Cargo cult economics

In the first pages of After Virtue Alasdair MacIntyre imagines people trying to revive science after it has been destroyed by catastrophes and know-nothing governments. They would, he said, have only fragments to build upon; bits of theories unrelated to other bits or to experimental evidence; and partial ideas unrelated to their context. They would use scientific words but the beliefs and evidence behind such words would be missing.

This, I fear, is the state in which economics has fallen in politicians' hands. They use economicky words, but stripped of the context and evidence in which such words made intelligent sense.

Here are some examples of what I mean.

Tax cuts.

The FT reports that, despite the evidence of the Truss-Kwarteng Budget, some Tory MPs still want tax cuts. Such demands might have made sense in the 60s and 70s, when top tax rates were so high that it was at least plausible that we were on the wrong side of the Laffer curve. And they might also have been sensible when public services were adequately funded.

But neither condition now holds. Tax rates are quite possibly below (pdf) their revenue-maximizing levels (pdf). And even if they weren't, the dire state of the NHS, local government and legal system mean that any future government would have to reverse tax cuts. Fearing cuts would only be temporary people would not change jobs or boost spending in response to them, and so they would not increase growth so much.

"Tax cuts", then, are words cut off from the context in which they made sense.

Profit maximization.

Milton Friedman famously argued (pdf) that "the social responsibility of business is to increase its profits". That was a tenable view when companies were constrained from egregious exploitation by strong unions, competition or regulation. In a world where these constraints are weak, however, a relentless pursuit of profit leads to shit in rivers and seas, terrible service and degrading working conditions.

Incentives.

High-powered financial incentives might sometimes adduce better performance. But they can also encourage reckless risk-taking (pdf); crowd out other motives such as professionalism or altrusim; discourage creativity; encourage fraud; or distract managers from important but difficult-to-measure tasks (pdf). It all depends upon detailed context. Idle talk of incentives cut off from precise individual context is mere handwaving - and often ideologically-motivated hand-waving.

Bashing trades unions.

This was a plausible position in the 1970s when profit margins were squeezed, leading to lower investment, and when regular strikes hampered productivity. Nobody, however, believes these conditions apply today.

None of this, however, is to say that context-free pseudo-economics is confined to the right. Here are two examples on the left.

Nationalization.

There's a tendency to see this as a solution in itself, echoing what James Scott in his marvellous Seeing Like A State calls "high modernism" - an overconfidence in the ability of the state to manage complex systems from the top down. Such a view - though now discredited - made sense in the context of the 1940s and 50s when wartime planning (plus the apparent success of the Soviet Union) lent it credence.

But this is not the context we live in now. We know that nationalized industries, in Tory hands, can be used as a weapon in the class war - to defeat unions (as in mining in the 80s), or to enrich their clients by selling them cheaply.

The question, then, is how to avoid this fate - how to ensure democratic control of the nationalized industries. Which also poses the question of what aims nationalization should serve: in electricity, for example, it could be used to shift from marginal to average cost pricing.

The point is that nationalization is not an end, but a means.

Wealth taxes.

Of course, a wealth tax would raise money. But the government does not need money: it can print as much of it as you want. It needs real resources: nurses, care-workers, builders, quality managers and so on. The question is how a wealth tax would release these from the private sector. It would do so if the rich respond to it by cutting their spending. But it won't if they merely run down their savings.

Again, what we have here is an idea out of context. In a context where governments cannot print money (such as in the euro zone), it might make sense. In a British context, however, the case for a wealth tax (if there be one) lies elsewhere - perhaps, in simple vindictiveness.

It's not just in what people say that they demonstrate context-free ideas. What's revealing is also what is not said, what's not on the agenda. Whilst politicians worry about shortages of labour, they are mostly silent about shortages of adequate management - despite the fact that even mainstream economists agree that these are a big cause of the UK's stagnant productivity*. They are stuck in an out-dated context of unthinking deference to bosses and hierarchy.

What we have here is, however, not unprecedented. In WWII some Melanesian islanders saw American soldiers marching and pointing lights towards the sky, after which cargo would be dropped from planes. They inferred that if they did similar things, they too would get valuable goods. They performed rituals, without understanding the causal link between those rituals and actual outcomes. So it is with so much talk about economics: it imitates the words of proper economics, but without comprehension of the circumstances in which such words have meaning or use.

* And perhaps of labour shortages too: some people are retiring early because of stressful work, which itself is caused by poor management.

Comments

[ltr]

Whilst politicians worry about shortages of labour, they are mostly silent about shortages of adequate management - despite the fact that even mainstream economists agree that these are a big cause of the UK's stagnant productivity.

[ While there may be "some" agreement on the reason for stagnant productivity being a lack of adequate management, this agreement is decidedly incorrect. The problem in Britain has been a lack of nonresidential investment extending from 2008 on. Austerity and Brexit are dramatically lessening the competitiveness of the British economy. ]

[Frank Little]

What do you say to the argument that simply moving to average pricing of electricity will lead to gas-powered power stations being withdrawn? Power cuts and brown-outs might follow.

[ltr]

What do you say to the argument that simply moving to average pricing of electricity will lead to gas-powered power stations being withdrawn?

[ Simply "threaten" to nationalize the industry and there will be no power station withdrawal. Utility activities always need to be at least subject to regulation.

The problem is regulation is against Tory intent and Labour after Corbyn is simply Tory-lite or worse for the pretense of still being Labour. ]

[rsm]

《the dire state of the NHS, local government and legal system mean that any future government would have to reverse tax cuts.》

《the government does not need money: it can print as much of it as you want. 》

Are taxes just passive-aggressive means of controlling nonviolent behavior you don't like but lack the ability to change through rhetoric?

[ltr]

I happened to find an inspiring documentary on the construction of the Channel Tunnel, which opened in 1994. What struck me, from this grand project, was the way in which Tories have all but given up on infrastructure investment since 2008 and how the relative lack of nonresidential investment since 2008 and increasing British isolation with Brexit which makes investment seem less necessary are going to mean a diminished country for quite some time to come.

I am truly saddened.

[Blissex]

«Tories have all but given up on infrastructure investment since 2008»

Except to boost property prices in the golden tory areas, where money is no object.

«and how the relative lack of nonresidential investment since 2008 and increasing British isolation with Brexit which makes investment seem less necessary are going to mean a diminished country»

The Conservatives and New New Labour are quite realistic and look ruthlessly at what works, and since 2009 the profits of that 20-40% of residential property owners have been booming. Don't fix what is working (for themselves).

When there have been things not working (for the people who matter), like the recent temporary bond price crash, they have been promptly fixed.

If the “diminished country” means that "losers" in the pushed-behind areas and in the lower classes of the golden tory areas will continue to struggle, for the 20-40% of upper-middle class people that's how things should be, or simply that is not an important matter.

[Blissex]

«the state in which economics has fallen in politicians' hands. They use economicky words, but stripped of the context and evidence in which such words made intelligent sense.»

Our blogger is shocked, shocked that propaganda is going on in politics, and that politics is not an earnest discussion among wykehamists. :-)

[Jan Wiklund]

There is a strong case for wealth tax – increasing equality. As even world bank economists have indicated, to much wealth with the wealthiest leads to a speculative boom and bust economy, and to rentierism in general. Economy works best if the wealthiest are not too wealthy.

Then one can always argue where the tax should be placed. For me, I favour inheritance tax. There is no need to inherit more than, say, a house or a family business.

[ltr]

Blissex:

When there have been things not working (for the people who matter), like the recent temporary bond price crash, they have been promptly fixed...

[ Perfect example, from an especially important though discouraging comment. I much appreciate the explanation, which makes ever increasing sense.

Thank you so much for the patience. ]