Stumbling and Mumbling

Power, not prices

We’re heading for a cost of living crisis because of big price rises for essential items such as gas and food. Everybody knows this. Which is unfortunate, because it’s not quite true.

Of course, I don’t deny that prices are rising. They are. What’s doubtful is that they are the sole cause of falling real incomes.

Simple statistics tell us this. Since quarterly data began in 1955 fluctuations in annual inflation (measured by the consumption deflator) have explained only 4.2% of the variation in annual growth in real households’ incomes; for longer-term changes such as three or five-year ones the explanatory power is even lower. This tells us that rising prices alone have been only a tiny cause of changes in real incomes.

What’s more, our period of highest inflation actually saw real household incomes do well. Consumer prices more than tripled during the 1970s, in part because the oil price rose by a factor of ten. But real households’ disposable incomes then grew by an average of 3.4 per cent a year – more than twice as much as they grew in the ten years before the pandemic, a period of low inflation.

Inflation on its own, therefore, is not a sufficient explanation of falling real incomes. Sometimes, as in 2016, real household incomes fall when inflation is low. And sometimes they rise when inflation is high, as in the 70s.

So, what does explain variations in real incomes?

Power, that’s what. There are two big differences between now and the 70s.

One is that back then many workers had the bargaining power to extract pay rises to maintain their real incomes in the face of rising prices. In the mid-70s the wage share in GDP rose sharply. It was capitalists and shareholders who suffered a crisis, not working households.

The other was that government borrowing rose markedly, which helped support incomes. Because that increased debt was devalued by inflation (in those naïve days before index-linked gilts) this meant there was in effect a transfer of real resources from gilt investors to other households.

Today, things are different. Except in a few industries, workers don’t have the power to protect real wages that they had for a while in the 70s. ONS data show that average weekly wages rose 4.2% in the year to November and that median monthly pay rose 5.3% in the year to December. Both measures fall short of CPI inflation.

What’s more, fiscal policy is being tightened. The OBR foresees cyclically-adjusted net borrowing falling by 4.4 percentage points of GDP in 2022-23. Higher NICs, the cut in Universal Credit and public sector pay restraint are all taking real incomes from households.

Real household incomes are not, then, falling solely because of inflation. They’re falling because people lack the market or political power to protect themselves from external shocks in the way they did in the 70s. Back in the 70s, working people were portrayed as greedy knaves; today they are seen as pawns, victims lacking agency (to borrowing Julian Le Grand’s terminology (pdf)). There’s a reason for this change.

A fall in some people’s real incomes at a time when GDP is growing – as is likely this year – is a transfer of real resources, from those without power to those with it. Inflation is a means (often unintended) whereby this transfer occurs. It is not the sole cause of it.

The “classical dichotomy” – the idea that real variables affect only things and monetary variables (such as prices) only monetary ones – is sometimes wrong. But not always; it usefully reminds us to think about real factors, not just monetary ones.

Those who attribute the cost of living crisis to inflation are therefore wrong. But their error is an old one. It’s what Georg Lukacs called reification, the process whereby:

A relation between people takes on the character of a thing and thus acquires a ‘phantom objectivity’, an autonomy that seems so strictly rational and all-embracing as to conceal every trace of its fundamental nature: the relation between people.

It’s what Marx called commodity fetishism – the way in which relations between people assume “the fantastic form of a relation between things.”

Even well-meaning talk of inflation, therefore, is ideological: it effaces a brute fact about capitalism, that some people have more power than others.  

How to commit fraud

It is fitting that Boris Johnson’s premiership should be in doubt so soon after Elizabeth Holmes has been found guilty of defrauding investors, because both show us how easily people are fooled.

Inspired by them, here are some tips for any would-be con artist.

Exploit wishful thinking. Experiments by Guy Mayraz have shown just how easy it is to induce this. People want to believe there’s been a great medical breakthrough, or that an obscure mining company has discovered huge mineral deposits, or that they’ve met “the one” who won’t cheat on them.

Ms Holmes preyed on this: people wanted to believe there was a new Steve Jobs, and the wish was father to the belief. Similarly, Johnson’s supporters in 2019 thought you could get Brexit done by sunny optimism rather than hard bargaining. And, writes Robert Hutton, ministers are now defending him in the “hope that, when Johnson is finally removed from office, the stink won’t linger on them or their party.” 

FOMO is your friend. This is clearly the case for Prime Ministers or would-be PMs: MPs will support you in the hope of winning office themselves, and journalists will do so for fear of being frozen out and denied scoops. But it also worked for Ms Holmes. Private equity investors not wanting to miss the next unicorn pile into start-ups, sometimes without adequate research.  Fear of missing out drive stock market bubbles, and it also enables fraud.

Be glamorous. “Investors are attracted to stocks that have emotional ‘glitter’” says Alok Kumar. We’re also attracted to people who glitter. We’re apt to trust good-looking ones even if they don’t deserve it – a fact Ms Holmes used on Henry Kissinger.

Of course, Johnson doesn’t have physical attraction on his side. But his schtick of raffish charm, bumbling good humour and optimism appeals to some. You’d rather go for a drink with him than Theresa May, even if you would have to buy it yourself.

Like attracts like. Affinity frauds are good business, because it’s easier to win the trust of people who think you are one of them. Bernie Madoff, for example, sold his Ponzi scheme to people like himself - affluent, respectable-looking Jews.

Similarly, Ms Holmes appealed to the rich because she was from a “good family”. One investor “says he thought Holmes would come by medical talent naturally because her grandparents had their name on a hospital.”

Hence the power of the “Boris” brand. Calling him by his first name creates an impression that he’s your mate. And you trust your mates, don’t you?

Have a story. Vanity Fair reports:

Holmes also paid indefatigable attention to her company’s story, its “narrative.” Theranos was not simply endeavoring to make a product that sold off the shelves and lined investors’ pockets; rather, it was attempting something far more poignant. In interviews, Holmes reiterated that Theranos’s proprietary technology could take a pinprick’s worth of blood, extracted from the tip of a finger, instead of intravenously, and test for hundreds of diseases—a remarkable innovation that was going to save millions of lives and, in a phrase she often repeated, “change the world.

Narratives matter. People believe them more than they should. And better still, as Robert Shiller shows in Narrative Economics, some of them go viral. People will do your work for you, by repeating your story.

Johnson also has used this trick. “Get Brexit done” and “levelling up” are stories – albeit ones we have to fill in ourselves.

Exploit deference. We have, wrote Adam Smith, a “disposition to admire, and almost to worship, the rich and the powerful.” You don’t have to be very rich or powerful to get such admiration. Some experiments in 1968 showed that drivers were less likely (pdf) to honk their horns in impatience at expensive cars than at cheap ones, for example.

This gives the fraudster his chance. If you pretend to be a bank official or policeman, somebody will hand over their account details to you out of deference.

And it’s part of the secret of Holmes and Johnson: journalists at least defer to bosses and Prime Ministers. The corridors of power turn venality into virtue and stupidity to wisdom.

Be different. In a superlative paper (pdf) the late Werner Troesken showed how snake oil salesmen thrived for centuries in part by differentiating their products. Disenchantment with some quack remedies therefore merely fuelled demand for others.

Ms Holmes exploited this. Merely by being a woman she stood out in male-dominated Silicon Valley.

And it’s part of Johnson’s success too. Tom McTague has written:

Johnson is nothing like the other prime ministers I’ve covered. Tony Blair and David Cameron were polished and formidable. Gordon Brown and Theresa May were rigid, fearful, cautious. Johnson might as well be another species.

That’s his appeal. In differentiating himself from both the cold fish Theresa May and from the technocratic style of New Labour, people disillusioned with both of those thus turned to him.

Now, in writing all this I’m not suggesting that you become fraudsters. For one thing, it’s difficult to pull off these tricks, especially if you are from the wrong background. For another fraudsters, like other businessmen, need not just personal skills but the right opportunities too. And for another, I've missed out some necessary advice - how to have an exit strategy and avoid getting caught. 

Instead, what I’m trying to do is solve a puzzle raised in the Times recently by Matthew Parris. He describes how “scores of individuals” have had their reputations ruined because “they got themselves mixed up with a superlative confidence trickster”. What he doesn’t do is say why so many people fell for Johnson. It’s not because they are stupid. Isaac Newton and Jonathan Swift both lost money in the South Sea bubble which tells us that even brilliant men can fall for cons. Instead, it’s because there are so many ways to trick even intelligent people.

Against work

The FT has a nice piece on the rise of the anti-work movement in the US, which encourages people to cut down on their paid employment: although different, this movement has something in common with the “financial independence, retire early” community.

All this contrasts with the Labour party since the 1990s, most of whose leaders – Sir Kier Starmer included – have valorized “hard-working families”*.

By this, they don’t mean people who work hard tending their allotments, practicing guitar or painting Warhammer figures. Instead, what Labour values – and the FIRE and anti-work movements do not – is paid employment.

There is, of course, a very long tradition on the anti-work side. Ancient Greek intellectuals despised manual workers because they could not devote their time to cultivating the mind – a tradition that inspired the ideal of the gentleman amateur in England.

Adam Smith had this in mind when he described the debilitating effects of the division of labour:

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.

It's not just manual work that has such effects. John Malesic describes how it leads to burnout. And John Danaher complains that employment “colonizes” our lives by dominating our mental space. Those contestants on Christmas University Challenge illustrate his point: “distinguished careers” (a malefaction I have been spared) can lead to an ignorance of everything outside one’s work.

Which aren’t the only problems. As Danaher says, “work is a source of freedom-undermining domination”. This isn’t only true in the many cases of egregious tyranny. As Martin Hagglund describes in his superlative This Life, even benign work steals that important scarce resource, time.

There is nothing “natural” about any of this. In his Stone Age Economics Marshall Sahlins shows how stone age men typically worked only a few hours a day. “Work as we know it is a modern invention” wrote Andre Gorz in his Critique of Economic Reason. The ethic of hard work, he wrote, “was a revolution, a subversion of the way of life” of pre-industrial times – a revolution, as Stephen Marglin showed, imposed by capitalist hierarchy. E.P Thompson has described (pdf) how it arose – over generations - from “the division of labour; the supervision of labour; fines; bells and clocks; money incentives; preachings and schoolings; [and] the suppression of fairs and sports.”

Hard work, then, is at best like physical courage – a virtue only in unpleasant circumstances.

Which has led to ideas such as Aaron Bastani’s fully automated luxury communism, a society in which commonly-owned technologies free us from drudge work.

Bastani’s terminology and inspiration might be Marxist, but you certainly don’t need to be a Marxist to buy into this ideal. In fact, historically, the great Liberals have espoused it too. John Stuart Mill wrote in 1848:

I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other’s heels, which form the existing type of social life, are the most desirable lot of human kind, or anything but the disagreeable symptoms of one of the phases of industrial progress….It is only in the backward countries of the world that increased production is still an important object

 In this tradition, Bertrand Russell wrote In Praise of Idleness, in which he looked forward to a short working week encouraging arts and science and “simple happiness”. And Keynes famously thought (pdf) that a 15-hour working week would be “quite enough to satisfy the old Adam in most of us!”

All of which poses the question. If the case against work is so strong, why has the Labour party for years valorized hard work so much?

There is a good reason. The transition from a world of hard work and accumulation to one of degrowth is difficult enough for individuals – which is why so many of us postpone retirement – and harder still for societies: it requires enormous social and cultural change.

But there are also bad ones. One is Labour’s fear of being seen to be on the side of benefit recipients. (There’s actually no evidence that it is, but evidence rarely plays a big role in party politics). Another is that politicians tend to be monomanic dullards, and they are sublimating that vision of life onto the rest of us. Also, social democratic politics requires economic activity to finance a big state: valorizing hard work and economic growth are alternatives to demanding massive redistribution.

And then, I fear, there is capitalist realism. It is too easy to see capitalist jobs – with their alienation, unfreedom, burnout and thwarting of our potential – as unavoidable. But in fact they might be, as Mill thought, merely “disagreeable symptoms of one of the phases of industrial progress”.

* Ironically, the one leader least prone to use that cliché – Jeremy Corbyn – was the one who more than the others actually won the votes of working people. Which might be a neat example of John Kay’s obliquity.