Stumbling and Mumbling

Hoist by his own petard

There is genuine anger at the behaviour of Dominic Cummings not just among the usual suspects but among some Tory MPs such as Roger Gale and Douglas Ross. It's worth exploring why this should be the case.

It's because of cultural evolution. Early humans worked out (or stumbled upon) an important fact, that we often thrive best when we cooperate. As Axelrod and Hamilton showed in a classic paper (pdf):

Cooperation based on reciprocity can get started in a predominantly noncooperative world, can thrive in a variegated environment, and can defend itself once fully established.

Or as Ken Binmore put it in Natural Justice:

We don't need to pretend that we are all Dr Jekylls in order to explain how we manage to get on with each other fairly well most of the time. Even a society of Mr Hydes can eventually learn to coordinate on an efficient equilibrium in an indefinitely repeated game.

This cooperation takes the form of the Golden Rule, or do as you would be done by. As Binmore shows, pretty much all societies have some version of this principle. I agree to obey rules - even at a cost to myself - because I expect you to do so.

But how are such norms enforced? By punishing defectors, that's how. In Axelrod and Hamilton's formal scheme, this takes the form of tit-for-tat strategies. Less formally, we use mockery, ostracism and even violence: "snitches get stitches."

Most of us have internalized these norms. We know this from experiments with the ultimatum game, wherein one player is given some money and can split it with another, with the other choosing to accept or reject the offer. Purely selfish offerers would offer the lowest amount possible, and purely selfish receivers would accept. But this is not what happens. Offers of less than 30-40% are only occasionally made, and often rejected when they are.

This shows that we have a norm of fairness. Offerers don't make unfair offers even if they'd benefit from doing so, and receivers reject such offers even if they'd be financially better off accepting. Both sides do so because the norm of fairness over-rides short-term financial gains.

It's for a similar reason that people leave tips even in restaurants they'll not return to. We feel bad not tipping; we don't want to be thought badly of; and we want to uphold incentives for good service because we'd expect visitors to our regular restaurants to do the same for us.

This, I think explains the anger towards Cummings. It's because people think he has broken one of the oldest social norms, of thinking the rules that apply to us don't apply to him. Millennial of cultural evolution mean this norm is now viscerally internalized. Hence the power of the charge "one rule for them, one for us".

In this context, it is pointless to wiggle about claiming that Cummings observed the letter of the rules. Such legalistic pedantry misses the point - that it is the spirit of the rules that matter.

This also explains Conservatives' disquiet. Some of them genuinely believe in the rule of law - the principle that laws apply to us all, which is part of the Golden Rule. For them, Cummings has broken a core moral principle.

One irony here is that Cummings should have been aware of all this. As he himself wrote:

Most of our politics is still conducted with the morality and the language of the simple primitive hunter-gatherer tribe...Our ‘chimp politics’ has an evolutionary logic: our powerful evolved instinct to conform to a group view is a flip-side of our evolved in-group solidarity.

Binmore points out that it was in tough times that norms of conformity were most strongly enforced, because it's then that survival requires them. Or as Marshall Sahlins put it:

During lean food seasons the incidence of generalized exchange should rise above average...Survival depends now upon a double-barrelled quickening of social solidarity and economic cooperation. The social and economic consolidation could conceivably progress to the maximum: normal reciprocal relations between households are suspended in favour of pooling of resources for the duration of emergency. (Stone Age Economics, p213-4)

Stone Age man's greater emphasis upon community and solidarity in hard times has a strong echo today. Because we're all suffering from the lockdown, we even more than usual expect everyone to muck in together and so are hostile to defectors.

But it has for decades had another echo. As Ben Friedman showed, in recessions we become more intolerant of outsiders, as solidarity with our tribe increases.

Which leads to an exquisite irony. Having exploited that atavistic sense of heightened solidarity so well during the Brexit campaign, Mr Cummings is now a victim of it. He is being hoist by his own petard. It takes a heart of stone not to laugh.

Austerity, power & BBC bias

George Osborne gave a revealing interview (1'52" in) to Radio 4 yesterday - revealing, not untypically for the BBC, for what it did not say.

Osborne said that sometime in the "next two or three years":

Markets, and indeed the country, will look to governments to set out plans for how they are going to eventually bring balance back to the public finances.

The first thing that was not said here - and certainly not by his fawning interviewer - is that the more educated parts of the country will be looking for no such thing. Intelligent economists (as well as me) agree that fiscal austerity will be counterproductive. With demand for gilts strong - even at negative yields - government borrowing is sustainable for now. And the best way to get it down is simply to ensure a strong economy. As Maynard Keynes said in 1933: "Look after the unemployment, and the Budget will look after itself."

Which poses the question. Why, then, would anybody prate about the need for austerity?

Which brings us to something else that was unsaid - that whilst austerity might not be technically necessary as a tool of macroeconomic management, it suits the interests of financial capital, a section of which pays Mr Osborne handsomely (another fact unsaid in the interview).

The reason for this is simple. For a given inflation target (the inflation target shouldn't be given but let that pass) monetary and fiscal policy are substitutes: tighter fiscal policy means looser monetary policy and vice versa. And this combination - what Osborne called fiscal conservatism and monetary activism - disproportionately benefits the finance sector for several reasons:

 - Many trading strategies carry very low returns even when they pay off; various carry trades, arbitrage or near-arbitrage, or picking up pennies in front of steamrollers. To make them pay well requires leverage. Which needs cheap and easy money.

 - Low interest rates and QE raise asset prices. And guess who benefits from these.

 - As Costas Lapavitsas & Ivan Mendieta- Muñoz show, bank profits depend a lot on the net interest margin. And this is often higher when banks' financing costs are lower. As Thomas Philippon and Guillaume Bazot have shown, the finance sector is oligopolistic, so lower costs don't get passed onto customers.

 - Low interest rates encourage people to take on more debt, to the benefit of banks. They also encourage savers to "reach for yield" and thus entrust their money to high-charging fund managers. If annuity and savings rates were high, savers would be less inclined to buy expensive funds.

Whilst fiscal austerity doesn't serve the interests of the country as a whole, therefore, it does suit the finance sector.

And it has disproportionate influence over policy. We don't need conspiracy theories to appreciate this. Nor is it because the sector pays Mr Osborne's wages: he served its interests long before he entered its employ. Nor is it even because of direct lobbying, important as that is.

It's also because of what James Kwak calls "cognitive capture". Finance professionals enjoy undue influence because they are perceived to have high status and expertise and network with politicians and journalists. They thus benefit from both the mere exposure effect and from the fact that, as Adam Smith said, the "respectful attentions of the world [are] more strongly directed towards the rich and the great, than towards the wise and the virtuous.

Yet another mechanism of influence has been described by Timo Walter and Leon Wansleben. Policy-makers, they say, have been drawn into "a kind of ‘ontological complicity’ with the dynamics of financialized capitalism" because large liquid markets give central banks more means of influencing the economy and hence greater power.

In these ways, financialization is self-reinforcing: a bigger financial sector gives finance greater pwoer.

Which is why I say that interview with Osborne was so inadvertently revealing. The (one-sided) discussion was framed in terms of what seems best for the country as a whole. But this of course is a fiction. Policy-making is not a technocratic exercise in what is best for the country but rather a matter of the extent to which policy is constrained by the influence of capital.

But how does that influence operate? How strong is it? Whose interests therefore does policy serve? These are questions which BBC usually overlooks. Which means that it is systematically and dangerously biased.

What we don't see

Daniel Hannan recently tweeted:

Around 80% of us say we support the lockdown. But, looking around me, I’d say that no more than 20% are still observing it rigorously. Is this a case of what economists call “revealed preference” - or do people want everyone else to apply stricter rules than they do themselves?

It might well be neither. Instead, it’s an example of the sampling bias. The people we see are, by definition, those who are outdoors and thus who are disproportionately likely to be breaching the lockdown. What Mr Hannan isn’t seeing are the countless thousands of us staying indoors and observing the lockdown. He’s failing to appreciate that what he sees is a biased sample of what there is.

In fairness to him, this is a common error, as experiments by Benjamin Enke have demonstrated. Here are a few other disparate examples of a similar mistake.

Benefit fraud. People greatly over-estimate the extent of this. A survey by the TUC a few years ago found that “people think that 27 per cent of the welfare budget is claimed fraudulently, while the government's own figure is 0.7 per cent.” One reason they do this is that they can see fraudsters whereas they don’t see the millions trapped indoors by disability or depression.

Opportunity cost. As Frederic Bastiat pointed out, we see the shopkeeper spending money to replace his broken window but don’t see that he would have spent money elsewhere had his window not been broken. We thus wrongly infer that some activities – be it breaking windows or going to war – boost economic activity when in fact they often don’t.

The unseen counterfactual. Because we don’t see the road not taken, we don’t benefit from the Jim Bowen effect: “here’s what you could have won.” We don’t therefore blame governments sufficiently for policies which impoverish us relative to a plausible counterfactual – such as austerity or Brexit.

Social transmission bias. In a recent paper David Hirshleifer describes how people’s savings and investment decisions are distorted by the biased signals they get from others. Because people are more likely to discuss their successes than their failures, they talk more about low-return but high-risk strategies that happened to get lucky. This leads listeners to believe that stock-picking works better than tracker funds and that speculative shares pay off better than defensive ones when in fact (pdf) they generally don’t.

Survivorship bias. The shares that are listed on the stock market are by definition those that have not gone bust. They are therefore a biased sample of all stocks. Because investors don’t fully appreciate this bias, they under-estimate the chances of corporate failure, especially over the long-run, and so over-estimate their chances of picking good stocks. In fact, as Hendrik Bessembinder shows, most stocks actually lose money over their lifetime, and stock market rises are due to great performance by a tiny minority of shares.

Biased news. As the ancient saying goes, “’dog bites man’ is not a story but ‘man bites dog’ is”. What we see reported on the TV are, therefore, unusual events. But by definition these do not describe reality. It’s partly for this reason that the fear of crime has not fallen as much as actual crime has. Also, in reporting salient events, the news understates slow-moving but world-changing trends – be it the decline in global poverty, stagnation in productivity or long-term decline in government borrowing costs. In this sense, the news – even if presented wholly honestly – distorts our perceptions of reality.

Immigration. People see what they think to be an adverse effect of immigration: “some immigrants arrived a few years ago and I’ve lost my job since.” What they don’t see, however, are the many mechanisms which counteract this apparent effect.

And herein lies the point. The social sciences are, as Jon Elster said, fundamentally a collection of mechanisms. But many of these are unseen. It is the role of social science to expose these mechanisms, and to show us that what we see is not all there is. As Marx said: "If there were no difference between essence and appearance, there would be no need for science." Or as Marvin Gaye, another great social thinker, famously put it: “believe half of what you see and none of what you hear.” Mr Hannan could learn something from him.

How to be wrong

“The tradition of all dead generations weighs like a nightmare on the brains of the living.” I was reminded of these words of Marx by the Telegraph’s report that some Treasury officials are pushing for tax rises and spending cuts in part because there is a “plausible” risk of a sovereign debt crisis.

Of course, Simon is right: there is no such risk as the Bank of England can, in extremis, buy up gilts. Certainly, financial markets aren’t worried; the latest gilt auction saw record demand. And it would be foolish to begin austerity before the recovery is well-established.

Which only poses the question: why do intelligent people believe such silly things?

Part of the answer lies in selection effects. The interests of capital constrain policy options, and the rise of financial/rentier capital and decline of Fordist capital has increased pressure for easier monetary policy rather than looser fiscal policy.

This is compounded by the fact that the marketplace in ideas is failing. John Stuart Mill thought that “wrong opinions and practices gradually yield to fact and argument”. But for various reasons – not least being our media – this does not happen. Nick Robinson’s claim on the Today programme yesterday that "the money has to be paid back somehow" shows that the myth of the government as a household stays obstinately alive.

But there’s more to it than this. There are also powerful psychological mechanisms that cause the Treasury’s error – mechanisms which, of course, occur all the time in other contexts. Here are three.

Formative years.

Napoleon was right: “to understand the man you have to know what was happening in the world when he was twenty.” Those of us in our 50s remember talk of the government having to go “cap in hand to the IMF”. And we were educated at a time when real interest rates were high and so we thought fiscal policy was constrained both by the fact that high yields would cause debt to increase and by the danger that borrowing would raise interest rates and so crowd out private sector spending. Of course, we now live in a completely different world of a savings glut, negative real rates and dearth of investment. But it’s hard for our minds to fully adapt. Marx was right; they are shaped by the past, not just the present.

We have good empirical evidence here from another context. Erin McGuire and Ulrike Malmendier (pdf) have both shown that our attitudes are disproportionately shaped by how the economy appeared to us in our formative years. People who suffered hard times, they show, invest less in equities even decades later. The distant past thus unduly influences behaviour today.

Bayesian conservatism.

We hate admitting that we were wrong. We therefore stick to our prior beliefs more than we should. If you sympathised with post-2010 austerity, therefore, it’s hard to admit you were wrong even in the face of strong evidence.

Again, it’s not just Treasury officials, journalists and politicians who make this error. People make the same mistake even when there is big money at stake. One of the strongest tendencies in equity investment is the so-called disposition effect; people hold onto badly performing shares because selling them would mean admitting – if only to themselves – that they were wrong.

Deformation professionelle.

Our professional training doesn’t just give us skills. It also inculcates particular biases into us – ways of seeing the world which are only partial. For decades, the Treasury’s role has been to watch the pennies – and in fairness somebody has to. This can easily lead to the belief that the pennies must be watched even when thy don’t need to be – a tendency reinforced by bureaucrat’s habit of mistaking bureaucratic convention for objective reality. And it is further reinforced by our reluctance to abandon ideas on which our career is built. As Upton Sinclair said, “It is difficult to get a man to understand something, when his job depends on not understanding it.” We apply the sunk cost fallacy to our beliefs.

Again, though, Treasury officials are not unusual here. Economists tend to over-estimate the role of financial incentives; lawyers over-estimate the role of the law as an agent for addressing social problems; and as for engineers…(pdf).

My point here is that it is incredibly easy to be wrong. The three mechanisms I’ve described here are powerful and ubiquitous. You can no doubt think of many other ways in which they apply – not least to me. This makes it all the more important that in politics we have filtering mechanisms which weed out errors. Our problem is that not only do we not have such mechanisms but that too often we have the opposite – ones that select not against error but in favour of it.

Technocrats & class

Are centrists even more utopian than socialists? I’m prompted to ask by a passage at the end of Anne Case and Angus Deaton’s Deaths of Despair. They write:

We believe that capitalism is an immensely powerful force for progress and for good, but it needs to serve people and not have people serve it. Capitalism needs to be better monitored and regulated, not to be replaced by some fantastical socialist utopia.

This comes after 260 pages in which they document how American capitalism has recently been a force not for progress and for good, but for mass social murder. They describe how the collapse of demand for unskilled labour has caused “the loss of meaning, of dignity, of pride, and of self-respect” and so led to tens of thousands of needless deaths of despair among the white working class – from suicide, alcoholism and drug abuse. The pharmaceuticals industry, they say, is “profiting by destroying lives” – not only through its over-prescription of opiods but because in forcing up the cost of health insurance it prices the low-paid out of the labour market.

How, then, can they believe in the face of their own evidence that capitalism is a force for good?

The answer is that centrists are prone to a form of utopianism, of wishful thinking.

They believe that reasonable policies and institutions could constrain capitalism’s rapacious and murderous tendencies and so make it a force for good. What this fails to see is that the same rapacity that makes capitalism a force for bad also forbids such change. Any child could think of a better healthcare system than the US’s; just look at any other advanced country. The US does not have such a system not because of a lack of intellect but because of the power of capital. As Case and Deaton show, the healthcare industry spends over £500bn on lobbying, and employs five lobbyists for every one Congressman.  

Lobbying, though, is only one of several levers that capital has over the state. The prospect of well-paid jobs after they leave politics incentivizes politicians to do capitalists’ bidding whilst in office. Blackrock isn’t paying George Osborne a fortune for his expertise; it is doing so to show finance minsters around the world the rewards of playing by the rules.

There’s also ideology. Capitalism (or indeed any social system) endogenously generates beliefs which help sustain its power structures, a process reinforced by the media: John Jost calls this system justification (pdf).

And then there’s plain deference. As Adam Smith wrote:

We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous

And of course, there are also economic levers. Governments feel the need to preserve business confidence in order to create jobs, which of course constrains its policy-making.

Given all these channels, a finding (pdf) by Martin Gilens and Benjamin I. Page should not surprise us:

Economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence

Pablo Torija Jimenez shows that this is true in most developed economies.

The power of capital over the state has not always been so malign. In the three decades after WWII, there was good evidence for Deaton and Case’s faith. Capitalism did indeed deliver full employment and rising wages, and there was a modicum of equality: the share of US incomes going to the 1% was barely half what it is today.

The Golden Age of capitalism was not, however, the product of mere goodwill. It was the result of material interests. Fordist capitalism required domestic mass markets, which required highish wages and full employment. And the threat of communism forced capitalists to prevent discontent. Yes, the US never had a large socialist party. But it did once have something nearly as good - a fear of socialism. Capitalism was kept tolerably decent by what j.K. Galbraith called countervailing powers. 

Today, though, this has changed. Capitalism has become more extractive and financialized, requiring high margins and cheap money more than mass markets. General Motors needed a large well-paid working class; Goldman Sachs, not so much.

The murderous power of the US healthcare industry and the vote for Brexit are both, in their different ways, signs of the victory of regressive capital.

Today’s capitalism, then, rules out the humane policies favoured by Case and Deaton, and thus refutes their optimism. Jeremy Cliffe recently asked “why the Anglo-Saxon model keeps going so wrong.” It’s because the dominance of extractive capitalism over the state precludes good technocratic politics.

In saying this, I am not making an original point. I’m merely echoing what Kalecki said (pdf) in 1943. He noted that economists knew technically how to achieve full employment, but feared that capitalists would oppose such policies:

The maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders. Indeed, under a regime of permanent full employment, the 'sack' would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow…’Discipline in the factories' and 'political stability' are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the 'normal' capitalist system.

“The assumption that a government will maintain full employment in a capitalist economy if it only knows how to do it is fallacious” he said.

Granted, he was wrong for 30 years after writing that. But the point is bang on today. Which is why Case and Deaton are missing something important. Good policy doesn’t require merely technical know-how. It requires the right material conditions, the right power bases. It is these, rather than technical know-how, that are lacking.

Case and Deaton are of course not alone in this error.  Let’s take just two recent examples, though you can no doubt think of many more. Layla Moran calls for a universal basic income. Such an income – if meaningful – would empower workers to reject bad jobs. But Ms Moran does not ask whether this is compatible with an extractive capitalism which wants a mass supply of cheap and quiescent labour. And Nick Cohen rightly lambasts our government of charlatans and dilletantes without asking whether this is the product not merely of individual bad character but rather of the nature of British capitalism: it prefers incompetents to anybody who challenges the system.

But why is the error so common among highly intelligent people?

I suspect what we have here is an example of schools functioning inadvertently as what Louis Althusser called ideological state apparatuses. At impressionable ages we are brought up to believe that success comes from knowledge and intellect. We thus believe this even in contexts where it is wrong. We’d be better prepared for politics if teachers gave top marks not to the brightest students but to the school bullies.  

It’s in this context that many of us applaud Corbynism. It mobilised an albeit-modest countervailing force to extractive capitalism – a base of renters, public sector workers and immaterial labour. Whilst this wasn’t sufficient for electoral victory, it did help pressurize the government into relaxing austerity.

The left realized that good, sensible decent technocratic policies require not just expertise but a material base in the form of particular types of class power and interests. And in the UK and US, this base is missing. In failing to realize this, centrists are too naïve.