Stumbling and Mumbling

Capital's political power

The Tories are corrupt. That’s the message of handing out PPE contracts to government cronies; Cameron’s lobbying for Greensill; the murky financing of Johnson’s home “improvements”; and Robert Jenrick’s doing the bidding of Tory donors. All this, says Grace Blakeley, highlights the problem of “politicians and business people being in each others’ pockets.”

All this, however, is only part of the story. Even if our politicians were honest and even if the media were unbiased capitalists would still have disproportionate (pdf) power over government. Grace is right to say that “our ‘democracy’ works for the powerful, not the people.” But this is due not to the shortcomings of particular individuals, but to systemic forces.

One of these was pointed out by that great left-wing economist Adam Smith. We have, he wrote, a “disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition”:

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. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent…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.

Gordon Brown – a more honest man than his successors – was prone to this. He praised top bosses as “wealth creators” and courageous leaders, inviting several to become ministers or advisors, such as Mervyn Davies, James Crosby, Shriti Vadera and David Freud.

The financial crisis and decade-plus long stagnation in productivity have of course shown that bosses in aggregate do not have the especial expertise Brown imputed to them. But the deference continues. If you listen to pretty much any 7.20 interview on Radio 4’s Today programme you hear bosses being interviewed as if they were impartial (even heroic) experts, whereas trades unions are portrayed as sectional interests.

It’s not just politicians and journalists who are deferential, though. So too are voters. How else to explain their belief that the Tories are economically competent when the truth is that they are criminally stupid?

Such deference amplifies a separate lever that capitalists have – business confidence. This, it is believed, is essential for investment and job creation. And so, wrote Michal Kalecki, “everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.” Hence the success of demands for low corporate and top tax rates.

There’s a third lever – ideology. John Jost has written of system justification theory (pdf), which he defines as the “process by which existing social arrangements are legitimized, even at the expense of personal and group interest.” This works through many mechanisms. There’s a form of anchoring (pdf) effect: Kris-Stella Trump shows how our perceptions of what’s fair are heavily influenced by the existing distribution of income. There are reference group effects: we compare ourselves to those around us, so many low-wage workers resent benefit claimants more than rich bosses. Then there are status quo biases and the just world illusion – mechanisms whereby we tolerate or even deny existing injustices.

Related to this is an asymmetric noise effect. As Amartya Sen pointed out, the very worst off are often “more easily reconciled to deprivations than others reared in more fortunate and affluent circumstances” (Ethics and Economics, p45). And so they make less noise than the wealthy, even if the latter’s complaints are trivial or arise from narcissistic over-entitlement.

I’ve no doubt that our media magnify these ideological biases towards capital. But I’m not sure they create them. One reason I say this is that we see the same cognitive biases that dispose voters to accept inequality in other domains such as the stock market. For example, analysts’ forecasts for a firms’ earnings growth are wrongly anchored (pdf) by the industry average growth, and the same reference group effect that causes people to punch down or across rather than up might help explain where there is often no risk-reward trade-off in finance. It has long puzzled me that when I write about cognitive biases in stock markets I’m seen as an intelligent technocrat but when I discuss the same ones in politics I become a loony Marxist drivelling about false consciousness.

None of this is to say that it is always a terrible thing that capital has undue sway over politics: sometimes the interests of capital and labour coincide. Our problem is that, in recent years, it has been the most backward segments of capital that has had most influence – rentiers rather than genuine entrepreneurs.

My point, though, is that the political power of capital over governments is not merely the result of cronyism and corruption. It is not therefore something to be cured simply by electing decent, honest people – although this job seems too much for the British electorate. If we are to have genuine democracy – in the sense of equality of political power – we need structural change.

On selection mechanisms

Market research is vital. Had the breakaway six done some, they’d have known it was an unpopular idea and so wouldn’t have destroyed their bargaining power with UEFA and their (in some cases tiny anyway) popularity with fans.  

Market research is a menace. Sir Keir Starmer’s concern with focus groups is creating timidity and a lack of direction. It’s causing him to reject Wayne Gretzky’s advice to skate to where the puck is going to be rather than to where it has been. Henry Ford never actually said “if I had asked people what they wanted, they would have said faster horses.” But it captures a limitation to how much we should listen to market research.

Which of these paragraphs is correct?

Both. What we have here is an example of Niels Bohr’s saying: the opposite of a great truth is another great truth.

We should think of all decision-making systems – be they corporate management, research methods, government regulation, our own mental habits and so on - as selection mechanisms.

Sometimes, such as in politics, these selection mechanisms select the worst, leading to inadequate politicians and bad ideas. Other mechanisms, though, can select against the worst whilst not necessarily selecting the best. I suspect this is true of market research. It’s perfectly possible that market research would have told the breakaway six they were backing a turkey whilst at the same time not telling Labour what will win most votes: one reason for this could be that people don’t actually know their preferences, and certainly not their future ones.

If this is the case (and this post is not really about that) then what we have here is one of a set of decision-making systems which function better at weeding out egregiously bad results than they do as selecting for the best ones.

Perhaps the best-known example of this is the US constitution. Its function is more to protect against tyranny than it is to ensure the best possible government, which might on occasion require a more activist state than the constitution permits.

Another example is Friedman’s idea (pdf) of monetary policy. The best it can do, he thought, is to “prevent money itself from being a major source of economic disturbance.” It cannot itself achieve really good things such as lasting full employment or rapid growth. That requires the working of “those basic forces of enterprise, ingenuity, invention, hard work, and thrift”. Friedman, I think, was too optimistic about the extent to which monetary policy would facilitate the latter. But the point is that, for him, good monetary policy was mostly “a negative proposition: avoid major mistakes” – advice which, admittedly, his epigones did not wholly follow.

Yet another example comes from my day job. There’s a lot stock-pickers can do to reduce the chance of bad outcomes such as avoiding the recency bias and disposition effects, knowing the edge of one’s competence, or not trading too much. These rules reduce the chance of us losing a lot. But they don’t much help in picking the best stocks – not least because, as Hendrik Bessembinder has pointed out, these are only a tiny fraction of all the stocks on the market.

A further example is medical regulation. Demanding that drugs meet stringent safety standards before coming to market can prevent catastrophes. But this comes at the expense of delaying the roll-out of a vaccine that would allow life to return to normal. In this case, procedures that select against bad outcomes can also impede good ones.

In his new book, Economics in One Virus, Ryan Bourne claims this is true generally.  Regulations, he says, “restrict businesses and individuals’ adaptability to new conditions – they curb within-market innovation.”

Selecting against bad outcomes, then, is different from selecting for good ones. And indeed, doing the one can sometimes actually impede the other. Neoliberal management of universities, for example, has probably done a good job of selecting against academics who are idle drunks, but given the replication crisis – incentivized by the pressure to publish – it’s done less well at selecting for good work.

Which selection mechanism we should adopt depends upon context: what would have worked for the breakaway six (arguably) doesn’t work for Starmer. As Edmund Burke said: “The circumstances are what render every civil and political scheme beneficial or noxious to mankind.” If you’re running a nuclear power station your focus should be upon avoiding worst-case outcomes, whereas in creative industries mechanisms should instead select more for best-case ones: this entails trade-offs because, as Dan Ariely has shown (pdf), dishonesty and creativity are often two sides of the same coin.

My point here is simple. We must ask of any decision-making system – that is to say, any power structure – what does it select for, and what does it select against? Yes, this is true of government regulation, but it is equally true of corporate management and political processes.

Capitalists against competition

Capitalists hate competition. That’s the message of plans by several big clubs – as well as Sp*rs – to form a “super” league in which they’ll be protected from the danger of relegation or from competition from emerging teams.

The smarter capitalists have of course long known that profits come from avoiding competition. Warren Buffett advises shareholders to look for companies with “economic moats” – things that protect them from competition. And Peter Thiel says start-ups should aim to become monopolies. “Competition is for losers” he says.

But here’s the thing. Striving for monopoly is by no means always a bad thing. The pursuit of brand power – one of Buffett’s moats – causes firms to try to make high-quality products consumers can trust. The urge for more market share causes them to undercut rivals and so keep prices low. Or the desire to win the natural monopoly that comes from having a dominant platform business leads firms such as Facebook or Twitter to give away services.

In ways such as these, capitalists’ attempts to overcome competition can work for everyone’s benefit.

But, but, but. This is only part of the story. Proposals for a breakaway league remind us that there are more malevolent ways of seeking to over-ride competition. Adam Smith famously saw one of these:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. 

We can add to this the pursuit of restrictive patents and copyrights; driving down of wages and working conditions; or lobbying governments for special favours.

Which poses the question: what can be done to ensure that capitalists strive for monopoly in benign rather than malign ways.

Changing ownership is not always the answer. Yes, there’s a case (pdf) for football clubs to be run by fans. But accountancy firms have long been worker-owned, and few people pretend that business is a model of a well-functioning market. This isn’t to say there’s no case for worker ownership – there definitely is. It’s just that coops’ many merits do not include being a magic bullet for producing the right kind of competition.

Nor, I suspect, are laws and regulations. Technocrats often forget that the law is endogenous. It is not imposed from outside by benign philosopher-kings, but is instead prone to being captured by capitalists. As Pablo Torija Jimenez has shown, the state serves the interests of the rich.

A third possibility – proposed for example by Jesse Norman in his book, Adam Smith: What He Thought and Why it Matters – is for capitalists to have the right kind of social norms, a sense of fair play. But of course, if they ever had such norms, they no longer do so.

Which leaves one other option – countervailing power. Strong trades unions in the post-war period, for example, not only prevented wages (of white men at least) being egregiously cut but also limited bosses’ rent-seeking.

If we are lucky, such countervailing power will kill the European super league. If enough players and managers resist it, along with fans, then club owners might cave in.

I’m reminded here of something Luigi Zingales has said. He points to what happened in 1994 when shareholders tried to stop Maurice Saatchi giving himself a lot of share options. He flounced off, taking with him clients and colleagues. The lesson of this, said Zingales, is that formal ownership is not the same as control. In the same way, Fenway Sports Group might formally own Liverpool FC but if Jurgen Klopp and some players were to oppose a super league, could they really force the club into it?

There’s no point making a firm prediction here: we’ll find out soon enough.

Instead, the point is that capitalists’ hatred of competition sometimes works for the public good and sometimes not. Which it is – and whether non-capitalistic forms of ownership can do better – depends upon context and environment which differ from industry to industry, place to place and time to time. It does seem, though, that recent years have seen these contexts change for the worst.   

On generational difference

There’s been a little pushback to this claim by Ezra Klein, but I suspect there’s a lot in it:

I’ve been struck by the generational divide within the Democratic Party. Washington is run by 20- and 30-somethings who run the numbers, draft the bills, brief the principals. And there is a marked difference between the staffers and even the politicians whose formative years were defined by stagflation, the rise of Reaganism and the relief of the Clinton boom, and those who came of age during financial crises, skyrocketing personal debt, racial reckonings and the climate emergency. There are exceptions to every rule, of course — see Sanders, Bernie — but in general, the younger generation has sharply different views on the role of government, the worth of markets and the risks worth taking seriously.

We have lots of evidence that our formative years can shape our perceptions many years later. For example, Ulrike Malmendier has shown that people who experienced recession in their youth own fewer (pdf) equities than others even in old age; that CEOs who saw the Great Depression run their companies more conservatively (pdf) than others; and that FOMC members (pdf) who saw higher inflation when young and impressionable are more likely to be hawks. And Erin McGuire writes:

Individuals who begin their lives by observing an economic downturn remain pessimistic and risk averse with respect to investments over the course of their lifetimes.

Napoleon, then, was correct: “to understand the man you have to know what was happening in the world when he was twenty.”

This, I suspect, bears upon the debate about how big a threat is inflation. Oldsters (like Larry Summers?) whose formative years saw high inflation are more worried about it now than are the (western) under-40s who have never experienced it.

This is consistent with David Hume’s thinking. What we see when we are in our teens and early 20s are impressions, things which enter our mind with “most force and violence.” What happened before then is what we read about in books, and what happens after are events which have less impact on our crusty minds. They are ideas, which are mere “faint images”.

Now, put yourself in the shoes of someone who is, say, 30. The financial crisis happened when you were in your late teens, and your subsequent years have seen stagnant real wages, unaffordable housing and high student debt. The impression you get is that capitalism doesn’t work. Of course, some older folk will tell you that there was a time when capitalism was functional, but for you this is a mere idea, a faint image.

By contrast, someone in their late 40s might well have had the collapse of communism make a forceful impression on them, whilst they saw affordable housing and years of economic stability. They have a much more favourable impression of capitalism therefore.

But of course, not all of us wrinklies have such an impression. My formative years were ones of violent class struggle, industrial decline and the deep recession and mass unemployment of the early 80s. Hence my sympathies with the likes of Grace Blakeley and Aaron Bastani.

Many of my contemporaries as teenagers had experiences like this:

Father (who left school during the full employment of the late 50s): Get off the settee and get a job.

Son: There aren’t any jobs.

Father: There are if you look.

Much effing and jeffing by both parties. Son slams door and walks out – to visit his grandad who, having grown up in the 1930s, knows his predicament.

Of course, not all 50-somethings share the formative experiences of my youth. David Cameron and Boris Johnson are around my age. But the 1980 recession looked very different from Eton than it did from a single-parent terraced house in inner-city Leicester. Napoleon’s point still holds. Class matters, as well as age.

We could extend the point. One reason for the generational divide over Brexit is that older folk who came to maturity before we joined the EU have the impression that we can do well outside the EU, whilst younger folk who have known nothing but EU membership see no reason to rock the boat.

All of this (as you'd expect) is to echo Marx:

The mode of production of material life conditions the general process of social, political and intellectual life. It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness

The conditioning, however, is not simply mechanistic: it’s not that this year’s economic circumstances alone influence our thinking, but rather that those of our formative years do so.

This helps explain why some bad ideas – such as a belief in fiscal rectitude – linger on after their material justification has vanished. We do not sufficiently update the thoughts acquired in our formative years, but rather are Bayesian conservatives who cleave to our priors. OK, boomer?

Prince Philip & the communist ideal

One unintended and unremarked effect of the eulogies to Prince Philip is that they have reminded us of Marx’s vision of communism.

What I mean is that several of his admirers describe him as a “renaissance man” on account of his wide range of interests.

This, however, is an example of a common error – of ascribing to agency what is in fact the result of economic forces.

Prince Philip could afford to pursue so many different passions because the day he married the Queen he was freed from what Marx called “the dull compulsion of economic relations.” For most of the rest of us, however, this compulsion forces us to specialize, to develop just one skill to the detriment of other interests. Capitalism rests upon the division of labour. But as Adam Smith saw, this can destroy us:

The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging.

A man’s mastery of one skill, said Smith is “acquired at the expense of his intellectual, social, and martial virtues.” And there’s plenty of evidence for this. Think of William Shockley, Bobby Fischer, James Watson, Larry Summers, Morrissey, Richard Dawkins….

In fact, the early history of capitalism was marked by workers’ fierce reluctance to devote long hours to doing just the one thing. Sidney Pollard (pdf) and E.P. Thompson (pdf) have documented how capitalists strove to instil an unnatural work discipline into their employees. As Pollard put it:

Men who were nonaccumulative, non-acquisitive, accustomed to work for subsistence, not for maximization of income, had to be made obedient to the cash stimulus, and obedient in such a way as to react precisely to the stimuli provided.

Of course, working conditions and hours have improved since Smith’s day and many people have internalized the capitalist work ethic. But not all of us. Research by Alex Bryson and George MacKerron has found that even people in good jobs are more miserable whilst at work than they are in any other activity bar being ill in bed. Which is why thousands of those who can afford to do so opt out of the rat race to do what Prince Philip could do – pursue a variety of interests. One reason why I’m looking forward to retiring (next year, I hope) is that I want to spend more time reading, gardening, learning music and learning Italian.

Which is where Marx comes in. His vision of communism was one in which the division of labour no longer suppressed our development as Smith thought it did. (Marx, of course, had read Smith much better than have today’s admirers of him):

As soon as the distribution of labour comes into being, each man has a particular, exclusive sphere of activity, which is forced upon him and from which he cannot escape. He is a hunter, a fisherman, a herdsman, or a critical critic, and must remain so if he does not want to lose his means of livelihood; while in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic.

You might object that Marx’s vision was one of a society of (surprisingly bucolic) dilettantes. That misses the point – that in communist society you will be able to pursue just one activity if you want: you’ll be free to choose.

Yes, free. Marx’s main beef with capitalism was not so much that it was unfair but that it generated unfreedom by alienating us from our nature. As William Clare Roberts puts it, capital “bends labour power to an alien and unnatural end.” Marx, says Clare Roberts, was a theorist of freedom.

Those of us who are rich enough can step away from the alienating and repressive division of labour by retiring early – although of course not without damage. But is what’s possible for a privileged few possible for all?

Only in a sufficiently developed economy. Marx thought that a particular level of affluence was necessary for communism, and that whilst capitalism could provide the potential for this affluence, it would not fully realize that potential and that there would come a time when capitalism ceased to develop productive forces but instead held them back. It would, he thought, require communism to allow that potential to be realized for everybody. Aaron Bastani’s “fully automated luxury communism” is in this tradition.

Whether this is feasible is of course another matter. The answer lies in the outcome of the race between technical change and diminishing returns and rising rents, and personally I think forecasting the former is a mug’s game.

For my purposes, though, this isn’t the point. I merely want to point to a nice irony – that Prince Philip’s eulogists have, perhaps inadvertently, made the case for Marx’s vision of communism.

The need for institutional brains

“The trouble with you, son” said Bill Shankly to a young player “is that your brains are all in your head.” I was reminded of this line from the great man by reading Ian Leslie’s Conflicted, on how to have more productive arguments.

His advice is good: define exactly what the disagreement is about; make your interlocutor feel good and secure; acknowledge your own uncertainties; be less tribal; and so on.

In the heat of argument and when the teacups are flying, however, it is easy to forget these principles. We then have what the ancient Greeks called the problem of akrasia, of lack of self-control. Just because we know the right thing to do does not ensure that we’ll actually do it; even self-confessed “moderates” are apt to forget their own advice on how to argue well.

This is what Shankly was getting at. He wanted players who were so well-drilled and who had such muscle memory that they did the right things in the heat of battle instinctively, without thinking. Ditto musicians, who must know a piece so well that they can perform it without conscious deliberation.

In such cases, we need our brains not in our heads but in our feet or fingers.

But brains need not and should not be confined to our bodies. They can, and should, and sometimes do, reside elsewhere.

One place is in our habits. I invest into tracker funds by direct debit each month. Most of my investment is done without thinking. 

Strictly speaking, this isn’t optimal: stock markets aren’t fully efficient and tracker funds can be beaten by momentum and defensive stocks (pdf) (but, I suspect, not by any other strategy). Implementing such strategies, however, would require me to think. And if I did that I’d fall prey to the gazillion cognitive biases that I warn IC readers against.

My habit, therefore, saves me from error in the same way that Ulysses tied himself to the mast of his ship to save himself from steering it onto the rocks. Government who have made their central banks operationally independent have done a similar thing: in renouncing control of interest rates they have given up the temptation to change them for political rather than economic reasons.

In ways such as these, we protect ourselves from akrasia by taking our brains out of our head and placing them into habits or institutions.

These aren’t the only examples of intelligence being embedded in institutions. No single individual knows how to build a jet plane. But Boeing does. Good companies have brains that no individual has. This is organizational capital. If there is a justification for the high valuations on big tech companies, it lies in this capital. I’d suggest that the Tory party is an example of this. Each individual in the party is cognitively limited. But the party as an organization has a fearsome ability to reinvent itself and win elections.

Companies aren’t the only institutions in which intelligence can exist. Take this observation from P.J. O’Rourke in 1998:

Why do some places prosper and thrive while others just suck? It's not a matter of brains. No part of the earth (with the possible exception of Brentwood) is dumber than Beverly Hills, and the residents are wading in gravy. In Russia, meanwhile, where chess is a spectator sport, they're boiling stones for soup.

The difference, of course, lies in institutions. The people of Beverly Hills have for decades had institutions which make best use of their limited brain-power, not least of these being moderately well-functioning markets. Russians, however, have not enjoyed these. Their tragedy has been (and still is) that their brains were all in their head.

This is why I can’t work up any enthusiasm for the idea that genetic editing could increase our intelligence. What we need is not more brains in our head, but in our institutions – ways of making better use of what intellect we have. Without such institutions, high IQ people merely become efficient rent-gatherers, to the detriment of society.

Which brings me back to Leslie. The question is: do we have the institutions which embed the principles he advocates?

I suspect not.

Yes, any well-run company should organize its meetings in a way to embed his ideas – and if they are not doing so already they should.

In public discourse, however, such institutions are absent. Any guest on one of the BBC’s many moron-yak shows who followed Leslie’s advice to show humility, introduce novelty or make their interlocutor feel good would probably not be invited back. Unproductive slanging matches are “good” TV and radio.

The point generalizes. Our “marketplace in ideas” is obviously broken. Not only does it not exclude bad arguments, or ones in bad faith, but it actually favours bare-faced lies and (to paraphrase Burke) the noise of half a dozen grasshoppers over the silence of thousands of great cattle,

What we have in public discourse is not the institutionalized intelligence that has made Beverly Hills or Boeing prosper, but institutionalized stupidity.

It need not be so. We could have institutions (pdf) of deliberative democracy such as citizens’ assemblies and rules about admissible evidence which would embed some of Leslie’s suggestions: “a set of agreed norms and boundaries that support self-expression”; not trying to control one’s interlocutor; establishing trust; valuing challenges to the consensus; ensuring that you understand your interlocutor; and so on.

But of course, a big reason why we don’t have such institutions is that our current media-political system suits those in power just fine.

And herein lies a problem. What does it mean to have a productive argument? It could be a way of reaching the truth. Or it could be a way of clearing the air so that colleagues and partners can get along better. Leslie’s book is aimed more at the latter: its subtitle is “Why arguments are tearing us apart and how they can bring us together.”

But there can be a trade-off here. The truth could be that your partner is a lazy lying cheat and you could do better for yourself. Sometimes, we’re better off not being brought together but rather ending toxic relationships – yes, cancelling people. I doubt that Leslie wants to have productive arguments with, say, anti-semites or fanatical Islamists.

Which leads me to a cynical thought. In a world of huge inequality of power in which we lack institutions which embed good rules of argument, there’s a danger that Leslie’s call for us to be reasonable merely means us accepting injustice, inefficiency and dishonesty.