms pay rises than they’ve had recently.

Young people, however, have none of these memories. For them, talk of nationalizing the railways trigger not memories of British Rail sandwiches but of pleasant train journeys in Europe.

Of course, the 1970s were the 1970s whether you experienced them or not. But as David Hume said, actual experiences – impressions – are stronger than mere ideas.   

In one sense, all of this might be trivially obvious. In another, though, it’s not. Even though the truth should in theory be the same for all of us – in the way that future share price moves will be – we perceive it differently. This is not (just) because we are stupid or dishonest. It’s because of how memory works.  

Challenging rightist illiteracy

Grace Blakeley raises an important issue, of how the Labour party can best answer the question: “how are you going to pay for it?” I fear that her answers, though, are a mix of the good and bad.

First, the bad. In saying that “the arbiters of economic credibility” claim that borrowing to invest doesn’t work, Grace is constructing a straw man. All sensible economists know, as Simon has said for years, that fiscal austerity at zero interest rates is a terrible idea.

For this reason, I disagree with Grace’s claim that mainstream economic theory “is designed to prop up the status quo.” Yes, this is the case in some respects, one of which I'll come to. But not in others. You can argue for fiscal expansion, liberal immigration policy, progressive taxation and even worker ownership without deviating at all from mainstream theory. Grace is right to say that the case for austerity was always political not rational – but mainstream theory tells us this.

I also suspect that Grace underplays the importance of the need to challenge the idea that government finances are just like the household’s, as Yanis Varoufakis tried to do here. The essence of politics is that there are failures of collective action. Sometimes, when each individual pursues her own interests, the outcome is bad for everyone; this is what happens when the government acts like a household. It’s this that provides a place for government action. The left must always make this argument.

But, but, but. Grace is bang right to say:

Working people are the ones who create the wealth, and that wealth should be returned to them.

You don’t need to believe the labour theory of value to believe this (though perhaps you should!) If working people don’t create wealth, capitalists would love to see strikes as they could carry on creating wealth without having to pay pesky workers. But of course, they don’t.

Nor is this even a left-wing view: once upon a time, It was believed by mainstream politicians.

In this sense, the left must reverse the rhetorical trick that the right has played for decades, of pretending that only entrepreneurs and the rich are “wealth creators”. They are not.

That said, I’m not sure that this leads only to a case for taxing the rich. The ONS estimates that the top 1% of the population get 7.1% of total household disposable income. Even if you could halve that – which is a big ask – you’d raise only £50bn. Instead, I suspect it’s also a case for greater worker ownership and control.

The issue here is a bigger, more general one: how does the left remove from public opinion the influence of the right’s economic illiteracy? Obviously, we cannot rely upon the mainstream media. And I doubt that hurried conversations on doorsteps with ill-tempered voters are sufficient.

It’s here, though, that Corbyn’s greatest achievement and legacy might lie. In motivating thousands of people to join Labour and become politically active, he has created the possibility of the left achieving hegemony via millions of everyday conversations in workplaces, pubs and cafes. Obviously, this hasn’t yielded fruit yet. It might take decades, just as it took decades for neoliberalism to eclipse social democracy. But there is this hope. And this is why I can’t regard Corbyn – for all his faults - with the disdain that so many others do.  

Labour's corporate tax plans: a half-defence

Who really pays corporate taxes? This is the question posed by Labour’s plan to raise £30bn (pdf) from extra taxes on companies.

These plans run into the problem that several studies have found that, ultimately, it is workers who pay a hefty chunk of such taxes. Michael Devereaux and colleagues have found that, in European countries, workers pay 92% of extra corporate taxes. A study of Germany alone has found that they pay around half (pdf) of them. And a US study (pdf) has found that they pay around one-third. A literature survey (pdf) by Ben Southwood finds that, on average, workers pay more than half of extra corporate taxes. But, he says, “each study gives such a wide range of results over such varying sets of circumstances.”

To see why the results vary, just remember how it is that corporate taxes are shifted onto workers. It’s because, as Sam Bowman says:

Lower returns to investment means less incentive to invest in the first place. Lower investment – less money spent on new machinery, research and development, and other business activity – means lower wages and lower growth.

And there is reasonable evidence that higher (pdf) corporate taxes do indeed cut investment (pdf).

It’s for this reason that some of us would prefer that taxation be shifted onto land and away from profits.

Nevertheless, there is a possible defence of Labour.

If begins from the fact that there’s a good reason why studies find different results for the impact of corporate taxes on wages. It’s because explaining fluctuations in capital spending is really difficult because so many things influence it.

One big fact tells us this. It is that, as my chart shows*, the share of business investment in GDP is much lower now than it was in the late 90s, despite the fact that the corporation tax rate has fallen from 31% to 19% in this time (and interest rates have too). Of course, this doesn’t tell us that corporate taxes do not affect investment. But it does tell us that many other things do influence it. As Grace Blakeley has written (pdf):

The competitiveness of the business environment in a particular country depends upon a wide variety of institutional considerations. These include ‘access to markets and profit opportunities; a predictable and non-discriminatory legal and regulatory framework; macroeconomic stability; skilled and responsive labour markets; and well-developed infrastructure’ (OECD 2008 (pdf)). For most types of business, these factors are considerably more important than the rate of corporation tax. This explains why Germany and France, for example, have continued to have higher levels of business investment than the UK despite much higher corporation tax rates.

What’s more, numerous factors have depressed capital spending lately.

One of these is uncertainty about Brexit.

Another is a scarring effect: the tech crash and financial crisis showed bosses that they could easily over-estimate future profits. That led to lower animal spirits.

Yet another are fears of a lack of future credit: although banks claim to be willing to lend now, firms have no assurance that credit lines will stay open during the next downturn. What’s more, as Jonathan Haskel and Stian Westlake have argued, businesses with large intangible assets find it difficult to raise finance because of a lack of collateral. For these reasons, firms have built up large cash piles in recent years.

And then there’s a simple lack of demand. We know that there is a ton of slack in the labour market. And the fact that inflation is low suggests there’s plenty in product markets too, all of which is reducing the need for firms to invest. As Simon says:

corporation tax plays a pretty small roll in investment decisions. The most important factor for investment in non-traded goods is the future level of demand

Herein lies a defence of Labour’s plans. It could be their other policies will boost capital spending - by reducing the chance of an economically-damaging Brexit; raising aggregate demand; and financing companies via the National Investment Bank. Yes, the medicine of higher corporate taxes have unpleasant side-effects, but Labour can treat these with other remedies.

Sadly, however, this is not certain. My concern is that neoliberalism has become performative. Decades of neoliberal ideology have taught British bosses to regard social democracy as abnormal even though it is perfectly familiar on the continent. In this way, Labour might depress animal spirits still further even though there is no logical necessity for this to be the case. If this is so, it might mean that social democratic policies are impossible, or it might mean that the job of investing can no longer be entrusted to capitalists. 

* The spike in 2005 was because investment in nuclear power was reclassified then.

Ownership and productivity

In last night’s leaders’ debate, the audience laughed when Jeremy Corbyn said that productivity gains could pay for a four-day week. This is an example of what I said recently – that we cannot have nice things because voters have resigned themselves to the inadequacy of British capitalism.

And inadequate it is. The ONS estimates that UK productivity is one-fifth lower than that of the US, Germany or France and one-tenth lower than Italy’s. Closing some of this gap would allow for a cut in the working week with no loss of pay.

In this context, Labour’s plans (pdf) to reform corporate governance, including putting workers on boards, are crucial. John McDonnell is bang right to say that giving workers a stake in companies raises productivity: there is a ton (pdf) of evidence for this. (Which of course is wholly consistent with the likelihood that there are many other possible ways in which a government might increase productivity.)

But how can this be? One answer lies in a classic article written 30 years ago by Michael Jensen. Stock market-listed firms, he said, contain “widespread waste and inefficiency” because an of “absence of effective monitoring” of bosses by shareholders. Giving workers greater say can reduce this agency failure. This is partly because workers know the ground truth of how the company is performing better than do external shareholders. But it’s also because many workers have more skin in the game than do fund managers; whereas workers lose their jobs if the firm does badly, fund managers face less severe penalties.

At this stage, righties like to claim that the market can solve this problem.

There’s a grain of truth in this: since Jensen’s classic article, the number of stock market-quoted firms has fallen and private ownership has risen. The market cannot, however, so easily transfer companies into worker ownership in part because workers are credit-constrained.

What's more, we know for sure that product market competition does not eliminate the inefficiencies caused by agency failures. Nick Bloom and John Van Reenen show (pdf) that there is “a long tail of extremely badly managed firms.” And Andy Haldane has said (pdf) that “there is a striking and widening divergence” between the most productive firms and the rest. This would not be the case if market forces quickly drove inefficient firms out of the market.

As for what explains such differences, Haldane echoes Jensen:

(A lack of) management quality is a plausible candidate explanation for the UK’s long tail of companies…It is possible that current UK corporate governance practices may act as a brake on innovative companies.

Fans of David Graeber’s book Bullshit Jobs (of whom I am one) know one way in which bad management manifests itself. “Managerial feudalism” means that intermediate bosses prefer to create hierarchies of flunkeys rather than maximize profits. And inadequate oversight and imperfect competition allow them to get away with this. Graeber's is a colourful way of expressing what economists and equity investors have known for a long time – that companies often grow at the expense of profits.

Now, in saying all this I’m not entirely endorsing Labour’s position. My point is that companies have not been effectively pursuing shareholder value, perhaps because, as John Kay has said, such value can only be achieved obliquely. (I’m also unsure whether short-termism is a problem.)

What I am saying, though, is that the notion that changing ownership might increase productivity is far from risible. There’s tons of evidence that it can do so, and mainstream economists agree that there are failures of management and ownership: Jensen, Haldane and Bloom are not Marxists.

The fact that an audience can laugh at Corbyn’s claim to raise productivity, therefore, tells us nothing about Labour policy. But it speaks volumes – and damning volumes at that – about a political discourse that has become so debased as to put discussions about productivity outside of mainstream politics.

Why we can't have nice things

We can’t have nice things. That’s the message of Ed Davey’s speech yesterday, in which he called for a structural current budget surplus and denounced Labour’s spending plans as “fantasy economics”. Voters seem to agree. Although many individual Labour policies are popular, the majority think Labour’s plans are unaffordable, and very few trust Corbyn on the economy.

From one perspective, all this is wrong. Over the last 25 years, two big things have changed.

One is that real risk-free interest rates have slumped. This means government borrowing and investment is much more affordable than it used to be. Governments should therefore be investing more, especially where (as with fibre broadband) the private sector is not doing so sufficiently. The failure of private sector capex to respond to ultra-low interest rates vindicates Keynes’ point:

It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment.

Secondly, we used to think that the Nairu was high, so that increased aggregate demand would swiftly lead to higher inflation. But this is no longer the case. Even if it exists at all, the Phillips curve is quite flat, and anyway there is much more slack in the labour market than headline unemployment numbers suggest. Inflation, then, is less of a constraint on public spending than it used to be.

Economics, then, says governments can and should borrow more.

So why do so many people think otherwise?

There are legitimate objections to Labour’s plans. The party seems to have underestimated the annual cost of free broadband, and is ignoring the fact that some local providers of fibre to the door are doing a decent job. But these, I suspect are technical matters which can be sorted out.

Also, although “where’s the money coming from?” is the stupidest question in the world, “where are the workers coming from?” is not. Even though there is lots of aggregate slack in the labour market, specific shortages of doctors and engineers could stymie Labour’s ambitious spending plans. Again, though, I’m not sure this is a decisive objection: such shortages can be overcome with freedom of movement.

Instead, I suspect animus to Labour’s plans are founded – at least in part - in less rational considerations.

What we have here might be yet another example of what I’ve called good ideas going bad. The belief that a big fiscal expansion would run into trouble was reasonable once. But people often hold onto ideas long after they’ve ceased to be valid. One reason for this, as researchers such as Erin McGuire and Ulrike Malmendier (pdf) have shown, is that our ideas are formed in our youth and we stick to them even when their empirical base has vanished.

Secondly, there’s a halo effect. There are good reasons to worry about Mr Corbyn’s judgment; his support for the Palestinian cause has led him to some regrettable associations. Such misgivings can easily spill over into distrust of him on other issues.

Thirdly, centre-right politicians have for years played a rhetorical trick. They have invited us to believe that “tough” talk about “hard choices” is a sign of economic competence. But as Simon says. it isn’t. Sometimes, a hard heart is a sign of a soft head.

Finally, there is resignation. Frederic Jameson (or Mark Fisher or Slavoj Zizek) said that it is easier to imagine an end to the world than an end to capitalism – or even, I’d add, a transition to moderate social democracy. He had a point. Research shows that people resign themselves to poverty and inequality, and so stop imagining that a better world is possible.

One thing that reinforces this is cynicism. People have stopped believing that politicians can create a better world.

Another reinforcer is deference. Adam Smith was right:

The great mob of mankind are the admirers and worshippers, and, what may seem more extraordinary, most frequently the disinterested admirers and worshippers, of wealth and greatness. 

Even the most incompetent and parasitic monopolist will therefore find vocal defenders.

Now, here I part company with many on the left who like to blame media bias. Yes, this might well amplify these sources of hostility to Labour’s economic plans. But as Daniel Kahneman showed, people often go wrong without any prompting from the media. Cognitive biases matter in politics, as they do in all other walks of life.  

Bad faith arguments

One feature of this election campaign is that we are seeing more bad faith arguments. By this, I mean arguments which their advocates cannot sincerely believe, at least not without humungous inconsistency with their other beliefs.

One egregious recent example of this was John Redwood’s claim that Brexit is an opportunity for us to “develop policies to rebuild our self-sufficiency in temperate food.” It is obviously absurd that someone who claims to support free markets – the essence of which is the division of labour – should suddenly favour North Korean-style Juche. But Redwood doesn’t sincerely believe this. He’s looking for an upside to Brexit and is clutching at straws (literally?). It’s a bad faith argument.

Here are some other examples.

“Labour’s call to abolish hospital car park charges is regressive, as it’ll benefit richer people who tend to drive.”

This misses the point. It’s absurd to means-test every transaction: barmen don’t ask to see how much you earn before deciding how much to charge you for a pint. Progressiveness or regressiveness should be judged at the level of the system as a whole, not for individual actions.

Which is why I say it’s bad faith. Those making this claim aren’t saying that, taken as a whole, Labour’s policies are insufficiently redistributive. They are just looking for a flaw in Labour’s policy and missing it.

“Labour shouldn’t scrap private schools: it should raise the standard of state schools.”

Simple maths shows the problem here. Average spending on state secondary school pupils is £6200 (pdf) per head. To raise spending to the level of that at a decent private school (say, Oakham) would need an extra £15,000 per pupil. Across 3.2 million (pdf) pupils, this implies extra spending of almost £50bn a year. That’s equivalent to a raising income tax by a quarter or VAT by one-third. And this is without considering the practical difficulties of giving each state school an Olympic-sized rowing lake as they have at Eton.

Nobody, though, is advocating such a spending increase. Nor are they identifying such massive inefficiencies in the state sector that the elimination of them could get pupils as well educated on £6200 a year as £21,000*. Which is why I say this is a bad faith argument.

“Labour’s plans for worker ownership are the confiscation of shareholders’ property.”

The people arguing this, however, take a very partial attitude to shareholders’ rights. Political uncertainty – about Brexit and Trump’s trade war – is depressing share prices and costing investors’ billions of pounds; we know this because there’s a strong correlation between the Baker, Bloom and Davis index of political uncertainty and equity valuations. If you think Labour is attacking shareholders without being equally vocal about the damage done by Trump and Brexit, you are guilty of bad faith.

“We must respect the will of the people on Brexit.”

The will of the people, however, is to retain free movement.  Which argues for only the softest type of Brexit. Supporters of Johnson’s plan – which he himself doesn’t understand – cannot, therefore, easily invoke the will of the people.

What’s more, the majority of voters favour nationalizing the railways, a wealth tax, worker-directors and higher taxes on top incomes. I haven’t heard Jacob Rees Mogg calling for these. Invoking the “will of the people” when you do it so partially is bad faith**.

“Immigration depresses wages and puts pressure on public services.”

All the evidence, however, is that it has only a tiny effect upon the wages of the low-skilled, and that EU migration is actually a net benefit for the public services. (See this pdf and the references therein.)

I call this a bad faith argument because those who are opposed to immigration aren’t motivated by economic considerations. Almost nobody says: “I was opposed to immigration but having seen the evidence that it does no economic harm I’m now in favour of it.” Instead, such opposition is based on non-economic factors, not all of which are racist. Trying to find an economic justification for tough immigration controls is bad faith: it misrepresents your actual beliefs.

To be clear, I am NOT saying that all arguments here are bad faith. There are valid cases to be made against Labour’s policies on private schools, car park charges and worker ownership, and in favour of Brexit and immigration controls. Not necessarily persuasive cases, but ones that deserve a hearing. So let’s hear them, and not rank dishonesty.

*  Is the Michaela Community School a counter-example to my claim? I don’t know. Its exam results seem good, but can it match private schools for activities such as sport and music?

** OK, so we’ve had a referendum on Brexit but not on a wealth tax. But why not?

Mass under-employment

Today’s figures showed that unemployment fell slightly in the third quarter, pushing the unemployment rate down to 3.8%, its lowest since 1974. This, however, vastly under-estimates the amount of slack in the labour market.

My chart shows the point. It shows that, in addition to the 1.3m officially unemployed there are also almost 1.9m who are out of the labour force who would like a job. We know this is no idle preference; labour market flows data show that, in Q3, 547,000 people moved from inactivity into employment (and 574,000 in the opposite direction).

But there’s much more. Other data today show that, in addition to these, there are 3.3m people who are under-employed – who are working fewer hours than they’d like.

Put together, this adds up to 6.45 million people – 695,000 more that at the low-point for labour market slack seen as far back as 2005.

A big reason why there is so much underemployment is that wages aren’t high enough to provide a decent income without long hours; this is also why more people in the same household are working. As the Resolution Foundation says:

Why are so many of us working? Because we’re a lot poorer than we expected to be

From this perspective, one fact becomes explicable – that real wages are still lower than they were in 2007*, and that nominal wage growth has slipped back slightly recently, to 3.6% in Q3 after 3.9% in the three months to July.

This is because the under-employed put significant downward pressure on wages. Put yourself in a boss’s shoes. If the labour market is really tight, you’ll have to raise pay to get people to work more. But if you already have an employee who wants longer hours, you can get them to work more instead. You don’t need to raise pay.

Of course, the under-employed are not the only ones unhappy with their hours. ONS data show that there are 3.4 million people who’d like fewer hours even if this means low pay: this suffices to refute the silly idea that you can think of the labour market in terms of a “representative agent”.

Such over-employment is, however, also a sign of labour market slack. It tells us that there aren’t enough jobs for people to find one with hours that suit them.

If we add together the unemployed, under-employed and over-employed we get almost ten million people who are unhappy with the world of work. That’s almost a quarter of the working age population. And this is before we mention those who are over-qualified for the jobs they are doing or who are in what David Graeber calls bullshit jobs.

This is surely a colossal systemic failure. In his book Not Working, David Blanchflower says one solution to this is for macro policy to put the pedal to the metal – to be much more expansionary. But I wonder: is this sufficient?

* OK, depending on how you measure price inflation.

Seeing what we expect

Read the words in the triangles.

Now read them again.

If you are like most people unprepared for the task, you’ll have read even these very simple sentences wrongly. You’ll have committed the mistake of seeing what you expect rather than what is there; you are so used to seeing such familiar phrases that you expect to see them even when what is actually there is a slight variation on them.

This is why it is impossible for most of us to proofread our own writing.

Not that this is always a handicap. Filling in gaps and overlooking small errors is why we can make sense of what people are saying when we can’t easily hear them because of background noise. And it’s why you all understand sentences such as “Boris Johnson is a c*** who is talking s***”.

Sometimes, though, this can lead us astray. It is, I suspect, one reason (of several) for the momentum effect in stock markets – the tendency for winning stocks to carry on rising and losers to continue falling. Investors who have bought a stock and then see it suffer some bad news cleave too strongly to their prior belief that it was a good stock and so don’t sell it sufficiently strongly. This causes the share to be over-priced and so to drift down gradually later.

This is Bayesian conservatism – the tendency to be too conservative in updating our beliefs when we see disconfirming evidence; we see what we expect, rather than what is there. It is often underpinned by two other common biases. One is wishful thinking: we want to believe that we were right in the first place, and the wish is father to the belief. And the other is overconfidence: we exaggerate our intellectual ability and so overestimate the extent to which we are right.

Of course, this is not the only deviation we make from full rationality. Just as it’s possible to fall off a bike to the left as well as to the right, so we can make the opposite mistake of underweighting prior information. This is called base rate neglect. It is, I suspect, one reason why bosses and investors overestimate the benefits of mergers: they pay too much attention to claims about synergy, and not enough to historic evidence that such mergers often fail.

We have, though, seen two examples of the mistake of seeing what we expect recently. One is David Ornstein’s report that Arsenal’s bosses are “100% behind Unai Emery.” If they are sincere (and they might be), they are seeing what they expect – that Emery is the right man – rather than what the evidence shows*.

The other was Jonathan Freedland’s mistaken claim that Labour has shortlisted an anti-semite as candidate for Birmingham Hall Green. I suspect that Mr Freedland’s willingness to think of Labour as an anti-semitic party led him to infer too quickly that the Majid Mahmood they had shortlisted was the same Majid Mahmood who was an anti-semite when in fact they are different men. Had your prior been that Labour could not possibly select an anti-semite, you would have reacted to the facts “Labour selects Majid Mahmood” and “Majid Mahmood was fined for anti-semitism” by checking whether they were in fact different Mr Mahmoods. Maybe your prior was wrong, maybe not – but it would at least have led you to the facts.  

It would be harsh to criticise Mr Freedland for seeing what he expected: this is a mistake we all make. Where he erred was in having a prior belief that so easily led to error in this case.

You might think that episode shows that centrists are not the rational evidence-based pragmatists they claim to be, but are in fact as ideological and irrational as the rest of this. I’m tempted to agree. But then in doing so I might commit exactly the same error – of seeing what we expect.

* There are parallels between those who wanted Wenger sacked and Brexiters: both demanded change without sufficient consideration of the effects of doing so.

Resilience and selection

If truth is the first casualty of war, social science is the first casualty of election campaigns. So it was with Sajid Javid’s speech yesterday. He claimed that Labour will tax everybody more, “saddle the next generation with debt”, “ruin your finances” and would be “letting prices run wild in the shops.”

All this is silly hyperbole.

I say so not just because, as Simon says. Labour’s spending plans are more sustainable than the Tories because it will not inflict a damaging Brexit upon the economy.

Instead, there are two other reasons why Javid is wrong.

One is that developed economies are resilient. They just don’t tip swiftly from prosperity to ruin. For one thing, high debt (even if we get it) is no barrier (pdf) to decent economic growth. Also, as Eric Lonergan says, “inflation is truly dead, and policy makers don’t need to worry about it.” Governments and central banks have struggled to raise inflation despite trying. It would be odd if Mr McDonnell had powers unknown to the ECB or Bank of Japan. And we must remember the finding of John Landon-Lane and Peter Robertson, that government policies don’t usually change trend growth by very much – a result that is comforting as well as dispiriting.

Adam Smith was bang right. There is a great deal of ruin in a nation. Countries can cope with bad policies. Those on the right who say the UK (well, actually Britain) can survive leaving the EU therefore have a point. But you cannot easily claim that the economy is resilient to changes in trading rules but ultra-vulnerable to moderate differences in fiscal policy and taxes.

There is, however, another reason why economies aren’t ruined by bad policy. It’s that such policies don’t persist. They get reversed. Examples of this include Mitterrand’s “austerity turn” in 1983 and Syriza's acceptance of EU-imposed austerity in 2015. But we have also seen examples under the Tories. Thatcher abandoned M3 targets and fiscal austerity in the mid-80s: cyclically adjusted net borrowing rose from a small surplus in 1981-82 to 2.8% of GDP in 1983-84. And Major pulled the UK out of the ERM in 1992.

Liberal democratic capitalism, then, selects against bad policies. Ones which damage the economy egregiously get reversed. If Labour’s policies are as bad as Javid claims (arguendo!) the correct inference is not that Labour will ruin the nation, but that Mr McDonnell will disappoint his supporters as so many of his predecessors have done.

Herein, I think, lies an under-appreciated reason for voting Labour. Selection pressures against bad policy apply more strongly to Labour than to the Tories, not least because policies that hurt capital arouse more powerful hostility than ones that only hurt the poor. Mediocre Labour policies will meet stiff resistance from the media and capital, whereas the Tories can get away with worse. The “hostile environment policy ruined many lives. And Austerity killed over 100,000 people and is only now being reversed (and for other reasons). It’s difficult to imagine that Labour policies that did so much harm could persist for so long.

Risk-averse people who are uncertain about the social and economic impact of the party’s policies should for this reason favour Labour: the worst they can do is very likely ultimately better than the worst the Tories can do.

Shoring up capitalism

They are not talking about it explicitly, but one of the interesting divisions on the centre and right in this election concerns the question: how best to sustain British capitalism?

Here, there are two related issues.

The first is: are we in a wage-led or profit-led regime? Sometimes (pdf), profit rates can be raised by policies and institutions that promote (pdf) full employment and high wages, as these boost aggregate demand. At other times, though, restoring profits requires policies to depress wages and rebuild profit margins. Tory governments in the 50s and 60s pursued wage-led policies, but Thatcher pursued profit-led ones.

Whether wage- or profit-led policies work varies from time to time and place to place, as Marglin and Bhaduri (pdf) and Onaran and Galanis (pdf) have shown.

The second issue is that there is sometimes a distinction between legitimacy and accumulation. This was put by James O’Connor back in 1973:

The capitalistic state must try to fulfill two basic and often contradictory functions – accumulation and legitimation. This means that the state must try to maintain or create the conditions in which profitable capital accumulation is possible. However the state also must try to maintain or create the conditions for social harmony. A capitalist state that openly uses its coercive forces to help one class accumulate capital at the expense of other classes loses its legitimacy…But a state that ignores the necessity of assisting the process of capital accumulation risks drying up the source of its own power. (The Fiscal Crisis of the State, p6)

Brexit, I think, embodies this conflict between legitimation and accumulation. On the one hand, it’s bad for accumulation as it’ll reduce economic activity to some degree. But on the other, you can see it as an attempt to shore up legitimacy by showing that “the elite” can give the people what they want.

Which poses the question: what are the centre and right parties offering in these dimensions?

In wanting to stop Brexit, the Lib Dems are going for accumulation at the expense of legitimacy. Which isn’t to say they are ignoring the latter completely. Jo Swinson claims that:

Politics is no longer about left or right. It's about open or closed. Liberal or authoritarian.

This is a longstanding theme of centrists – an effort to pretend that we are divided by something other than class. In being mostly on the liberal-open side of this divide, capitalists are on the same side as many workers. Insofar as playing up this distinction works, it thus serves to enhance capitalist legitimacy by effacing the capital-labour divide.

In pursuing Brexit, however, the Tories are going for legitimacy at the expense of accumulation. Their attitude to the latter, though, seems ambivalent. On the one hand, promises to raise the minimum wage and public spending suggest a wage-led mindset. But on the other, the prominence in government of Britannia Unchainders such as Patel, Raab and Truss suggest a profit-led tendency – a possibility consistent with the fact that Johnson’s Brexit deal opens the door for cuts in UK labour protections. This division might well reflect a division among capitalists themselves, with what Phil calls “ the most backward, uncompetitive and socially regressive sections of capital” having disproportionate influence.

Another interesting case is the Brexit party. Pursuing the hardest possible Brexit is obviously a threat to accumulation. But I’m not sure either that they are trying to shore up legitimacy. Quite the opposite. In fuelling permanent resentment against the elite they are undermining it: there might in this sense be no great incongruity in Claire Fox’s migration from the RCP to Brexit party. Granted, the resentment is directed at political rather than economic elites. But this is a distinction that might be hard to sustain; the problem with rocking the boat is that there’s no telling who’ll fall out.

None of these answers to the question of how to sustain capitalism seems wholly satisfactory – which isn’t entirely surprising given that none of the parties has the wit to ask the question explicitly. Which is why a few intelligent capitalists, such as Dan Davies, are attracted to Labour.

But why aren’t they offering good answers? It might be that they’re just not smart enough. Sam Bowman and Stian Westlake have suggested ways in which the centre-right might bolster accumulation, but their ideas haven’t yet been embraced. But it might instead be that it’s not at all obvious what would shore up capitalism: wage-led policies might work, but then again might not. If so, the parties’ confusion reflects the messiness of the real world.