Stumbling and Mumbling

Three types of "error"

It's often the case that sport can give us lessons for other walks of life. So it is with Mikel Arteta's recent reaction to Lee Mason's failure to draw the lines on the TV replay which would have shown that Brentford's equalizing goal was offside. He said:

That wasn’t a human error…it was a big, big, big, not conceiving or understanding your job. That’s not acceptable.

This distinction is a nice one. In environments where there is uncertainty, time pressure and incomplete information human errors are inevitable and thus forgivable (although the history of the airline industry shows they can be reduced). What's less forgivable, though, is just not understanding your job. We often see this in football; the player who mishits a backpass or misses an easy chance will usually be consoled by his team-mates whilst the one who fails to mark his opponent or track his runner will be criticized.

This distinction also applies in finance. The fund manager who picks a quality defensive stock might under-perform. But that's a human error. He at least understands his job - because we know that such shares in general on average do in fact beat the market. By contrast, the fund manager who buys a spivvy Aim stock and loses money is not even understanding his job, because Aim stocks on average under-perform badly, perhaps because investors systematically pay too much for lottery-type shares: the Aim index is lower now than it was in 1997 whilst the All-share index has almost doubled.

The failure of Neil Woodford's funds was, I think, a case of not understanding his job. Buying under-performing shares is mere human error. But Woodford's error was more culpable. He held illiquid stocks in an inappropriate vehicle - an open-ended fund - which meant that when investors wanted their money back he couldn't give it them.

This error was compounded by another failure of understanding the job - that the task of decision-makers must be to avoid egregious and well-known mistakes. One of these is that past success often makes people dizzy with success, with terrible effects. Woodford was following a pattern: Goodwin's success at taking over Nat West made him think he could do the same with ABN Amro, and Cameron's victories in the 2014 Scottish independence referendum and 2015 general election emoboldened him to think he could win a Brexit referendum. Both ended in disaster.

We should view policy mistakes through this same distinction. Some mistakes are inevitable and forgivable because of what Thomas Homer Dixon called an "ingenuity gap": there's a gap between the vast complexity and unknowability of the world and our puny knowledge.

I'd put some of the Covid reponses into this. Not locking down earlier when we first knew about the virus might well have been an error in retrospect. But it was a forgivable one: Covid was a new and unfamiliar threat.

Similarly, the Bank of England's failure to keep inflation down is also a partly forgivable error. It could not have foreseen the surge in oil and gas prices following Russia's invasion of Ukraine, and even if it had done so it could not have raised interest rates to the level needed to keep inflation at two per cent without inflicting massive damage on the economy. Yes, it might have raised rates in anticipation of mismatches between supply and demand driving up prices, but even had it done so inflation would now still be way above target.

What are not so forgivable, however, are fiscal policy errors. The purpose of fiscal policy is not to enact the voices in your head. It is to respond to economic facts on the ground. Failing to see this is to fail to understand the job of being chancellor. Which is what Kwarteng did in announcing a tax-cutting Budget at a time when markets were worrying about inflation.

And not just Kwarteng. Tight fiscal policy in the early 2010s when there were unemployed resources and interest rates were at their lower bound was also a misunderstanding of the job of chancellor - that looser policy is warranted in such circumstances.

Tory fiscal policy has been like Eric Morecombe's piano-playing; the right notes, but not necessarily in the right order*. Just as the one misunderstands the job of the pianist, so the other misunderstands the job of policy-making.

Useful as it is, Arteta's distinction is not a complete one. We might add a third type of error - that of professional deformation, that professionals are trained and selected to have a particular worldview. Politicians, lawyers and - yes - economists all have distorted views of the world by virtue of (and perhaps because of) understanding their job.

Journalism is an important example of this problem. A lot of what is wrong with it is due not to human error or to obeying the orders of billionaires. They are instead an inherent product of the profession of journalism itself: a bias towards individual agency and against emergence; towards human interest rather than statistics; towards individual events rather than slow-moving trends; and towards over-selling stories. Such biases exist even if the journalist is doing her job properly: journalism is not social science, and cannot give us an accurate picture of the world.

There's another problem here, inherent to our language. We apply words such as "error" and "mistake" to policy-making, forecasting or stock-picking as if we were teachers putting a red cross next to an exam answer. But this is sometimes wrong. In an uncertain world, nobody has the right answers except perhaps in hindsight. We need a different word, for a "mistake" which is inevitable and forgivable. Until we get one, we must ask other questions, the answers to which will vary from context to context. To what extent can human errors be reduced by better training and selection? Or might such training actually introduce other errors? Which errors would persist simply because the world is complex and our knowledge limited? And, if errors are inevitable, how can we ensure we are resilient to them, and which ones would we rather make - because in our complex world, this is sometimes all we can do?

* A pedant writes: technically, he wasn't, as he was playing in different keys.

Anti-business

Rachel Reeves claims to be "pro-business." At risk of mistaking a vacuous cliche for a serious proposition, I'm not sure she should be.

It's not obvious that business has intrinsic virtues. Yes, some businessmen are genuinely committed to virtues of excellence even if they don't use that MacIntyrean term, but equally business is a location of hierarchy, unfreedom, bullshit jobs and bullshit language.

What's more, the single-minded pursuit of short-term profit often displaces such virtues. It can crowd out altruism or professional pride; incentivize managers to chase a quick buck through fraud rather than by promoting a healthy corporate culture (pdf); encourage risk-taking; and reduce creativity (pdf).

Equally, whilst businesses can be part of a healthy market environment, they can also undermine that environment by bribing government, seeking special favours or hiding behind intellectual property laws that restrict competition. It's not obvious that governments should be pro-businesses such as PPE Medpro, Relx or Capita.

Instead, if we should be pro-business, it is because business is a means to achieving other things, the most obvious of which is prosperity.

Now, all economists agree that the determinants of a nation's prosperity are capital, labour, technology, institutions and culture. Which poses the question: to what extent do businesses contribute to these?

For years - long before Brexit - the UK has had low capital investment and a lack of vocational skills. Which tells us that businesses' ability to grow the first two of these has been limited.

But a more interesting case is technology. The best companies have organizational capital; they are more productive than you would imagine from looking only at the capital and labour they employ. Compare, for example, Amazon and Evri. There's not much difference between their drivers and vans. And yet Amazon is an excellent at delivering goods and Evri less so. It has organizational capital, an ability to do things with capital and labour that other firms cannot. It is more than the sum of its parts.

We have a rough way of measuring investors' assessment of such organizational capital. It is the ratio of the share price to book value, the value of a company's capital stock. For years, Amazon's price-book value has been high, meaning that investors have considered it to be worth much more than the sum of its parts. In this sense, the Amazon business adds value by doing clever things. So too do other big tech companies such as Microsoft or Apple*.

It makes sense to be pro these sorts of business; they create wealth by being good businesses, not simply by buying capital and labour power.

But not all busineses are like this. Many don't so much create wealth as divert it. Fund managers are mostly quacks and snake oil salesmen whilst banks are mainly property lenders with casino sidelines. They are, as Adair Turner said, socially useless.

This is especially the case for utility companies. Water companies pour shit into seas and rivers; gas and electricity suppliers rip off their customers; and train companies cancel thousands of services, meaning they fail in their basic duty of getting capital and labour in the right place. There's no reason we should be pro these.

Put it this way. If E.On or EDF were to disappear tomorrow, what would we lose? As long as we have electricity and gas production and distribution - that is, real resources and technologies - not much. Such companies are no more than the logo and letterhead to whom you send your bill.

Even outside of egregious cases such as these, many firms destroy value. Many - including household names such as National Express, Vodafone or Saga - have low price-book values, suggesting that the market thinks they subtract value from the resources they employ (though of course whether the market is right is another matter).

You might think such inefficiency will be corrected by market forces either by product market competition driving out bad businesses, or by them being taken over. But this does not happen in those sectors such as utilities where competition is absent. And it happens only weakly in other markets. As Nick Bloom and John Van Reenen have shown, there is a "long tail of badly managed firms". Yes, there's a case for strengthening market forces to ensure that competition is stronger, but this only reminds us that pro-market policies can and should be anti-(some) business ones.

Which brings us to the nub. If Labour is serious about boosting trend growth - and it should be - then it needs policies which are anti-business, or at least anti some businesses. Tougher competition policy would be bad for incumbent businesses but would foster the creative destruction necessary for productivity growth. A shift from taxing profits to taxing land would be anti businesses that own commercial property but would perhaps incentivize productive capital spending. Encouraging alternative means of financing start-ups (such as a state investment bank) would be anti-bank - more competition for them - but pro-entrepreneur. And encouraging worker democracy would be anti-business in the sense that it would undermine the power and self-regard of the worst sort of bosses, but we've good evidence that it would (pdf) raise productivity.

Labour should be pro the small shop confronted with a rapacious landlord; pro the pub or restaurant owner being ripped off by the utility company; and pro the start-up struggling to raise finance from a dysfunctional banking system. It should not be generically pro-business - and in fact given conflicts of interests such as these it cannot be.

Of course, there's isn't always a conflict between policies that are pro-growth and those that are pro-business. Rejoining the single market, for example, would be both; that Labour is not advocating this suggests its embrace of pro-business principles is mitigated by other considerations.

All this should sound familiar. For one thing it is bog-standard conventional economics: proper economics, remember is not the free market fairy tale of Tufton Street but an analysis of how the real world operates. And for another, it echoes Ed Miliband's distinction between producers and predators.

And yet his distinction was howled down by his opponents in the Tory party and (what is much the same thing) the media. Perhaps Reeves has to retreat behind mindless cliches because she knows that intelligent political discourse is not possible.

* A high PB ratio is often a sign that a company has a lot of intangible assets. But such assets are at least sometimes how they create value - a knowledge of how to do clever things with assets that other companies cannot.

Lee Anderson & the nature of politics

Lee Anderson's promotion to deputy chairman of the Tory party highlights an under-rated fact about politics - one which perhaps the right understands instinctively better than the left.

Defenders of his elevation claim that Anderson represents interests and ideas that would otherwise be underweighted in Westminster politics. Matt Goodwin points out that Anderson, unlike an increasing number of Labour MPs, had a "working class" job before entering parliament. Dominic Lawson says he "speaks for millions". And Dan Hodges says:

It's important we have voices like Lee Anderson as part of the political mainstream. 52% of voters support the death penalty in certain circumstances. You can't just say to half the electorate, "sorry, we're excluding you lot".

Even if we allow for the tendency for some posh rightists to project their own reactionary attitudes onto a partially-imagined "white working class", there is a germ of truth in this.

But it inadvertently reveals a bigger truth - that politics is not a matter of rational debate about issues we agree to be important, but rather is a struggle for what gets discussed; whose ideas are represented; and whose interests are given mainstream voice.

The thing is that there are hundreds of interests, people and ideas which are underweighted in mainstream politics. I don't just mean identities: women and young people are under-represented in parliament, though less so ethnic minorities and gay people. I mean people such as the disabled, those with special educational needs or others who are dependent upon dwindling local government resources; low-wage workers; tenants facing lousy landlords and exorbitant rents; people with mental health difficulties; those who need probabation services; those dependent upon public transport; or single parents. The recent Dilnot-Blastland report (pdf) showed how the BBC's coverage of the public finances was distorted because it neglected interests such as these.

What's more, there are countless ideas which are under-weighted in Westminster in part because MPs and journalists are selected not to have them - such as the importance of emergence; the fact that work is for millions futile drudgery; the importance of bounded knowledge and rationality; the fact that capitalism constrains policy-making; or that top-down managerialism is not the only model of decision-making. Ideas as different (and I think important) as Oakeshottian conservatism, Ricardianism or free market egalitarianism don't get the attention in politics they should. Nor do many important questions such as why the UK is such a poor country, or why our politics is so anti-intellectual and philistine.

All of which poses the question. Why are Goodwin and Hodges (and Sunak and most of the Tory party) so keen that reactionary older people get a voice and yet so unconcerned that countless other voices are not being heard in Westminster? To put this another way, why is it so important to hear from ex-mining communities now when it was important not to hear from them in 1984-85?

The answer is that the right are not interested in the democratic ideal of equal representation for everyone. They want the likes of Anderson to have a voice precisely so that other voices are not heard. If we are debating the death penalty or immigration or travellers we are not debating other things such as falling real wages, stagnant productivity, the social murder that is austerity or the failure of British capitalism. And guess who that suits?

The right is engaged in a Gramscian war of position, wanting to promote reaction and silence the left, the powerless and (a more recent development) intellectuals. Of course, many on the right don't want to appear so oikish as to actually express Anderson's views themselves. For them, Anderson is a sort of ventriloquist's dummy, a comic entertainment saying what they cannot bring themselves to.

Herein lies the danger. In taking Anderson at face value the left risks being sucked onto the battlefield the right wants - that of culture rather than economics. But then, to quote Orwell out of context, "so much of left-wing thought is a kind of playing with fire by people who don't even know that fire is hot."

Weird politicians

Our political system is dysfunctional. It selects for the incompetent, the dishonest and the downright deluded.

So much is obvious to those who care to think about it. What's not so obvious is that there is a more subtle bias in politics which distorts and diminishes political debate.

Recall that all institutions are selection devices: they select for some people and ideas and against others by filtering out some types and by disproportionately attracting others. Even if we had a well-functioning system which selected against crooks, fools, narcissists, egomaniacs and sociopaths our politicians would still be unrepresentative of the people, even of educated and informed people.

To see this just ask: what sort of people are attracted to political careers?

In a well-functioning polity, the answer would be (and in fact is for many MPs now): those who think politics matters, that it can make a difference. If you think it can't - either because a £2.5 trillion economy is hard to change, or because the power of capital constrains reform, or whatever - you'll choose a different career.

And what sort of folk think that politics can make a difference?

Those who are overconfident - if not about their personal abilities then about the potential for small policies to have large effects; or about the ability of policy-makers to escape the constraints imposed by capital; or about their ability to overcome bounded rationality and knowledge; or about the potential for "good chaps" to stay in charge of government.

Such overconfidence will have systematic effects. It will lead to a neglect of the need for policies and institutions which are resilient to error so it will (for example) underweight the need for automatic stablizers in the belief that policy-makers are smart enough to use discretionary policy to prevent recession. It will cause them to favour tricksy policies such as tax credits or corporation tax over simple ones such as a basic income or land value tax because they over-rate their ability to design and implement complicated policies. It will cause a bias towards belligerent foreign policy by underweighting the risks of intelligence or military failures. And there'll be a bias against freedom because, as Hayek said, "we will rarely know what we lose through a particular restriction of freedom" - and overconfident policy-makers will not be awake to the limits of their knowledge.

Closely related to the faith in policy is a belief that the economy and society can be managed from the top down whilst under-appreciating the importance of complexity and emergence. Marx thought that "the emancipation of the working classes must be conquered by the working classes themselves" - that socialism would be an emergent process. Parliamentarians, by contrast, have been squeamish about such agency. As Ralph Miliband put it, they have "treated the voters not as potential comrades but as possible clients." Labourism, says Phil Burton-Cartledge "was born for the compromises, Byzantine procedures, and plodding constitutionalism of the House of Commons."

In the party, this has for years meant a hostility to "extraparliamentary" action. As Miliband put it in Parliamentary Socialism:

The leaders of the Labour Party have always rejected any kind of political action (such as industrial action for political purposes) which fell, or which appeared to them to fall, outside the framework and conventions of the parliamentary system. The Labour Party has not only been a parliamentary party; it has been a party deeply imbued by parliamentarism.

This is echoed today in Starmer's ambivalence towards railworkers' strikes.

It also means the party has accepted managers' right to manage. We saw this particularly in Gordon Brown's acquiescence to bosses in the belief - refuted by the financial crisis - that they had especial skills of foresight and control. And as Phil says, for Labour economic issues have traditionally been "about 'fairness', not contesting the employer's right to run matters as they see fit." The party has long been wary of economic democracy for this reason.

For the same reason politicians also have a bias against free markets because these too are emergent processes; the creation of private sector monopolies is not, remember, the same as the creation of a market.

Not that this under-weighting of emergence is confined to Labour. Far from it. It is one of the more egregious examples of BBC bias. The BBC has long neglected slow-moving emergent processes such as the productivity stagnation and has failed to see that government borrowing is the counterpart of private sector decisions to save or (not) invest: it is emergent.

This overconfidence in top-down control can have fatal effects. The Chilcott report found that one reason for the failure of the Iraq invasion was that over-optimism "can prevent ground truth from reaching senior ears."

Sometimes, however, it is through small windows that we see a big picture. So it is here. Politicians and political journalists are avid consumers of political biography and have less interest in the social sciences. That fits with overweighting the potential for "great men" to change events whilst underweighting socio-economic forces.

There's something else. The problem with politics is that, to paraphrase Michael Walzer, it takes too many evenings. Professional politicians must attend to their constituents and various hobbyists with bees in their bonnets. They are therefore selected to be busy cunts, to borrow Jaap Stam's famous description of the Neville brothers. It's no surprise, therefore, that all politicians value "hard working families" and neglect Bertrand Russell's essay in praise of idleness. Nor is it surprising that they regard increasing numbers of over-50s leaving work as a problem rather than as something to be celebrated - people being liberated from drudgery and hierarchy.

If your evenings are consumed by political meetings, you can't go to concerts,watch TV or read. Politics will therefore select for philistines. Hence the cuts to arts funding; squeezing of music and arts out of schools; and destruction of adult education.

My point here echoes Peter Allen's The Political Class. Politicians are unrepresentative not just because they are disproportionately male, stale and pale but simply because they are politicians. All professions tend to have a partial and distorted view of the world merely by virtue of attracting particular types and developing particular ideas and dispositions. Politicians are no different.

Except, I suspect, that it is harder for them to see it. The tendencies I've described aren't confined only to MPs, but also to many political journalists and the talking heads who appear on those speak your branes shows. They are therefore reinforced by echo chambers and groupthink. Fish don't know they are wet.

This is not to say this view of the world is wholly wrong. It's not: sometimes moderate top-down reforms do work. Nor is it to say that all MPs and political journalists share all of these dispositions. They don't; it's just that they are more prevalent among the political class than the general educated public.

And - what is important - this would be the case even if there were no nepotism in journalism or rigging of the choosing of parliamentary candidates, and even if politicians were intelligent, rational and well-intentioned. It's simply the result of selection effects - effects which are inherent in even the best-functioning representative democracy. Which is why there's a case for considering alternatives such as sortition and deliberative democracy.