"A great deal of ruin"

“There is a great deal of ruin in a nation” wrote Adam Smith in 1777, suggesting (possibly) that countries can cope with poor policies. These are wise words, in many contexts.

Take for example, the NAO’s claim that there is “likely to be considerable amounts of fraud and error” in the government’s furlough scheme and the Resolution Foundation’s estimate that the government has paid around £1.3bn to self-employed workers who in fact suffered no loss of income. No doubt this is sub-optimal, an element of ruin. But this is not in itself a decisive objection to the schemes. It was essential that people hit by the lockdown got quick support. And as the old saying goes: “Good, fast, cheap: choose two.” In choosing “fast”, the government sacrificed a little “cheap”. It incurred some ruin. But this, I think, was a reasonable choice*.

 To take another example, Tory MP Ben Bradley has claimed that free school meals vouchers are “effectively” a handout to a crack den and brothel. Even if this is true – and the evidence for it is less than overwhelming – so what? It is impossible, except at colossal administrative cost, to target help to the deserving poor and only the deserving poor. The question is what ruin do we want to incur – that of some help going to crack dealers, or that of some children going hungry? Many of us would prefer to err on the side of the former – and in an imperfect world we must err.

Economic policy entails trade-offs – a fact which holds even if there is no binding constraint (yet) upon government borrowing. For example, a small welfare state might incentivize people to find work, but it also imposes greater cyclical risk upon workers and indeed businesses. Or a vibrant market economy entails economic and social instability. We cannot avoid some element of ruin. Sometimes, we must choose which type of ruin to incur.

There’s another form of ruin – ignorance. Michael Story and Stuart Ritchie describe how experts were initially wrong about Covid-19, for example in resisting the use of masks and calls for an early lockdown. Again, though, this form of ruin is inevitable: the world is complex and unknowable. We must choose which errors to make, what ruin to incur. Where we might justifiably blame the experts is not so much for being wrong but for exaggerating their knowledge.

And where knowledge is unobtainable – as it often is about the future - optimization is futile. We can only satisfice – which entails (with hindsight) waste, or ruin.

All this applies to policy-making. But it is not just states that contain a great deal of ruin. So too does the private sector – as anybody who has worked in it will know. Nick Bloom and John Van Reenen have shown (pdf) that in all countries there is “a long tail of extremely badly managed firms.” Competition does not eliminate inefficiency. Ruin remains.

This is not just because there are all sorts of obstacles to strong effective competition such as excess regulation or rent-seeking. Even where competition is strong and incentives to succeed are sharp, people fall short of optimality. We know this from the economics of sport. NFL teams have punted too much (pdf) on fourth downs; ice hockey teams don’t replace their goalminders often enough when they are trailing; and golfers don’t put as much focus (pdf) into birdie putts as par ones.

Markets are a great technology. But they are not the devices for achieving optimizing that simple-minded Econ101 tells us.

We must not, however, think that ruin is necessarily a bad thing. It’s not. There’s a trade-off between optimization and resiliency. Redundancy (ruin) can give us the flexibility to respond to crises**. Had the NHS had more beds and doctors before Covid struck, it would have coped better – but at the expense of “wasting tax-payers’ money” in normal times. As João Ferreira do Amaral wrote (pdf):

There is I think a good case for keeping a system flexible to cope with surprise even if this mean more uncertainty and less efficiency.

There is, though, another form of ruin, of imperfection – the trivial fact that there are so many idiots in the world. It’s tempting to try to engage with these. But often wrong. As Tim Harford has shown, myth-busting often doesn’t work. Mill was wrong: wrong opinions do not “gradually yield to fact and argument.” In many cases – where the opinions are those of obscure cranks – we should just ignore them. Haters are gonna hate and twats are gonna twat.

Not only is it better for the level of debate if we recognise that there is a great deal of ruin in a nation, but it’s probably also better for our mental health as well.

* In fact, it also sacrificed some good. The RF points out that lots of hard-hit self-employed got nothing. For me, this is a less forgivable error.

** The converse is also true: in 2008 banks went bust because of their "optimized" portfolios. 

Comments

[Dipper]

'Michael Story and Stuart Ritchie describe how experts were initially wrong about Covid-19, for example in resisting the use of masks and calls for an early lockdown.'

This is hindsightism. I I forecast that the next throw of the dice will be a 1, and you forecast it will be 3, and the next throw is a 1, does that make me a better forecaster?

And there is no evidence that Lockdowns work either in the short or long term, and you have assigned no opportunity cost to Lockdowns in terms of maths due to cancer, heart disease, or suicides.

To be honest I expected better from you. Of all the depressing things about this pandemic the sight of non-scientists wading into scientific matters and making basic errors in logic is possibly the most depressing.

Science is hard. Unlike Economics and the humanities, there is a truth out there. That truth cares nothing for our opinions, is hard to discover, and is often stranger than we can imagine.

At the heart of science lies experiments. To conduct an experiment we need to have clear and unambiguously definitions of things to be measured, and accurate techniques to measure them. Nearly a year into this pandemic, we still have neither.

Take the PCS test. There is considerable evidence that the test picks up traces of the virus well after the virus has ceased to be viable in the host (see the Florence 3). Can you be sure that the accelerating cases are not just the cumulative effect of a steady increase rather than run-away instant case numbers?

And as of mid October the ONS was reporting no noticeable second wave in the death rate.

[rsm]

> where the opinions are those of obscure cranks – we should just ignore them.

But if the cranks get too popular, they must be censored, because our opinions are obviously better and if people aren't listening to us that means they are the problem and they must be protected from cranks for their own good?

Rather than waste time hardening our theories against cranks, we should just assume we are infallible and when cranks get too much attention we must deplatform them, because that is the easiest way to make everyone take our sacrosanct advice to ignore them?

[Nick Drew]

I'm often critical around here: but this a very good post. (Over our way, we often disuss the trade-off between optimisation** and resilience; between self-sufficiency and efficiency; between just-in-time and holding inventory. And we cite the same Adam Smith, too)

@ "in all countries there is 'a long tail of extremely badly managed firms.'"
I don't think we need to put it as strongly as that. If you've ever started up a new company with a great business model, it is often possible to start in hyper-efficient mode: e.g. (to take one illustrative dimension) all the staff hand-picked, highly motivated, self-starting, fully aligned. Then you get bigger. You hire as best you can, but slowly you start getting the inevitable bad hire, the person with not quite the right attitude or skills, bullshitters who get past your selecton process, people who turn out to be outright wasters etc etc. Before you know it, you have a middle-sized company with the usual frictions, inefficiencies and general dross, dragging down the performance you could theoretically achieve.

But: all these time-wasters are "making money", "doing something productive", "holding down a job" ... which overall represents a major societal benefit, even as it makes the founders of the company despair.

______
** of course, the key - as good regulators strive to achieve - is to have a metric for security of supply, too, so that the 'optimisation' can factor that in. It's a complex topic, but one in which a combination of better quantification + manadtory pricing-in of security risk can do better than just passive "all too difficult"

[Paulc156]

@Dipper "And there is no evidence that Lockdowns work either in the short or long term, and you have assigned no opportunity cost to Lockdowns in terms of maths due to cancer, heart disease, or suicides."

Opportunity costs? Do you think there will be spare beds and doctors to treat more cancer/ heart patients if we dont introduce measures to slow down infection rates? Or do you think we should simply refuse entry to hospitals for people suffering from accute covid symptoms so as to mitigate those cancer/heart patients?
I'm curious as to what you mean by no evidence that 'Lockdown measures work' even short term. Does reducing re-infection rate and consequently hospital admissions constitute 'working'? Only you give no preferred criteria by which to judge the claimed 'lack of evidence' for your definition of 'not working'. Too vague.

[ltr]

Failing to understand or acknowledge just how poor public health policy in the UK has been since January is distressing:

October 30, 2020

Coronavirus

UK

Cases   ( 989,745)
Deaths   ( 46,229)

Deaths per million   ( 680)

Germany

Cases   ( 517,720)
Deaths   ( 10,523)

Deaths per million   ( 125)

[ltr]

The disgrace and shame of the Tory government, but Labour, having ruined the socially dedicated Jeremy Corbyn, is as disgraceful:

October 31, 2020

Coronavirus

UK

Cases   ( 1,011,660)
Deaths   ( 46,555)

Deaths per million   ( 685)

Germany

Cases   ( 522,214)
Deaths   ( 10,543)

Deaths per million   ( 126)

[ltr]

That even Conservatives fail to be appalled at the shameful way in which a so-called Labour elite have tossed Jeremy Corbyn from the party is distressing to me. Such a decent socially conscious political leader should not ever be dismissed from a political party.

Labour leadership have ruined the party, have betrayed all Labour is supposed to stand for.

[Dipper]

@ Paulc156 "Do you think there will be spare beds and doctors to treat more cancer/ heart patients if we dont introduce measures to slow down infection rates?"

the issue is that Lockdown's don't appear to slow down infection rates beyond what social distancing and other more benign measures produce.

We know who is at risk, and where transmission happens. Much better to concentrate specifically on those areas.

[Sick of clown world]

"We must not, however, think that ruin is necessarily a bad thing. It’s not."

Spoken like a true communist.

[marku52]

"We know who is at risk, and where transmission happens. Much better to concentrate specifically on those areas."

Really? Do tell. That's my problem with Barrington. Protect the elderly, and let everyone else go free. How do we do that, when the kids come home and infect granny?

"First, we postulate a unicorn"

And notice, testing has been rising linearly, and cases went exponential. That is a clue....

[ltr]

Intolerable ruin, but we sadly allowed the Conservative and Labour elite to ruin the socially conscious-socially responsible Jeremy Corbyn:

November 1, 2020

Coronavirus

UK

Cases   ( 1,034,914)
Deaths   ( 46,717)

Deaths per million   ( 687)

Germany

Cases   ( 536,836)
Deaths   ( 10,601)

Deaths per million   ( 126)

[Dipper]

@ marku52

"Protect the elderly, and let everyone else go free. How do we do that, when the kids come home and infect granny?"

yes. Move granny. We are spending billions on T&T systems that will never work. I can literally walk round any town or city and point at the people who are at risk and the people who aren't. forcibly isolate the people who are at risk.

What is your problem with that? Consent? Civil Liberties? Those ships have sailed.

'testing has been rising linearly, and cases went exponential. That is a clue...'

The Florence 3 showed that the testing is not instantaneous but has a long period when it gives a positive reading. So if the spread is linear then you will pick up a cumulative measure which will grow roughly parabolically.

Other data does not indicate rapid growth. Working through the ratios of cases:hospitalisation:ICU:death requires us to have massive numbers of cases now to meet some of the projections. We will see soon that these projections are nonsense.

I challenge anyone to look at the figures for London and say what it needs right now is a lockdown.

[James Charles]

'The converse is also true: in 2008 banks went bust because of their "optimized" portfolios.'

Was 'this' the 'optimized portfolio'?

“As Axel Weber remarked, afterwards:
I asked the typical macro question: who are the twenty biggest suppliers of securitization products, and who are the twenty biggest buyers. I got a paper, and they were both the same set of institutions. . . . The industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them…” 1h. 10m. in.
http://www.lse.ac.uk/lse-player?id=1856

“The root problem of 2008 was a failure to recognize that the highly leveraged money center banks had used derivatives not to distribute subprime mortgage risk to the broad risk bearing capacity of the market as a whole but, rather, to concentrate it in themselves.”
https://equitablegrowth.org/misdiagnosis-of-2008-and-the-fed-inflation-targeting-was-not-the-problem-an-unwillingness-to-vaporize-asset-values-was-not-the-problem/

[LJC]

"There’s another form of ruin – ignorance."

This could easily be applied to businesses in the UK. If we look back to the Victorian era and even up to the mid-20th century, businesses were led by people who understood the business; they might be engineers (e.g. Charles Royce) or salesmen (e.g. Henry Rolls), but either way they understood the products they were making and selling. The middle of the 20th Century brought the accountants to the fore; people like Arnold Weinstock, who never knowingly overpaid for a business and made a practice of buying his competitors out of receivership. For a company as large as GEC was, it innovated relatively little, preferring to buy others' intellectual property using its massive cash reserves.

Compare the UK with Germany where the Mittlestand are still largely family-owned and true to the traditions of their founders, and the reason for the relative failure and success of their industries becomes clear.

Accountants need to be on tap, not on top.

[marku52]

"The Florence 3 showed that the testing is not instantaneous but has a long period when it gives a positive reading. So if the spread is linear then you will pick up a cumulative measure which will grow roughly parabolically."

Interesting point. Thanks. I still don't see how you are going to protect granny unless you are erecting hostels and forcing people into them, as well as aggressively testing the support (yes, they will need full support for the duration) staff.

[Paulc156]

@Dipper...you don't think the tests are any good. You don't think lockdowns do much...

Just because Serco have unending access to government cash doesn't mean they should continue to get it.

New Zealand, Australia, Japan, Thailand, Taiwan, Vietnam and China have virtually suppressed the virus...nostly by use of effective test and trace. In the case of New York it was lockdown. Clearly it works in the short term if it's administered effectively.

Hospital admissions are projected to be overwhelmed on current trajectory before Xmas. That's in London,including Nightingales and assuming all elective surgery is cancelled. In the South West, Armageddon is expected much earlier.
TINA springs to mind on the basis that enforced incarceration of over 65s is a non starter.

[George Carty]

@Paulc156

China did use mass incarceration to suppress the virus: in their case they incarcerated all those who tested positive or had a cough or fever, along with any contacts of such people. In fact they resorted to this approach precisely because their lockdown of Wuhan had failed (it only reduced R from 3.9 to 1.3)

All of the other Asia/Pacific success stories you mention never allowed the virus to become endemic in the first place: what screwed Europe and America over was the fact that a huge outbreak built up undetected in northern Italy in January and early February, and then easily spread across Europe's open borders.

[Paulc156]

@George Carly.
I get your point that once the virus is endemic without a good test track and trace then repeated waves of infection are inevitable without some sort of lockdown...as per Melbourne recently or New York before that and Germany right now. The Asian states more generally were better prepared due to previous experience with Sars.
However I'm hearing today on BBC radio about quick turn around tests ready to go in Liverpool that are showing false positives at 1 in a thousand levels so rendering Dipper's concerns 're Florence 3 redundant. With current advances it would be perfectly feasible to test entire populations 'locally' in short order and so long as financial support is given those required to isolate we could move to local regional lockdowns within weeks. Provided we remove Serco et al from their command and control monopoly.
Seriously, does anyone with an ounce of sense think the alternative of encarceration of entire over 65 population with full enforcement necessary to implement it would even be remotely feasible? I mean this demographic is overwhelmingly Tory and accounts for about 60% of Conservative Party membership. :)

[Hugh Mann]

A pity you closed the last thread, I was going to take issue with "economic growth gives us liberalism and demands for equality whilst stagnation and regress give us political reaction".

Since 1997, real GDP in the UK has risen 50%, if the St Louis Fed figures are to be believed.

Yet real male median wages in 2019 were lower than in 1997, while real house prices have doubled (or more).

The benefits of GDP growth have gone entirely to the top couple of percent.

If real median wages were 50% higher than in 1997 people would be a lot happier. It's slow immiseration that pisses people off.

There's a reason why you never hear the news talking about "standard of living" any more. Instead they talk about "the economy".

[Hugh Mann]

You could say the same about the States, where male median wages have been falling for more thamn 45 years.

https://www.brookings.edu/opinions/the-typical-male-u-s-worker-earned-less-in-2014-than-in-1973/

[ltr]

China did use mass incarceration to suppress the virus...

[ This is a vile, racist lie. Sickening, racist lying. ]

[ltr]

November 2, 2020

Coronavirus

US

Cases   ( 9,567,543)
Deaths   ( 236,997)

India

Cases   ( 8,266,914)
Deaths   ( 123,139)

France

Cases   ( 1,466,433)
Deaths   ( 37,035)

UK

Cases   ( 1,053,864)
Deaths   ( 46,853)

Mexico

Cases   ( 929,392)
Deaths   ( 91,895)

Germany

Cases   ( 560,586)
Deaths   ( 10,734)

Canada

Cases   ( 240,263)
Deaths   ( 10,208)

China

Cases   ( 86,021)
Deaths   ( 4,634)

[ltr]

November 2, 2020

Coronavirus   (Deaths per million)

US   ( 715)
Mexico   ( 710)
UK   ( 689)
France   ( 573)

Canada   ( 270)
Germany   ( 128)
India   ( 89)
China   ( 3)

[ltr]

November 2, 2020

Coronavirus   (Deaths per million)

Belgium   ( 1,011)
Spain   ( 775)
US   ( 715)
Mexico   ( 710)

UK   ( 689)
Italy   ( 646)
Sweden   ( 587)
France   ( 573)

Netherlands   ( 435)
Ireland   ( 387)
Switzerland   ( 277)
Canada   ( 270)

Portugal   ( 254)
Luxembourg   ( 254)
Germany   ( 128)
Austria   ( 128)

Denmark   ( 125)
India   ( 89)
Finland   ( 65)
Greece   ( 62)

Norway   ( 52)
Australia   ( 35)
Japan   ( 14)
Korea   ( 9)

China   ( 3)