Stumbling and Mumbling

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.

On resilience

Two apparently different things I've seen recently illustrate a common mistake which distorts our thinking about politics and organizations.

First, 30p Lee tried to show that one could eat very cheaply with Tesco's Weetabix. And then when somebody posted a picture of a mouldy Tesla, Musk's incel fanboys claimed the fault was "owner error."

Anderson's mistake is to fail to see that whilst one perhaps could subsist adequately if one were a joyless calculating machine (what a great advert for capitalism), few people are such machines. And Tesla's fans fail to appreciate that even if Teslas do keep well in optimum conditions, few of us are so careful of our vehicles.

The common error here is an inability to see that products and systems must be resilient to human error simply because such errors are widespread and an inevitable part of the human condition.

Risible though these examples are, similar mistakes are common.

Brexiters who complain that Brexit has been poorly implemented should have foreseen the chance that the process would have been undertaken by fallible individuals. In policy-making, implementation must not be a mere after-thought. A policy that only works if everyone is competent is not a serious policy at all.

The same is true of those calling for reform of the NHS. Maybe there is some kind of insurance system which would be an improvement. But this is only a voice in your head. In this world, we must guard against the (high) risk that the task of reforming the NHS will be undertaken by vicious incompetents in hock to US insurance companies.

My call for policy and institutions to be robust to human error is in fact one with a long tradition. Burke famously 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.

Marx said that "the emancipation of the working classes must be conquered by the working classes themselves" because he did not trust individual leaders. (Marx and Burke aren't so unalike).

The US's founding fathers created a system of checks and balances "to control the abuses of government." "If angels were to govern men, neither external nor internal controls on government would be necessary" wrote James Madison, knowing that men were far from angels.

And Warren Buffett has said: "I always invest in companies an idiot could run, because one day one will." He looks for companies that are resilient to human error. The damage caused by such error can be enormous; one cause of the financial crisis was Fred Goodwin's tyrannical management of Nat West.

So, what would a polity that embeds this principle look like?

In some ways, like our present one. There are nine decision-makers on the MPC to help guard against any one of them being fallible. Judges are constrained by sentencing guidelines to avoid rogue ones making erratic decicions. Where markets function well, they eliminate the bad products resulting from human error. And there's increasing use of algorithms because, as Daniel Kahneman and colleagues have concluded, "simple models beat humans" (although of course algos can go wrong because they are made by flawed humans).

But could we do better? Yes. Here are four possibilities:

 - A more generous welfare state. In my context, the case for this isn't just that Anderson is wrong and people need an income well above subsistence levels because they cannot budget with maximal efficiency. It's also because fiscal and monetary policy-makers cannot adequately foresee the future which means that discretionary policy is unreliable. Stronger automatic stabilizers - a higher safety net - thus do a better job of protecting is in bad times.

 - Improving selection mechanisms. Our media-political institutions select not for the best but for the worst: they attract incompetent MPs and ministers, and filter out intelligent ideas. They thereby magnify our vulnerability to the human factor: the story of Truss and Johnson is one of systemic rather than individual failure. We must think how to reverse this.

 - Increasing diversity. Cognitive diversity reduces the danger of us accepting bad policy by ensuring that all views - not just those of narcissists flattering themselves they are "contrarian" - get heard. Institutions that might facilitate this include citizens assemblies and forms of sortition.

 - Economic democracy. The UK has a shortage of good managers. Econ 101 says we should economize on scarce resources. We must find ways of reducing our dependence upon incompetent, rent-seeking or hubristic bosses. One way to do so is strong competition policy: in well-functioning markets, bad companies are competed out of business and easily replaced by rivals. Failing that, tougher regulation of financial "services", rail companies or utilities is needed; one lesson of the financial crisis is that our economy was too dependent upon a few flawed individuals. And there's a case for worker democracy too.

I know. All these proposals are vague. I mention them not as a blueprint - there's no point writing a menu if you don't have a kitchen - but to highlight how far short our existing institutions fall from the ideal of ensuring resilience to bad decision-makers.

This issue is, however, off the political agenda. One of the many defects of our political debate is a belief that things will be tolerable if only we could find the right people; this is Bonnie Tylerism, holding out for a hero. This, however, is the wrong question. We should be looking not for good people but for the right institutions, selection mechanisms and processes - devices which would make our economy and politics more resilient to idiots or crooks.

The full employment challenge

Many technocrats think the UK is at or around full employment. What they don't say is that this requires some radical thinking about economic policy.

The Bank's chief economist Huw Pill recently said that the labour market so tight that higher interest rates might be needed to cut aggregate demand and inflation. And Sir Keir Starmer says: "We’re going to have to be fiscally disciplined." The only charitable reading of this is that it means he thinks he's going to inherit a reasonably tight labour market (albeit perhaps not as much so as now) and so a fiscal expansion would be inflationary.

Which raises a big problem. Any intelligent government will need many more workers in some sectors: in health and social care; in housebuilding; in insulating homes; or making and installing solar panels and windmills. But where will these workers come from? The answer used to be simple: migrants and the dole queues. If these are not sufficient to supply the extra staff, however, we need something else - to destroy some existing jobs. Rachel Reeves has promised to "create good jobs", but this might require the abolition of bad ones.

At full employment, doing the things we want - building houses, improving social care, greening the economy - means doing less of something else. Progress must be a matter of creative destruction.
Which jobs should be destroyed? It's here that we need radical thinking.

For a long time, many economists have thought that the labour market was micro efficient but macro inefficient. As Keynes said:

I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use. There are, of course, errors of foresight; but these would not be avoided by centralising decisions. When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.

If this is the case, then the solution to our problem is simple: higher taxes would destroy private sector jobs generally, thus making room for job creation in priority sectors.

But it might not be the case. There are reasons to think the existing system does seriously misemploy factors of production.

I don't mean that simply that people spend too much on trinkets of frivolous utility, thus creating over-employment in nail bars, takeaway restaurants or in sports car manufacturing. Instead, I'm thinking of five other mechanisms.

Agency failure. The "bullshit jobs" described by David Graeber are a product of this: middle managers would rather expand their empire of underlings than maximize "shareholder value". So to is the guard labour documented by Samuel Bowles and Arjun Jayadev: security guards, supervisors and some of legal system are in employed to ensure that agents (workers) do what principals (capitalists) want. I'd add many fund managers to this category: savers don't know that active managers on average under-perform the market and so employ too many of them.

Wrong policy choices. One obvious example here are the Border Force agents and lawyers needed to enforce an illiberal immigration policy. I'd add the lawyers, accountants and DWP staff employed to cope with an excessively complicated tax and benefit system, and the police required to enforce anti-drugs laws.

Ideology. Skill is a social construct, a product of ideology. Fund managers are considered skilled even though “the vast majority” of them are “genuinely unskilled” measured by their ability to beat the market. Conversely, care workers are considered unskilled not because they lack technique because they are disproportionately women or ethnic minorities. The result is excessive demand for some workers (many financiers and managers) and insufficient for others.

Externalities. Where the social cost of pollution is unpriced or under-priced, some industries are larger than would be socially optimum and so have too many workers. Standard examples here are those which emit carbon and other air pollutants. But these aren't the only forms of pollution. There's also risk pollution. The costs of financial crises are borne by all of us rather than internalized with the financial system, and so there is excess employment in the sector. Similarly, when Bulb went bust, we all had to pay more, reminding us that privatized utilities might employ more people than necessary. But there's something else. A lot of "journalism" and poshcuntstalkshit programmes are intellectual pollution; they degrade the public sphere and contribute to bad government.

Peer pressure. Robert Frank has shown that some types of consumer spending (such as on big cars) are fuelled by a desire to keep up with the Joneses, leading to excessive employment in those sectors. He advocates a progressive consumption tax to - in effect - ratchet down this arms race.

Here, though, is a problem. Except perhaps in our last case, higher taxes in general will not on their own destroy the right jobs. We need other policies: tax simplification; deregulation in some sectors and more regulation in others; nationalization; carbon taxes and Pigou taxes; worker democracy; cultural change to valorise care work; better financial education; and so on. It's not clear to me, however, that Labour is thinking along these lines, or even is aware of the problem.

Maybe it is right to be. Perhaps the labour market isn't as tight as Pill believes: this is a purely empirical question the answer to which must not be coloured by one's ideology. (The level of unemployment is not a sufficient metric here: what also matters are mismatches between demand and supply). Or perhaps it will be loose by the time Labour takes office.

Herein lies a paradox. In some respects, inheriting a recession would make things easier for Labour. In such a world, it could create jobs in the care sector and green economy simply by fiscal expansion - assuming it has the will to reject moronic talk of fiscal responsibility. Intellectually, there is no challenge here.

If, however, the labour market is tight, decarbonizing the economy and fixing health and social care will require much more thought.

For decades, we've thought of full employment as an ideal. Which in many ways it is: joblessness is a big cause of unhappiness. In a sclerotic, low-productivity economy, however, it also brings with challenges - ones which are largely neglected.

The two agendas

During my long adulthood there has been an under-appreciated change in British politics: whereas left and right used to at least agree upon what the issues were, this is now less true.

Historically, left and right disagreed upon economic issues: nationalization or privatization; capital or labour; fiscal or monetary activism; regulation or deregulation; austerity or not. But for all our differences, we at least agreed that these were the big questions.

This agreement, though, has faded. Whist many of us are still pre-occupied by economic questions - how to raise productivity, decarbonize, democratize the economy and so on - many others are not. Their concerns lie elsewhere: in combatting imagined attacks on freedom whilst ignoring real ones; in identity politics; in talk of "diversitycrats", wokeness or "gender identity ideology"; in what should be taught in schools; or in "stopping the boats."

This divide is not wholly a left-right one. There are some on the left who are obsessed with identity politics (albeit far fewer than in the right's fevered fantasies) and others in the Labour party who fret about second-order issues, whilst some centrists haven't abandoned interest in economics. Nevertheless there is, I sense, an overlap between the left-right split and the disagreement about what matters.

Which leaves many of us older economic-orientied leftists befuddled. As Duncan Weldon tweeted:

Worst NHS crisis of my lifetime, dire economic situation and the public policy discussion today is about a maths teaching plan for the mid to late 2020s which we don’t have the teachers to deliver.

To a degree I've not seen in my lifetime, left and right disagree not just about policy but about what the issues are.

Brexit was an example of this. Before 2016, the big division wasn't so much between Leavers and Remainers: such words had no meaning then. Instead, it was between a few rightists who thought EU membership was a big issue and the rest of us who didn't: one of the right's great rhetorical tricks was to call themselves "eurosceptics" rather than what they really were - which was eurofanatics.

Which poses the question: why has this division emerged?

Part of the story is the spread of poshcuntstalkshit programming. The lack of demand and supply of genuine experts means these are filled with "commentators" whose main talent is being able to turn up to a TV studio at short notice. As these are unable to talk intelligently about complex issues - the stalling of productivity growth, fiscal policy; falling real incomes; the NHS's problems - they resort to the drivel one could hear from thousands of golf club gammons.

But there's something else. It's that actually-existing British capitalism - whether you call it neoliberalism, financialization, rentierism or whatever - has failed most people; even before the jump in gas prices real wages were barely higher than they had been 15 years previously. If you are going to talk about economics, then, you must either talk of big change or defend a system that works only for a minority. It's no wonder therefore that many on the right would rather point to a dead cat: Prince Harry is the latest one, but there'll be another along soon enough. "Culture wars" are a product of capitalist stagnation.

With the economy flat-lining, tricky questions arise. Should we allow public services to deteriorate or raise taxes, if so on whom? Do we really want to cut private consumption to make room for more public consumption? Given that higher energy costs mean that the UK is poorer as a country, whose real income should take the hit: nurses and railworkers, or others, and if so whom? In short, who do we throw under the bus?

These are nasty trade-offs. Which many don't want to talk about. This is true more of the centre and right than left: whereas the latter are comfortable demanding higher taxes on the rich (maybe too comfortable) the former don't like to call explicitly for the impoverishment of nurses.

Instead, if they must talk of economics they wibble about electability or a lack of money - which is only slightly less moronic than asking about nationalizing sausages. Better for them that they retreat to the comfort zone of culture wars.

I would read Truss's ill-fated premiership in this context. Although she spoke of being pro-growth and breaking with Treasury orthodoxy, this was mere cargo-cult economics. It was language without substance, and assertion without evidence - for example that tax cuts would boost growth. Instead, it was identity politics - invoking a (partly fictitious) image of Thatcher and appealing to Tory prejudices rather than seriously engaging with genuine issues.

Whatever the reason for this divide about what we should talk about, it has an important implication. One facet of political power is control over the agenda: if we're talking about immigration or trans people or "wokesters" we are not talking about the failure of capitalism. One under-appreciated route through which the media exercise influence is in deciding what it is that we do talk about. Given this, it's not at all clear to me that it is even possible for the BBC to be truly impartial.