Stumbling and Mumbling

The minimum wage dilemma

Should the national living wage rise to £15 an hour? For me, it’s a dilemma because there are two competing and powerful perspectives.

The economic perspective is sceptical. Econ 101 says a higher price means lower demand, so a higher minimum will lead to job losses or – just as importantly but often overlooked – cuts in hours.

Granted, Econ 101 might be wrong. Where employers have monopsony power, a higher minimum wage can lead to employment actually increasing.

Which leads us to the thorny question of empirical evidence. Here, we have a problem. It’s possible that previous rises in the minimum wage have had little effect upon labour demand simply because they have been small – enough to generate favourable effects by reducing monopsony but not so big as to have the effects predicted by Econ 101*. It’s like taking paracetamol; one or two will make you feel better, but it does not follow that a whole bottle will make you even better.

What we need, then, is evidence from big rises in minimum wages. Much of this comes from Seattle, which gradually raised its minimum from under $10 an hour in 2015 to $15 this year.

Sadly, this evidence is mixed. Some has found (pdf) no adverse (pdf) employment effect (pdf), whilst other research has found that hours (pdf) worked fell and prices rose. And other research suggests that big rises rises in minimum wages do cut jobs (pdf) even though small ones don’t.

Net, the economic perspective, I suspect, says that a £15 minimum wage would be a risky experiment.

But it is not the only perspective. There’s another one. It says that pay is not just a matter of technical skill and effort – much minimum wage work requires lots of both – but of power. “Skill” is a social construct. People are low paid because they lack power and because society grossly undervalues some types of work – not least the sort traditionally done by women and minority workers. And because we tend to equate people’s worth with the worth of their labour-power, this means that some people are devalued. A higher minimum wage is an attack upon these inequalities.

Herein lies my problem. If we take only the economic perspective we are guilty of capitalist realism, of failing to imagine an alternative to inequalities. But if we take only the latter perspective, we are guilty of at best wishful thinking and at worst recklessly endangering the livelihoods of the worst off.

So, can we combine both perspectives?

Perhaps.

Part of the answer is to regard a higher minimum wage not as a standalone, isolated technocratic fix but as one of a suite of policies to improve life for the worst off.

The most important of these is to run the economy hot, to achieve genuine full employment. One reason why some of those Seattle studies have not found adverse effects of jobs is that the economy was booming as the minimum wage rose. As Dan Davies has said, whatever your preferred social policy objective is, full employment is a good way to achieve it. But we should add into the mix in-work income support (say through a basic income) to mitigate any loss of hours and stronger trades unions. Personally, I regard minimum wages as a second-best, a means of achieving what would in a better world be done not through state diktat but collective bargaining.

There’s something else. What we also need is a revalorization of work, that recognizes the worth and merit of those who clean up after us. We don’t try to employ bosses or TV presenters on the cheap, so why should we think we can get social care or meals out on the cheap?

Of course, all this poses deep questions. How – if at all - can we effect such a big cultural change? Are higher wages in the interests of capital (because they might raise aggregate demand) or not – that is, is wage-led growth feasible? And how might we counter the potential inflationary impact of full employment and higher wages, for example by spreading profit-sharing?

Frankly, I don’t know the answer to these questions. But I do know two things. One is that they should be asked and answered by cleverer people than me. The other is that we should at least acknowledge the dilemma created by that clash of perspectives.

* Even this might not be wholly true, though. A recent paper (pdf) found that “employment growth from 2015 to 2018 was in the region of 2 or 3 percentage points lower in firms affected by the introduction of the National Living Wage.”

What Starmer misses: the C-word

One word is notably absent in Sir Keir Starmer’s recent essay – capitalism.

Our most successful politicians have had something to say about this – whether it be Thatcher’s belief that capitalism needed low inflation and weak unions if it were to thrive, or Blair’s belief that governments and people needed to adapt to capitalist forces of globalization. Starmer, however, has no such analysis.

For example, he notes that, “entering the 2020s, Britain faced stagnant wages, vast inequality and the slowest growth in living standards since the second world war.” But he attributes this solely to “Tory failure”. Which is dubious. It omits the fact that slower growth in output and productivity – and the symptom thereof, lower real interest rates – are global phenomena. Larry Summers didn’t (re-) coin the phrase “secular stagnation” to describe bad policy in a single country.

Of course, we can debate the causes of this: falling profit rates, an ageing population, lack of monetizable innovations; depressed animal spirits as a legacy of the financial crisis; and so on. But Starmer seems unaware there’s even a debate. Which leads to this:

Business is a force for good in society, providing jobs, prosperity and wealth. But business has been let down by a Tory government.

But is it less of a force for good than it used to be? Stagnation, job polarization and deprofessionalization all mean that capitalism has become less good at providing jobs and prosperity for many people. To some extent, it is the Tory government that has been let down by business, not just vice versa.

Failing to ask this question leads to this:

A Labour government would provide a level playing field, a skilled workforce and a modern infrastructure, from transport to public services.

This is the politics of Prince: partying like it’s 1999. But capitalism has changed since then. We now need more than just good infrastructure and rules of the game to stimulate growth. Starmer shows no awareness of this possibility.

Which brings us to another omission. Starmer decries the nationalism and other “identity-based politics in the Western world that has done immense damage to the progressive cause.” But he fails to ask: why has such politics gained traction only in recent years? In the 90s and early 00s the Tories’ obsession with Europe led them into electoral oblivion. So why has it become so effective recently?

The answer – as regular readers will be bored of hearing – lies in Ben Friedman’s The Moral Consequences of Economic Growth. He shows that economic stagnation fuels illiberal nationalism, and sometimes worse. Populism is one more consequence of capitalist failure. If you don’t appreciate this, your critique of it is mere narcissistic moralizing: “why can’t people be reasonable like ME?” The cure for populism is economic growth. But if stagnation is due to capitalist failure as well as to Tory failure, this needs some kind of critique of capitalism – which Starmer lacks.

Here we run into another problem. Capitalism sets constraints upon what governments can do. These constraints operate in countless ways: lobbying; ownership of the media; offering ex-ministers well-paid jobs to incentivize them to behave whilst in government; controlling business confidence; emergently creating an ideology (pdf) which supports the existing order; and so on. These mechanisms mean that, as Pablo Torija Jimenez has shown, governments serve the interests of the 1%.

Good policies require much more than the goodwill and intellect of politicians. They require a material base, a particular set of class interests and balance of class power. We had this in the post-war era: a strong union movement and capitalist class that required a mass consumer market made full employment politically feasible. One challenge for social democratic politics is how to recreate such interests. In the absence of an analysis of capitalism, you cannot do this. Without it, though, your politics is just moralizing.

In lacking a critique of capitalism Starmer is actually more backward than capitalists themselves. One thing we’ve seen this year is the acquisition of companies such as Morrisons, Aggreko and Meggitt by private equity firms. This is happening in part because, as Michael Jensen famously pointed out, dispersed equity ownership is inappropriate for many firms – which is why we’ve seen a long-term decline in the numbers listed on stock markets.

But if capitalists themselves can ask the question of who should own assets, why shouldn’t politicians? It is quite possible that some forms of increased worker ownership will increase productivity, and so should be part of that suite of policies necessary to raise wages. This is not a terribly radical claim: it was part of the 1983 SDP manifesto. But it seems beyond Starmer. I fear his refusal to nationalize the big six energy companies is the product not of serious thought about the nature of ownership but rather an unthinking acceptance of the constraints set by capital.

Of course, I might be wrong here. Maybe capitalism is more dynamic than I believe and maybe it is less antagonistic to technocratic social democratic reforms. If you think I am wrong, though, you need to produce evidence and reasons. Which Starmer’s essay does not. It is one thing to be captured by capitalist interests. It is quite another not to even see the bars of your cage.

The death of free market ideology

Free market economics is dead as a political idea.

The government’s subsidy to CF Industries to ensure that it supplies a product that is (checks notes) soaring in price is just one of several examples of this. It has also introduced trade barriers within the UK, an almost unprecedent move for any developed nation in modern times. Even before the rise in National Insurance, it was planning on raising the share of taxes in GDP to what the OBR says would be “its highest level since Roy Jenkins was Chancellor in the late 1960s.” And you can interpret all the talk of “levelling up” (and it is all talk) as a renunciation of the free market idea that companies will relocate to areas where land and labour are relatively cheap.

All of this fits with Johnson’s “fuck business” remark; his renunciation of the European single market; and wilful increase in political uncertainty. What we have here is a flat rejection of Thatcherism. 

Of course, markets are still a massive part of capitalism (and I suspect they should be a big part of post-capitalism too). But they have few defenders in government,

Which poses the question: why have we seen so great an intellectual counter-revolution?

It’s a tricky question because of an astonishing fact which demonstrates the emergent genius of the Tory party – that it has made this move without a protracted debate. Whereas the Labour party tears itself apart over much smaller differences, the Tories just get on with it without feeling any need for ideological consistency or introspection. As Sir Keir Starmer says, they have “a remarkable ability to shed their skin.”

Although the Tories aren’t telling us why they’ve made so great a change, I’d suggest several possibilities.

One is the simple empirical fact, that free markets haven’t worked as billed. I don’t just mean that the pseudo-market in retail gas and electricity has failed. I’m thinking also of the financial crisis and the long stagnation in productivity. All show in different ways that markets don’t deliver stability and growth as much as hoped. Of course, free marketers have defences against these points – but the point is that they need defences, and are now on the back foot.

We can turn this around. In what sector is there a clear case for introducing more market forces? It’s not obvious. (No, healthcare isn’t one).

There’s a second reason, which we can derive from Jesse Norman’s admirable book, Adam Smith: what he thought and why it matters. Markets, he says, are not isolated technologies. Instead, they “are sustained not merely by incentives of gain and loss, but by laws, institutions, norms and identities.”

If we have the right such norms and institutions, the self-interest of market actors will indeed promote the public interest. If not, though, we get rent-seeking, corruption and cronyism, as Jesse says:

Capitalism can encourage people to behave in socially productive or unproductive ways: to devote their energies to building homes or finding new tax loopholes; to developing life-saving drugs or running offshore sweatshops. It can stimulate fruitful investment, or the search for unwitting clients to be ripped off.

Latter-day free markets have, however, given us too much of the unproductive activities: fraud; mis-selling; cronyism and rentierism (pdf). Thatcher hoped a market society would give us men like her father; in fact it gave us ones like her son. Actually-existing free markets have not been embedded in the norms and institutions that would make them work in the public good. Which has, maybe unfairly, discredited the case for them.

Relatedly, one lesson of recent years is that capitalism requires a more extensive state than Thatcherites thought - not just to provide infrastructure and regulation but to provide automatic stabilizers and support for those “left behind” by globalization – a group which was never in the free marketeers’ original script.

Perhaps, though, there is something else. Tory support for market forces was strong when they were operating to enrich capitalists and hold down wages, but it has waned now that they are starting to raise wages, if only in a few sectors. Business owners whining about staff shortages are showing a fine sense of entitlement but not so keen a grasp of market economics. The attitude of many on the right to the free market reminds me of Corporal Jones: “they don’t like it up ‘em”.

Perhaps free market ideology was, for many, never a principle but only just one more weapon in the class war, a means of protecting what Tories really care about, which is the defence of private sector hierarchies.

Capitalism and the state

Greg Smith and Dehenna Davison write:

For many in left behind parts of the country, the reality is that the private sector is stifled by a bloated public sector that is almost Soviet-sized in some areas of the North.

This seems to me to be a case of confusing correlation and causality. The reason why the public sector accounts for such a big share of economic activity in some areas is that the private sector in those places is so weak.

In fact, I’d suggest that – for the economy as a whole – a bigger state can work to the benefit of capitalism.

My story here is not about the several mechanisms through which the rich (pdf) disproportionately influence government policy, nor about crony capitalism, corporate welfare, bank bailouts and implicit subsidies, important as all these are.

Instead, let’s start in a less likely place - with a paper (pdf) written by Robert Merton in 1969. He showed that the proportion of wealth an investor should devote to risky assets rather than safe ones such as cash or bonds could be described by a simple equation. This says the proportion should be equal to the expected annual return on risky assets over safe ones, divided by the product of the variance of risky returns and a coefficient of risk aversion.

Let’s put some numbers into this. One bit of standard theory (p20 of this pdf) predicts that the expected risk premium should be only two percentage points or even less. The standard deviation of a well-diversified equity portfolio is around 15% giving us a variance of 0.0225. And a reasonable estimate of the coefficient of risk aversion is around three. This give us a solution to Merton’s equation of 0.02/(0.0225x3) = 0.296. Less than a third of one’s wealth should therefore be in risky assets.

For many people, the weighting of equities should be even less. If you could lose your job in a recession, equities are especially risky for you because they too would fall when your earnings disappear. And if you regard housing as an asset (say because you are planning on trading down) it too could fall in a recession, when shares fall. Both risks point to a low equity weight.

What’s more, for many people the opportunity cost of holding equities is not cash or bond yields but rather paying off the mortgage or credit card bills, the interest rate on which is higher than that on cash. Yulia Merkoulova and Chris Veld point out that, for these people, the personal equity risk premium is very low or even negative. That can justify holding no equities at all.

Some standard economics therefore predicts that demand for equities should be very low indeed. Which suggests that stock market capitalization should be paltry.

So why isn’t it?

Enter the welfare state. The wealth in Merton’s equation means your total wealth. Wealth is merely capitalized income*. And income includes pension income. The state pension is therefore a big part of your wealth. At current annuity rates, the basic state pension is worth over £170,000 for a 70-year-old. This means that, following the maths above, somebody with £100,000 of other wealth should have not £30,000 in equities but £80,000.

The state pension thus boosts demand for equities. In giving us a safe income, it allows us to take financial risks we otherwise would not.

Of course, this is not the only way the welfare state supports the stock market. It acts as an automatic stabilizer, helping to mitigate recessions; this is especially important as policy-makers cannot predict recessions and so cannot always use monetary and fiscal policy to stabilize the economy. Such stabilization policy reduces the cyclicality of corporate earnings and also our background risks such as the cyclicality of or jobs and small businesses. On both counts, it raises demand for equities.

We often talk of tax incidence, the fact that taxes aren’t necessarily paid by the people they directly fall upon. But there is also benefit incidence: welfare benefits don’t benefit only those who receive them, but also those who own the businesses where those benefits get spent.

In fact, there’s a third historic benefit of the welfare state. In buying off discontent, it has reduced the threat of revolution which has also supported shares.

All of this explains a big fact – that stock markets in developed economies did best whilst the role of government in the economy was expanding. The UK market made no capital gains on average during the free market era of the 19^th and early 20^th century, but soared in the post-war era.

One reason for the famous equity premium puzzle (pdf) of Mehra and Prescott is that the riskiness of equities fell in the latter part of the 20^th century and so share prices rose – as the threat of depression and political unrest fell. The larger welfare state is a big part of that story.

What Marx said in 1848 is therefore still valid: “the executive of the modern state is nothing but a committee for managing the common affairs of the whole bourgeoisie.” The state functions to support capitalism.

Of course, this is not to say that the current boundaries of the state are exactly those which are optimum for capitalism. Reasonable people can disagree on what these are: they might include a lot of social democracy.

Instead, my point is merely that there are many channels through which a big state can – and should! – sustain capitalism. Which is why few intelligent capitalists are minimal state purists, and perhaps why so many rightists have very comfortably abandoned the small state thinking of the 1980s.

* This is why wealth taxes should be redundant. If we’re measuring income properly (which the tax system does not), wealth taxes are just capitalised income taxes.

Cancel culture, & the death of classical liberalism

Most of us by now are bored with rightists complaining about cancel culture. But we shouldn’t be, because they show that the left has won an important battle about the meaning of liberty.

What I mean is that such complaints show that the right has abandoned a classical liberal conception of the term.

Let’s take Friedrich Hayek’s discussion of liberty. He defined this in negative terms, as the absence of coercion, where coercion is something which “occurs when one man’s actions are made to serve another man’s will, not for his own but for the other’s purpose.”

But what exactly is and is not coercion? Here’s Hayek:

Coercion should be carefully distinguished from the conditions or terms on which our fellow men are willing to render us specific services or benefits…in a free society these mutual services are voluntary, and each can determine to whom he wants to render services and on what terms…If a hostess will invite me to her parties only if I conform to certain standards of conduct and dress, or my neighbour converse with me only if I observe conventional manners, this is certainly not coercion. (The Constitution of Liberty, p135-6).

In this sense, “cancel culture” is not coercion and not therefore a violation of freedom. If hostesses withdraw your invitation to speak to a student union because you don’t conform to their standards you are not being coerced. Nor are you if the Guardian withdraws the benefit of its employment from you - because in free society that is its choice.

Of course, the student hostesses and Guardian might be unwise or silly to “cancel” you. But on Hayek’s view of freedom they are not depriving you of your liberty. It is stupid of the Daily Telegraph to deny their readers the benefit of my wit and brilliance by not employing me as a columnist, but in doing so, it is not denying me freedom in Hayek’s sense.

But isn’t such no-platforming an example of what Mill called the tyranny of the majority?

Not for Hayek. For him, Mill’s complaint “overstated the case for liberty”. Instead, for him social pressures could be a good thing:

There can be little question that these moral rules and conventions that possess less binding power than the law have an important role to perform and probably do as much to facilitate life in society as do the strict rules of law…Conventions and norms of social intercourse and individual conduct do not constitute a serious infringement of individual liberty but secure a certain minimum of uniformity of conduct that assists individual efforts more than it impedes them. (The Constitution of Liberty, p144-7)

This gives us a defence of “woke” social norms which forbid racism, homophobia or transphobia. Such norms “facilitate life in society” for people of colour, gays and trans folk by reducing the overt prejudice they used to suffer.

If the marketplace of ideas is to work properly, some thoughts must be cancelled. Just as a well-functioning market drives out shoddy goods, so it should also drive out bad ideas. “Cancel culture” is therefore an essential part of a market.

David Aaronovitch in the Times complains about self-censorship that arises from the fear “of losing our livelihoods, disadvantaging our families or of not succeeding”. On a Hayekian view, however, such extra-legal penalties are not coercion and not “a serious infringement of individual liberty”. They even serve a useful function: we want holocaust deniers, vax-opposers, racists and fruitloops to bite their tongue. If we didn’t self-censor, there would be a Hobbesian war of all against all. Do you really want to know my unself-censored opinions?

Again, you might object that our social norms are wrong. Fair enough. On a Hayekian reading, however, you cannot complain that they violate your liberty.

You might reply here, though, that Hayek’s conception of liberty was, as Martin Hagglund says in his superb This Life, merely “formal” and “utterly impoverished” as it is insufficient to provide substantive freedom.

Precisely.

Hayek had a reason for defining freedom this way. He wanted to show that coercion was something imposed by the state whilst the market and private sector were (except in circumstances he considered exceptional) “a very Eden of the innate rights of man*.” His idea of freedom was a way of promoting the market and a small state.

Those who complain about cancel culture being a threat to freedom, however, reject this project. If a few dippy students can violate your rights, mightn’t other private sector actors do so too in other ways? If employers limit your freedom by insisting you have particular political beliefs, don’t they also do so by insisting upon erratic or unsociable hours or low pay or bad working conditions? And if denying you a job for political reasons violates your freedom, isn’t your freedom also violated if the government, for political reasons, creates unemployment?

Once you think that “cancel culture” is anti-freedom, you are conceding the left’s claims that the private sector and employment relations are sources of unfreedom and that people should have not just political rights but substantive economic ones too, such as the right to well-paid work without oppressive employers.

We have, therefore, a lovely paradox – that classical liberalism in the Hayekian sense has been defeated not by the left but by the right itself.

So why did the right make this move? One possibility is that Hayek’s philosophy was only ever a cover for the pursuit of their material interests. In the 70s and 80s they regarded a smaller state and market forces as a means of asserting capital’s power over workers. Today, though, their concern is with protecting another type of inequality – the ability of old white men to spout off without challenge from hitherto marginalized people such as ethnic minorities, youngsters, or LGBTQI people. Conservatives’ main priority, as Corey Robin has argued, is to defend private sector hierarchies, and philosophy is subordinate to this end.

* That line is of course Marx’s.

The politics of abstraction

“Migrants will be turned back to France” cheers the Daily Express – alongside a picture celebrating Emma Raducanu who is herself a migrant, the Canadian-born daughter of Chinese and Romanian parents.

Of course, an Express front page should normally be beneath our notice. This one, however, is significant as I suspect it embodies a widespread phenomenon in mainstream politics – the prioritizing of abstractions over real people.

The Express’s doublethink has happened because, for much of the right, “migrants” are not real people such as Ms Raducanu, or the parents of most of the England team which did so well in the summer’s Euros, or the perfectly nice people you meet at work and in shops. They are instead an abstraction, a phantom invoking a vague sense of the nation (another abstraction) losing control of its borders. This is why hostility to immigration has often been stronger in areas with fewer migrants rather than in cities with many of them. And it is why Priti Patel is threatening to turn back boats carrying migrants. So what if they drown? It’s not as if they are real people.

It’s not just in attitudes to immigration that we see this abstraction. The same has happened with Brexit. This was never about improving the living standards of real people but rather an appeal to abstractions such as national sovereignty and taking back control*.

This isn’t to say that the prioritizing of abstraction over ground truth is confined to the right. It’s not. In all its reports on the state of the public finances the BBC has not, as far as I know, ever interviewed a real person who has described convincingly how high government borrowing has worsened their own personal life. Fretting about the public finances is elevating an abstraction over the real lives of real people as it means devaluing the truth that austerity probably caused thousands of deaths.

Centrists are guilty of the same thing in another way. The ground truth is that the financial crisis taught us that capitalism is more unstable and less capable of generating growth in real wages than New Labour believed. This should have led to a rethinking of how to best achieve stability and rising living standards. But it didn’t. All the political centre has to offer is abstract waffle about electability. Hence (for example) Sir Keir Starmer’s inability to answer the simple question of how to pay for increased public spending on health and social care.

Older readers will detect a puzzle here. Back in the 90s New Labour spoke a lot about evidence-based policy-making. A generation later, however, what we have is abstraction-based policy-making. The story of how one gave way to the other needs to be told – and it will be one with no heroes but many villains.

* You might object here that in causing shortages of lorry drivers and hospitality workers Brexit is driving up wages. But this is true only of a minority of workers. And the price rises that are the counterpart of their pay rises mean cuts in real incomes for others – which is inevitable if higher pay isn’t accompanied by higher productivity. Sure enough, the ONS reports that real wages have actually fallen so far this year.