Stumbling and Mumbling

In praise of conventional thinking

When does innovation work and when not? I'm prompted to ask by Ed Smith's wonderful new book, Making Decisions, which argues for the need for"anti-processes", original thinking and spontaneity to resist "the slide into bureaucratic inertia":

If your decisions do not diverge from conventional wisdom in any important respect, you are failing to do your job. Indeed, you no longer have a job. You have a sinecure.

All this is good and true. Following process and protocols can degenerate into groupthink, cargo-cult decision-making, and an irresponsible deference to algorithms.

But, but, but. I read Ed's book whilst cryptocurrencies were collapsing: whilst Elon Musk was ruining Twitter; whilst we are still awaiting the "sunny uplands" of Brexit; and a few weeks after Liz Truss's promise of "doing things differently" ended in abject failure. All of which show that there's something to be said for cleaving to the conventional wisdom. As Edmund Burke said:

We are afraid to put men to live and trade each on his own private stock of reason; because we suspect that this stock in each man is small, and that the individuals would do better to avail themselves of the general bank and capital of nations and of ages.

Reinforcing this point, whilst reading Ed I was listening to a lot of J.S. Bach, whose life shows that great genius sometimes consists not in originality but in sticking to rules.

Economics, perhaps, offers more examples of what I mean. It's not clear that recent new economic thinking - be it DSGE models or MMT - is much of an improvement on the functional finance and structural models we had before the 1980s. A while back, the Guardian used to run tiresome articles calling for new thinking about economics, when what I suspect they meant was a return to old thinking.

Nor is economics alone here. In Science Fictions, Stuart Ritchie describes "a deep corruption within science itself", which has a "dizzying array of incompetence, delusion, lies and self-deception." Hence the replication crisis which seems to have afflicted most academic disciplines. "New thinking" is often bad thinking with dubious results.

All of which raises the question: under what circumstances should we stick to conventional thinking, and which not?

Of course, the best time to innovate is when there is cheap money and lots of mug punters. The collapse of cryptocurrencies is yet another reminder that actually-existing markets incentivize bad innovation rather than good.

That aside, there are, I suspect, four conditions when we should reject Burke and Bach in favour of Smith.

One is that the conventional wisdom is sometimes merely the groupthink of the privileged, who use it to entrench inequality. Talk of a "fiscal black hole" for example is used to justify otherwise questionable austerity, just as talk of incentives or deregulation (pdf) can be a ideological cloak for inequality.

A second is that the cliche is true: necessity is the mother of invention. Bach had such abundant resources of genius that he could create brilliantly within existing conventions; he didn't need to innovate. The rest of us, though, often aren't so lucky. Francis Spufford's brilliant Backroom Boys describes how British boffins in the mid-20th century developed space rockets and computer games with little budget and puny computing power.

Ed had to do something similar. In 2019 England lacked top-quality opening batters and so experimented with a big hitter, Jason Roy, at the top of the order. That didn't work, but the subsequent performance of England's openers suggests it was worth a try.

A more successful example of innovation in response to lack of resources was "moneyball". The Oakland Athletics' small budget for players led their manager Billy Beane to evaluate players on the basis of statistics rather than conventional coaching judgements which led (briefly) to the recruitment of undervalued players and an improvement in the team.

Economic policy also provides an example. The UK adopted inflation targeting in 1992 in a panic and pretty much as a last resort after previous "monetary anchors" such as M3 targets, shadowing the Deutschemark or ERM membership had failed. Until recently, it worked much better than its predecessors.

A third circumstance favouring innovation and thinking outside the box is when the environment changes. Cricket provides another example. Jonathan Liew describes T20 as "an entirely different sport now" requiring the "shedding the decades of ingrained cultural baggage." In T20, a team's most aggressive batter should be not in the middle order but an opener, simply because he can then potentially face more balls.

The environment, of course, also includes technological possibilities. These don't just facilitate new companies, but also new strategies. As Stian Westlake and Jonathan Haskel have pointed out, modern intangible assets make production much more scalable which enables a few successful companies to get very big - hence the emergence of superstar (pdf) firms.

We see - or should see - this in politics too. The genius of Blair and Brown was to see that changing socio-economic conditions after the 1970s required a new form of social democracy. Equally, though, economic changes after the 90s requires yet another rethinking of social democratic politics. Most Blairites and Corbynites are too tribal to see it, but in important respects Corbyn was the heir to Blair.

But there is a limit here. It's easy to see a changed environment when in fact there is only fashion. One of the surest ways for investors to lose money is to believe "this time is different". Which it rarely is. Conventional thinking, such as intelligent momentum investing, beats believing hype about new technologies.

We could add a fourth circumstance when thinking outside the box works. In strategic interactions, be it sport or business, it can give one an edge over one's opponents. Arsene Wenger's use of healthy diets and more overseas players gave Arsenal big advantages in the late 90s.

The problem with these, however, is that one's opponents quickly learn to emulate such innovations, thereby neutralizing them. Wenger's use of sports science became less help as other coaches copied him, and Billy Beane's moneyball became less effective as rival teams adopted his methods.

The point generalizes. William Nordhaus has shown that the profits to companies' innovative activities are usually tiny simply because new products and processes get copied, thus bidding away initially high profits. Sustainable high profits come from conventional thinking about how to hold down costs, preserve brand power and fend off competitors thus maintaining what Warren Buffett calls economic moats.

All of which is to merely regurgitate an old saying of Niels Bohr: the opposite of a great truth is another great truth. Whilst there is sometimes (occasionally) a case for original thinking it is also true that conventional ideas are sometimes conventional for a very good reason. Which vindicates Ed's point: we will always need a "human dimension" if we are to have a hope of distinguishing the two.

The austerity choice

The Tories, aided by much of the media, are trying to pull a con trick. They want to present spending cuts as a technocratic necessity when they are in fact a political choice.

A big part of this trick is the idea that there is a fiscal "black hole" that needs to be plugged. Fiscal black holes, however, are not like stellar ones. They are not objective physical facts, but are subjective economist-made artefacts. This is partly because they are products of economic forecasts and any forecast, as Carsten Jung says, "depends hugely on the assumptions for economic growth, inflation and interest rates." But it's also because, as Ed Conway says, "they exist only relative to particular fiscal rules." If the fiscal rule mandates a large surplus, a given forecast deficit will imply a big "black hole" but if it permits a large deficit - voila - the black hole disappears.

For example, the IFS's Carl Emmerson says:

We need a credible plan to ensure that government debt can be expected to fall over the medium-term.

But this poses questions. Why must government debt be expected to fall? Why isn't mere stability sufficient, given that there is no credible evidence that a particular debt-GDP ratio leads to trouble? What does "medium-term" mean - two or three years, or five or ten? And should the requirement to cut debt be absolute, or instead contingent upon factors such as economic growth, inflation or bond yields?

The size - or even existence - of the "black hole" is therefore a choice. It depends upon the choices you make when you produce economic forecasts. And it depends upon your choice of fiscal rule. And fiscal rules, remember, are very much a political choice: since 2010 the government has changed (pdf) them in April 2011, March 2014, December 2014, October 2015, January 2017 and January 2022.

The only black hole that exists for sure in this debate is in the media, where political journalists are so dense that little can escape from them. 

None of this, however, is to rule out some type of austerity. There might be a case for it. But if so, it is for a reason the Tories don't want to advertise.

Quite simply, it is because we are a poorer country than we would like to be, and if we are poorer we just can't afford stuff (yes, economics can be simple.)

One reason for this, of course, is that higher energy prices are cutting our real incomes. To the extent that these are temporary, there is a strong case for government borrowing to smooth out higher costs over several years. But it's not clear that this is wholly the case: although gas prices have fallen since the summer, they are still well above their pre-2022 levels.

But there are other causes of our low incomes. Some are policy choices, such as Brexit, antipathy to migrants and the failure to invest in infrastructure. Others, though, are the failures of the private sector that have given us 15 years of flatlining productivity. One symptom of this, as Duncan Weldon has pointed out, is that labour-intensive hand car washes have replaced automated ones.

And herein lies the fiscal policy problem. Our economy is so labour-intensive that we are near full employment - maybe not actually at it, but near it. There is therefore a real resource constraint upon fiscal policy: a loosening of fiscal policy will lead not so much to increased employment and output but to inflation - which is one reason why bond markets took fright at the Truss/Kwarteng Budget.

Herein lie not one but two different arguments for austerity.

Argument one is that tigher fiscal policy will cut aggregate demand and thus inflation, and so prevent interest rates rising as far as they otherwise would. Austerity, then, is the price to pay for lower mortgage rates.

This is a choice. Such a policy would benefit home-owners, and especially that minority that benefits from rising house prices, to the detriment of public service workers and users. Which poses the question. Why should wealthy people gain more at the expense of some of the most vulnerable such as those with serious health or educational needs? Talk of needing to fill a fiscal black hole effaces this question, and denies a key fact - that policy-making is about power, and choosing whom to throw under the bus.

Argument two is that when we are near full employment, fiscal austerity is necessary to release the real resources needed to work on our priorities. If we want more nurses, social care workers, home insulators or solar panel manufacturers we need to stop some people doing the jobs they are currently doing so they can transfer to these others. The question "where will the money come from?" has always been a bullshit question asked only by dickheads. But the question "where will the nurses come from?" most certainly is not.

Of course, in a rationally governed nation, part of this answer would be: from migrants. In the real world, however, the answer lies in tighter fiscal policy. This was the (largely unspoken) logic behind Sunak's health and social care levy: higher national insurance contributions would cut consumer spending, thereby forcing some retail, hospitality and nail bar workers out of their jobs, from where thry could find work in social care.

Which brings us to the problem. Neither left not right are making this argument. The right isn't justifying austerity on the basis that it's needed for a greener, caring economy. Nor, of course, can they, because such an economy requires higher public spending. And Labour are dodging the question. To a greater extent than other taxes, windfall and wealth taxes seize money that would otherwise be saved rather than spent. They therefore do little to depress demand and thus little to free up labour. Such taxes are vindictive (for me, a feature not a bug), but they are cargo cult fiscal policy - a worshipping of the fetish of "sound money" whilst failing to identify the fundamental question.

Which is: what kind of economy do we want? In a resource-constrained economy, we cannot have more private consumption, more people working to decarbonize and more social services. Nor even can we have adequate public services at current levels of taxation and economic growth.

We must choose. Carys Roberts is right: macroeconomic policy "isn’t simply a technocratic exercise to fill a 'black hole'. It’s deeply political."

Which is why talk of fiscal black holes is so nasty. Not only is it terrible economics, but it is also terrible politics in two ways. First, because it tries to pretend that politics is a merely technocratic recognition of necessity, thus effacing the fact that it is about choice. And second, because it denies the fact that years of economic dysfunction have left us with real and nasty choices.