Stumbling and Mumbling

Devaluing excellence

Disputes about wages are rarely about financial considerations alone, but are often tied up with ideas of respect, expectations and morality. The fact that we call wages "earnings" alerts us to the close link between pay and our sense of desert. As Daniel Kahneman, Jack Knetsch and Richard Thaler wrote in a famous paper (pdf), "rules of fairness can also have significant economic effects."

We should regard the pay disputes of academics and junior doctors in this light.

The thing is that they all did what teachers tell us are the right things to do. They studied hard and got top grades. And their reward? For junior doctors, it's a mere £14 an hour (pdf). And many academics cannot afford (pdf) basic necessities and face job insecurity.

Yes, some will become well-paid senior doctors and professors (although even the latter have seen pension cuts). But their landlords won't accept the promise of big money in future instead of payment now, so why should they?

Hence their sense of injustice - a sense heightened by the contrasts between doctors' pay and the millions handed to firms' for often-defective PPE, and between academics' pay and that of vice-chancellors.

What we pay is what we value, and these priorities signal that the Tories value cronyism and managerialism more than learning.

From this perspective, we should regard the underpayment of junior doctors and academics alongside cuts to arts funding and the BBC's attacks on the BBC Singers and orchestras. (Yes, redunancies have been suspended, but the mere initial announcement of them indicated the BBC's priorities.) What all these have in common is an undervaluing of academic and technical excellence and an overvaluing of cronyism - not just in PPE contracts but in the BBC appointing Tories such as Robbie Gibb, Richard Sharp and John McAndrew to senior positions.

Here. as so often, we need Alasdair MacIntyre. He distinguished between goods of excellence - which consisted in mastery of particular practices - and goods of effectiveness: wealth, power and fame. Sometimes these two goods go together: if you are an excellent footballer, you'll acquire the goods of effectiveness. But often they don't, as when musicians struggle to earn a living.

The word "neoliberalism" is much misused. We might, however, attach that label to the valorization of the goods of effectiveness over those of excellence - of winning at all costs over performing well. This is true not just in the NHS, the BBC or universities. Barney Ronay's observation that the Chelsea team shows the "distorting effects of money without sense or love or care" is a complaint that the goods of effectiveness have eclipsed those of excellence. It's also a trend in both business and the public sector generally, where managerialism is eroding professional skill and autonomy; a big reason why many erstwhile "middle-class" people voted Labour in 2019 was that they have become proletarianized.

The intellectual decline of the Tory party is part of this trend. When MPs such as Dorries, Gullis or Anderson flaunt their boorish ignorance like pigs wallowing in muck they are demonstrating the same contempt for learning that causes them to underpay well-qualified professionals. Not that the disease is confined to a few grotesque outliers. Even the "sensible technocrats" such as Sunak or Hunt never give any hint of being influenced by serious thinkers in the way that Thatcher often expressed her debt to Hayek, Popper or Friedman. Matt Goodwin, emboldened perhaps by the knowledge that in the land of the blind the one-eyed man is king, has espied a gap in the market for a Tory intellectual - but his sneer that anyone demonstrating a sign of education is a member of the "liberal elite" merely further reveals the party's philistinism.

Which, from a historic perspective, is odd. Many Tories traditionally aligned themselves with an educated elite. Think of Edmund Burke fearing that, in a revolution, "learning will be cast into the mire and trodden down under the hoofs of a swinish multitude." Or Michael Oakeshott's claim that education is "an initiation into a civilization". Or Roger Scruton's defences of "high culture" against the depredations of the left. Or Allan Bloom's defence of the "canon" against the "closing of the American mind".

That the right has, perhaps with the sole exception of Jesse Norman, abandoned this tradition shows just how far it has been taken over by an obsession with money and power to the exclusion of excellence.

It's not just its crass philistinism that should trouble us about this. Everyone with a stake in currently-existing capitalism should be worried.

Intelligent defenders of capitalism have long known that its stability requires a large and contented middle class. Thatcher tried to create a property-owning democracy for just this reason. Which is just what her epigones are not doing. In alienating professionals such as junior doctors and academics (and squeezing them out of property ownership) they are creating a narrow elite to which erstwhile allies are now hostile. If doctors - a traditionally conservative bunch - won't side with the ruling class, then who will?

History has a warning here. Peter Turchin has shown that revolutions are more likely when the ruling elite becomes narrow, closed and antagonistic to the middle-class: think of the French and Russian revolutions.

Which is why everyone wanting capitalism to be sustained must support academics and doctors - not just because doing so valorizes intellectual achievement, but because it forestalls a dangerous isolation of the ruling elite. Sometimes capitalism needs an inoculation - a small illness to prevent a worse one.

You might think it odd that a Marxist is making this point. Well, whilst my brain and heart favour revolution, my Isa statements do not. As Hayek said (pdf):

The main task of those who believe in the basic principles of capitalism must frequently be to defend this system against the capitalists.

Of course I appreciate that some conservatives don't want to support "woke" academics, just as some leftists won't like seeing that there's a conservative case for higher pay in the public sector. But politics, if it is to be a worthwhile activity, must not be a search for ideological purity but rather a building of alliances.

When clever people do stupid things

Simon Wren Lewis asks:

There is no doubt that Lawson was far better qualified than many other Chancellors, and also that he was clever, so why did he get these major judgements wrong?

It's a good question because it broadens. Clever people gave us the poll tax, the invasion of Iraq, financial crisis and collapses of Silicon Valley and Credit Suisse.

So why do they so often get it wrong. There are many reasons.

One, which Simon attributes to Lawson, is arrogance. In ignoring his advisors, Lawson did not go as far as Kwasi Kwarteng (double first, PhD and Browne medal) who sacked one of his. And observers agree that one of the defining features of Fred Goodwin which contributed to the collapse of RBS was his arrogance. Being clever tempts men to ignore Burke's advice:

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.

Instead, they are prone to what Daniel Kahneman has called an illusion of skill. They believe their intellect equips them to foresee or control events which are largely unpredictable and uncontrollable in a complex world.

We see this in finance. Although intelligent investors do perform slightly better than others, they still make errors - such as buying expensive but poorly-performing funds - because they think they have the ability to spot good assets.

Closely related to arrogance is the failure to see that intellectual ability is often context-specific, that there are no general purpose experts. They forget Charlie Munger's advice: "one skill is knowing the edge of your own competency." Many men have made fools of themselves by spouting off outside their field of expertise: think of William Shockley, Bobby, Fischer, James Watson or Richard Dawkins...

Failing to know one's limitations isn't the only way intelligent people go wrong, as the story of Vicky Pryce shows. She went to prison because her great intellect was eclipsed by her hatred for her ex-husband. Which is a dramatic exemplar of a widespread tendency, for our intellect to fail us in times of stress. The better financial advisors tell people to never take decisions when we are emotionally aroused because this clouds our judgment and so "produces substantial financial costs".

Warren Buffett has famously warned of this. "Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ" he has said. "You don’t need a lot of brains to be in this business...What you do need is emotional stability."

The ancient Greeks had a good word - phronesis, which referred not to mere intellect, but to the ability to apply that intellect appropriately in the right context. You all know clever people who lack that skill.

One reason they lack it is that intellect is not the same as biasfreeness. In Human Inference, one of the earliest books in the cognitive bias literature, Richard Nisbett and Lee Ross wrote:

There is no inferential error that can be demonstrated with untrained undergraduates that cannot also be demonstrated in somewhat more subtle form in the highlt trained scientist.

And David Robson has written that "greater education and expertise can often amplify our mistakes while rendering us blind to our biases."

One such bias is groupthink. In The Blunders of our Governments Anthony King and Ivor Crewe say this was true of the emergence of the poll tax. The people charged with reviewing local government finance were very bright - William Waldegrave was a fellow of All Souls - but they also, say Crewe and King, "developed a considerable esprit de corps". And this can drain any group of self-criticism:

Some of the best and brightest in British government - none of those intimately involved was remotely a fool - nevertheless contrived to produce one of the worst and stupidest pieces of legislation in modern British history.

But we don't need groups to turn smart people into bad decision-makers. We can do it on our own. There is, for example, no link between intelligence and the myside bias. In fact, greater intelligence makes us more able to see the flaws in opposing ideas and more able to defend our own with sophistry. It's perhaps for this reason that George Orwell said that "some ideas are so stupid that only intellectuals believe them."

What he's getting at here is ideology. Of course, we all have ideology - yes, even (especially) "moderate" and "reasonable" centrists. What we must not do, though, is let our ideology distort our assessment of the facts. This is what Lawson and Kwarteng failed to do: the ideology that tax cuts would swiftly boost potential supply led them to underestimate the impact they would have on inflation, inflation expectations and interest rates. Similarly, proponents of the poll tax let the ideological view that users should pay for public services colour their judgment about the feasibility of that tax.

It's not just partisan ideology that can hinder our intellect. So too does professional deformation, the tendency of our professional training to distort our perceptions. Academics, for example, might be antipathetic to my point here because they are apt to overweight the importance of intellectual ability. In the same way, engineers to often see everything as a control problem; lawyers over-estimate the role of law in social change and - yes - economists can exaggerate the importance of incentives.

The same applies to politicians. Even the very smartest of them, merely by virtue of being politicians, will be biased. They are disproportionately likely to be over-optimistic about the ability of good policy to improve things; to exaggerate the competence and knowledge of top-down controllers (which contributed to the Iraq disaster); to under-play the value of emergence and freedom; and to overvalue hard work.

Raw intellect, then, is on its own useless and sometimes downright dangerous.

This is not to say decision-makers should be chosen for their stupidity: if this were so, we would now be living in a golden age of governance. What it is is an argument against epistocracy.

It's also an argument for ensuring that intellect exists not in individual brains but in institutions and habits. Except for a little seasonal investing, my investments are all passive: I merely make a regular monthly payment into tracker funds. I do this because good habits matter more than thinking about investing with all its pitfalls. The same should be true in companies. The best ones have organizational capital, routines which help limited people do good things. Well-functioning markets also do this, by weeding out egregiously incompetent companies. And the same could be true in politics: deliberative democracy could in principle mobilize the general bank and capital of wisdom.

But of course, our actually-existing institutions are far from ideal. The marketplace of ideas - of which the media is a big part - selects against good ideas and in favour of bad. Economic policy is bad not (just) because politicians are stupid but because there are powerful pressures from the forces of conservatism operating against good policy. Companies sometimes select in favour of psychopaths (pdf) and the overconfident. Academics produce bad research not because they are stupid but because of the compulsion to "public or perish." And the financial crisis was caused in part by bad incentives: bankers were paid well to ignore risks.

Which brings me to my point. We must avoid the schoolteacher attitude to politics and business, marking the work of politicians and businessmen as if it were a test of intellectual ability and singling out the best and worst students. Instead, we must consider institutions. Do we have those institutions which help filter out incompetence and bias, or which are resilient to error? The answer, for now, is: no.

Why not raise CGT?

The Labour party is more influenced by the Tory press than by economic rationality. That's the inference to draw from Rachel Reeves saying she has no plans to raise capital gains tax.

I say this because there is a widely-accepted economic logic for doing so. It is that income and capital gains are much the same: what should matter on any investment is the total return, not the form in which that return comes. Taxing capital gains at a lower rate than income therefore distorts individual behaviour. For assets held outside of tax shelters, this pushes investment towards shares that don't pay dividends - which are often spivvy Aim stocks - and away from dividend-paying ones. It encourages investors to sell some shares merely to realize a capital loss and to hold others to avoid a capital gains tax bill. It encourages people to take their returns as capital gains rather than as income, which often entails the deadweight costs of keeping armies of lawyers and accountants looking for tax fiddles. And it favours financial capital over human capital.

In all these ways, having a lower CGT than income tax rate is iniquitous and inefficient. This argument is separate from the question of whether or not we should tax the rich more.

Sensible economists have long appreciated this. "Capital gains need to be taxed at the same rate as other components of income" said the Mirrlees Review (pdf) in 2011. And back in 1988, Nigel Lawson said:

In principle, there is little economic difference between income and capital gains, and many people effectively have the option of choosing to a significant extent which to receive. And in so far as there is a difference, it is by no means clear why one should be taxed more heavily than the other. Taxing them at different rates distorts investment decisions and inevitably creates a major tax avoidance industry.

Why, then, is Reeves so loath to raise CGT? Doing so feeds into the impression that Labour lacks not just ideas, but any basis in serious thought.

The answer, I think, is simple. The Labour leadership is terrified of the headlines that would accompany even rational tax reforms: "tax raid on millions", "attack on business" and so on. As I've said, what matters in politics is not intellect, but power. Intellectually, there's a case for equalizing CGT and income tax rates. But intellect loses to power.

A sensible Labour party could however use the media to its own advantage here, at least once it is in office: it is always easier to get forgiveness than permission.

Another media attack upon Labour is that of fiscal profligacy: "where will the money come from?" Labour could answer this question by using CGT simply as a revenue-raiser.

Strictly speaking, of course, this makes little sense, and not just because the rise wouldn't raise very much. What a Labour government will need is not money but real resources: nurses, care-workers, builders, skilled management and so on. Raising CGT would tax cash that would largely be saved rather than spent, and so would do little to release these resources.

But we don't live in a polity in which good arguments prevail, not least because years of intellectual pollution from the media have replaced them with mindless drivel. The media would therefore have no right to complain if Labour were to raise CGT merely to "raise revenue". If you make bombs you don't win any sympathy if one goes off in your face.