Stumbling and Mumbling

The right's "woke" capitalism problem

Whatever happened to the right's faith in market forces? I ask because of their complaints about "woke capitalism" after Coutts refused Nigel Farage's custom.

Farage says:

I find it extraordinary that in modern corporate Britain, being seen to be politically correct matters more than making profits.

In theory, though, market forces should solve this problem. Imagine a business were to systematically turn away customers whose views it didn't like. Then a rival company that wasn't so fussy could serve them. This rival would expand at the expense of the "woke" one, possibly even driving the latter out of business. In a well-functioning market economy, companies have to care about making profits because if they do not they go bust.

There's an analogy here. Gary Becker claimed that this would be the fate of racist employers. Companies that discriminated against black people - that is, ones that thought that being politically incorrect mattered more than making profits - would, he said, suffer a competitive disadvantage as non-racist rivals hired good black workers or served black customers.

This isn't wholly fanciful. Becker pointed out that young industries with small growing companies were less likely to discriminate than older bigger firms where market forces weren't so powerful; in the 1920s Hollywood and Tin Pan Alley were more hospitable to Jews or blacks than less competitive banks or steel firms.

And in the 1970s black footballers were rare, partly because of racist stereotypes of them being lazy and ill-disciplined. Then West Brom manager Ron Atkinson* signed the "three degrees" and his team, inspired by them, did so well that other teams hired black players. Yes, those stereotypes persist but there are countless more black players in football now than there were when I was a kid.

The analogy is not perfect, however. Whereas racist businesses refused to hire or serve black people, "woke" ones are generally not refusing to employ Remainers or declining their custom: Coutts is closing Farage's account because it will no longer meet the criteria it imposes on all accounts, as Frances Coppola has explained.

But the point holds. If people don't like "woke" companies, there's a market opportunity. Non-"woke" companies can appeal to them and take business from the "wokesters". Competition should select against companies that pursue goals other than maximizing profits. Companies who think that "being seen to be politically correct matters more than making profits" should therefire shrink and go out of business. The market should solve the problem of "woke" capitalism, just as Becker thought it should solve the problem of racist capitalism.

Granted, it does so at a cost. Becker warned that the profit-maximizing solution would lead to racial segregation as black workers flocked to non-racist companies or served black clients rather than racist whites. But I don't see this applying to "woke" and "non-woke" firms. Yes, there are probably more Remainers in Starbucks or Prets than in Wetherspoons, but this probably reflects our big demographic divide than the professed ideology of those businesses. We're a long way from Jim Crow.

Also, it's not clear historically how far Beckerian competition caused racist companies to decline rather than the effects of legislative and cultural change. Which poses the question: could it be that the right whine about "woke capitalism" because it fears it is on the wrong side of cultural change and so cannot hope to reverse the tide of "wokeness"?

But the question remains: why hasn't the market (yet) selected against "woke" businesses?

One thing Farage has said actually sharpens the question: "they're all woke; they're all remainer". But this just means there is a bigger potential market for a non-"woke" company.

There's one answer Becker gave to this question that doesn't seem to apply. Profit-maximising employers, he said, had to consider the tastes of their customers or of other workers. They could lose business if racist customers refused to eat in the same cafes as black people, and lose staff or productivity if racist workers were unhappy to have black colleagues. And so even profit-maximizing firms might discriminate against blacks.

But this doesn't apply to "woke" companies today. Coutts is not closing Farage's account because "woke" customers refuse to bank with a firm that has him as a client. Nor are other "woke" capitalists such as Starbucks or Ben & Jerry's facing an efflux of customers who refuse to buy coffee or ice cream from companies that might occasionally sell to Brexiters.

Instead, I suspect the answer lies in a mundane fact - one that applied also to racist or sexist companies. Quite simply, the wheels of competition do not grind finely. Nick Bloom and John Van Reenen have shown (pdf) that there is "a long tail of extremely badly managed firms." If market forces don't weed out these, why should they weed out "wokesters" - especially as professing (not necessarily sincerely) political correctness might be a handy marketing strategy? There is, as Adam Smith said, a great deal of ruin in a nation.

It's easy to see why. In many industries there are big barriers to entry in the form of high capital requirements (have you tried setting up a bank?), intellectual property protection, the difficult of finding good premises, or simply the hassle to customers of switching.

Of course, lefties have pointed out such frictions for decades: that's why they were sceptical of the more optimistic interpretations of Becker's analysis.

What's odd is that the right has, implicitly, come round to agreeing. Which poses some questions. As Robert Shrimsley has asked, if the right no longer supports free markets what exactly is their mental model of the economy? And were the right ever sincere in the support for free markets, or was this support only strong when those markets were operating to weaken the working class?

* Atkinson, like many men of his time, had racist attitudes. Which shows that you don't need to be a saint to combat racism, but just someone who cares about winning football games and making money.

Fiscal conservatism, economic radicalism

Sir Keir Starmer has ruled out significant rises in public spending under a Labour government. He's partly right. What his supporters and many critics fail to appreciate, however, is that a tight fiscal stance is wholly consistent with some very left-wing policies.

First, why is he partly right?

The answer has nothing to do with "iron-clad fiscal rules". Such talk is merely to appease the nonces, imbeciles and billionaires' gimps in the media.

Instead, Labour's problem is that we are close to effective full employment; certainly, there are very few doctors or builders out of work. This means that any increase in public spending in excess of taxes would be potentially inflationary and would therefore (given the current inflation target) lead to the higher mortgage rates Sir Keir warns us of.

Just as Blairites fail to see that it's not 1997 any more, so some of Starmer's critics fail to see that it's not 2010 any more. There aren't the unemployed real resources to permit a significant fiscal expansion.

This does not, however, justify sticking with every detail of the Tories' spending plans such as the two child benefit cap. From an economic point of view, increased public spending is perfectly acceptable if it is matched by taxes which would offset the boost to aggregate demand. Sticking with the Tories' plans might be a coherent media strategy, but it is not an economic necessity.

Rigid fiscal discipline, however, by no means rules out radical policies. Here are a few Labour could follow:

Economic democracy.

It's no accident that our 15-year long stagnation in productivity and real wages followed rising inequality, because there are many channels through which inequality can depress output. Fixing this requires institutional change. As Joe Guinan and Martin O’Neill say:

The institutional arrangements at the heart of today’s British capitalism – concentrated private ownership, corporate dominance, and the overweening might of London-based finance capital – together form a powerful engine for the extraction of value and its distribution upwards. It is this basic institutional design that drives the outcomes we are seeing in terms of crumbling public infrastructure, social atomisation, environmental degradation, and a widespread sense of popular disempowerment.

Part of the solution here involves tougher regulation and tax reform, such as abolishing the carried interest anomaly - a fiscal tightening Labour should approve.

Another part requires the encouragement of more worker democracy (pdf), simply because we have evidence that this would raise productivity. As Virginie Pérotin puts it:

Worker cooperatives are more productive than conventional businesses, with staff working “better and smarter” and production organised more efficiently.

This could be done by - for example - using central and local government procurement to favour worker-owned companies or social enterprises; giving workers first refusal when a business is sold; encouraging lenders to better support coops (assuming that a National Investment Bank is off the agenda for wrong-headed fiscal reasons); or giving tax breaks to employee ownership schemes.

Tougher regulation.

Beefing up competition policy doesn't require more public spending. Nor does an attack upon regulatory capture: the revolving door between Ofwat and water companies' management shows that the former does a poor job of keeping the latter in its place.

We don't necessarily need nationalization to address this problem. We could convert water companies into franchises which bid for time-limited contracts to supply water, run sewage networks and so on.

Alternatively, the government could simply impose price caps itself on utilities rather than have captured regulators do so. The theory of the second-best shows us that where there is a market failure (such as a natural monopoly) another market "distortion" can be efficient.

Tax and benefit reform.

Taxes and benefits both need to be simplified. Reducing the conditions attached to Universal Credit, for example, would be a small step towards a basic income and would actually be "fiscally responsible" by cutting the number of administrators and work coaches.

And the goal of tax reform should be to shift towards taxing (pdf) inheritances and land rather than incomes - starting perhaps with a commercial land tax.

A maximum wage.

This is typically justified in terms of fairness, to stop executives earning hundreds of times more than their employees.

There is, however, a case for such a limit in terms of efficiency.

For one thing, big inequality can reduce an organization's efficiency as middle management spend their efforts on office politics or looking for the next job; or as they look to highly-paid bosses to give the lead rather than taking their own initiative.

Against this, you might argue that such a maximum would reduce the supply of talented bosses even more than it is currently restricted. This, however, could be a good thing: if it encourages the break-up of large firms it would decrease monopoly power.
If the maximum does not apply to companies where the CEO has a large ownership stake, it would have another advantage. It would encourage CEOs to set up their own companies. In this way, we'd get an increase in the number of talented entrepreneurs.

Now, I've not gone into detail on these because, to paraphrase Marx, there's no point writing recipes when you don't have a kitchen. Instead, I'm just saying that Labour could in principle be economically very radical even whilst having a tight fiscal policy and ruling out nationalization.

There's a strand of social democracy - I'm thinking of Polly Toynbee - which see politics largely through a tax-and-spend lens and which is therefore disappointed by fiscal restraint. Such a social democracy however works only if capitalism is healthy so that economic growth will deliver taxes. But capitalism is not healthy. We need radical supply-side measures to boost productivity.

You'll object here that the policies I've outlined are neither "practical" nor "credible".

And that's the point. Although these policies might well boost economic growth (and I've not mentioned rejoining the single market) whilst reducing inequality Labour is not offering them. Which suggests that its talk of fiscal discipline is not merely an economic policy. It is instead part of a wider message - of placating the right by showing that it is no threat to inequality and extractive capitalism. Labour is capital's second XI - and the second XI of the most backward and regressive parts of capital at that. 

On being conservative

Katherine Birbalsingh recently tweeted something insightful:

"Having small c conservative values" is not political. Many lefties have them.

True. I think of myself as one of these.

The conservative disposition, wrote (pdf) Michael Oakeshott, "is averse from change, which appears always, in the first place, as deprivation." And there have been many changes in my lifetime which are indeed deprivations: the dumbing down of the public sphere and disappearance of the public intellectual; the loss of music teaching in state schools; the closure of thousands of pubs; the insertion into football of billionaire owners backed by repressive states; the loss of cleanish bathing water in our seas and rivers; the declining quality of popular music. And don't get me started on cricket.

But here's the thing. Many of these losses have been inflicted upon us by neoliberal capitalism: the privatization of water; the view that schooling (or at least state schooling) must merely prepare youngsters for labour; the opening up of English institutions to predators of all nations; and a university management which valorizes unreplicable "research outputs" over genuine intellectual work.

Not least of these impositions have been the forces that have diminished the traditional "middle-class". Financialization has led to thousands of people in professional jobs being unable to buy a house - a development which would have appalled Thatcher with her advocacy of property-owning democracy. And the professions themselves have been degraded by managerialism - hence gruelling hours and the loss of autonomy.

Neoliberal capitalism has done much more damage to the traditional English way of life than "cultural Marxism" or "wokesters" ever have.

In fact, the very use of those terms by the right is a sign of a temperament antithetical to small-c conservatism. Whereas small-c conservatism - as expressed by Burke or Oakeshott - advocates cool-headed scepticism and attention to empirical fact, talk of "wokesters" or "cultural Marxists" is that of fanatics who live in their own head or (what is just as bad) get their ideas of the world not from the evidence of their own eyes but from the scribblings of billionaires' gimps.

Not that their fanaticism stops there. Liz Truss was propelled into government by a small cult. And her belief that a tax-cutting Budget could boost growth even when the economy was close to full capacity was a denial not only of conventional macroeconomic thinking but also of Burke's conservative dictum:

Circumstances (which with some gentlemen pass for nothing) give in reality to every political principle its distinguishing colour, and discriminating effect. The circumstances are what render every civil and political scheme beneficial or noxious to mankind.

Her ill-fated premiership was at one with Brexit in this regard. The conservative, wrote Oakeshott, is "cool and critical in respect of change an innovation", preferring the tried to the untried. Brexiters, however, were the opposite of this - fanatics for change who, in most unBurkean fashion, over-estimated the capacity of government to achieve a satisfactory post-Brexit settlement.

"We tolerate monomaniacs, it is our habit to do so; but why should we be ruled by them?" asked Oakeshott, adding that goverment should "protect its subjects against the nuisance of those who spend their energy and their wealth in the service of some pet indignation."

In all these respects, therefore, the small-c conservative should be antipathetic to today's Tory party and to the neoliberal capitalism it (partially) represents.

Which leads to a puzzle. Ms Birbalsingh went on to commend National Conservatism as a grouping of small-c conservatives. Its defining features, however, seem to me to be not hostility to Brexit, Truss and neoliberalism but to migrants, "gender ideology" and "wokesters". Yes, there are complaints that policy-makers have put "the abstract goal of global free trade ahead of the economic welfare of all citizens." But the new right is defined more by culture war issues than by an antipathy to actually-existing capitalism.

Part of the reason for this is that conservatives love what they have come to know, which leads to Scruton's point*:

The disquiet over immigration [is] the result, it seems to me, not of racism, but of the disruption of an old experience of of home, and a loss of the enchantment which made home a place of safety and consolation. (England: An Elegy, p7-8)

This, however, runs into two problems. One is that migration isn't the only thing that's disrupting our old experience of home. So too (for example) is the environmental change caused by water companies and climate change. We would therefore expect anti-migration sentiments to be correlated with support for green policies. Whilst this is true in some cases, such as some nimbys or Zac Goldsmith, the opposite is more often the case: Ukip, for example, is campaigning against decarbonization policies and wants to reopen coal mines.

The second problem is that those areas that have actually experienced more immigration - and therefore one supposes more disruption of home - are more accepting of it; it was areas with low migration who were more likely to vote for Brexit, for example.

This might be because fear is worse than reality. Or it might be because of something else.

That something is that the idea of home is, for some, not merely an empirical matter of one's local area and the people and places we see every day but is instead a reified and ideologized notion. "Britain" is a bundle of symbols and myths, such as of a benign Empire or wholly heroic Churchill. And this "Britain" is identified with rich, white (and southern) people so that Russian agents are more "British" than Muslims or trades unionists. Which is a legacy of an old attitude described by C.B. Macpherson in The Political Theory of Possessive Individualism: "the poor were not full members of a moral community...They were in but not of civil society."

Such patriotism is thus a love of a cleansed and mythologized nation.

Which is paradoxical. For me, one of the attractions of small-c conservatism is its empiricism and distrust of abstractions and dreams. And yet small-c conservatives on the right too often invoke just such an abstraction - that of what Benedict Anderson called an imaginary community. This is not to say they are flat wrong: we all need myths and legends. It's just to say that we can and should separate small-c conservatism from anti-migrant sentiments. To fail to do so is to miss the many strengths of conservatism.

* Scruton went on to add that "the right of asylum is an untouchable provision of the English law", putting him to the left of today's Tories.

Inflation: a political problem

Why is inflation a problem? I ask because the common sense answer is wrong, whilst a standard answer among economists is out-of-date.

You might think the answer is obvious: inflation is making us poorer. Not so. Of course, wages haven't kept pace with prices, especially of food and fuel. But this, strictly speaking, isn't inflation. It is a change in relative prices. If utility bills were rising 17 percentage points faster than wages and food prices 12 percentage points we'd have a problem even if other components of the CPI were falling so that overall inflation were low.

Nor are higher mortgage rates a cost of inflation. They are a cost of bringing inflation down. And this is a policy decision in two senses: first to want to cut inflation; and secondly to do so through higher interest rates rather than through other means such as higher taxes or price controls.

We define inflation as a rise in the general price level, in which prices and wages rise at the same rates. What's so wrong with that?

For years, the standard view among economists was: not much, unless the inflation is unexpected. As Milton Friedman wrote (pdf):

Anticipated inflations or deflations produce no transfers from debtors to creditors which raise questions of equity; the interest rate on claims valued in nominal terms adjusts to allow for the anticipated rate of inflation. Anticipated inflations or deflations need involve no frictions in adjusting to changing prices. Every individual can take the anticipated change in the price level into account in setting prices for future trades. Finally, anticipated inflations or deflations involve no trade-offs between inflation and employment.

And in 1995 Robert Barro found that it was only high inflation - above 15% - that had a statistically significant impact in reducing economic growth.

Why, then, worry about inflation?

One answer is that it can raise taxes. If our wages rise by, say, 10% at a time when prices are rising 10% we are no better off. But that 10% rise will make us pay more tax, and push many of us into a higher tax bracket. Which is happening now. HMRC says that the number of people paying the higher rate of income tax rose by over 40% from 2020-21 to 2023-24.

I don't think this is a cost of inflation, though. It is a cost of the government's conscious decision not to index tax allowances to the rate of inflation - something which, thanks to the Rooker-Wise amendment of 1977, used to be the case.

Instead, Friedman's beef with anticipated inflation was different. Higher inflation and higher interest rates, he said, caused us to economize on holding cash; because it pays no interest it is more expensive the higher are interest rates. That in turn means that, rather than carry lots of cash on the hip, we have to make more trips to the bank which means we waste more time walking there and standing in queues. Economists called these "shoe-leather costs". In the late 90s, Bank of England economists estimated these to be significant - equivalent to £60bn at the time, which is almost £120bn in today's money.

But obviously, this is out-of-date. Many of us rarely use cash today; the quantity of notes and coins in circulation has fallen in the last two years, and many of these I suspect are sitting in vaults and jars rather than changing hands rapidly.

If shoe-leather costs are no longer so significant, then, what is wrong with inflation?

Maybe not much. Good judges have for years advocated raising (pdf) the inflation target, on the grounds that the benefits of low inflation are small and outweighed by a cost - of the risk of low inflation becoming a deflation which drags us towards the zero bound wherein monetary loses its efficacy.
I suspect, though, that there are reasons why inflation is a bad thing.

For one thing, it creates uncertainty; this is perhaps one reason why the inflations of the 70s and late 80s were accompanied by rises in the households' saving ratio.

The uncertainty here isn't just our reaction of "how much?!" when being charged £13 for a pint of beer and glass of wine at the Hornblower. It's deeper than that. Inflation enriches some at the expense of others. And it does so not on the basis of contribution to society but upon factors such as: how real interest rates move; whether one has a nominal fixed income (such as an annuity or contract to deliver goods at a given price); or - of course - one's bargaining power. As Maynard Keynes wrote (pdf):

The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the existing distribution of wealth... and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.

Right now, this "arbitrary rearrangement" is benefiting higher earners and larger capitalists who can exercise their greater bargaining power.

You might think this is welcome from a capitalist point of view.

Not necessarily. Capitalism requires not just favourable conditions for profit-making but also legitimacy. And inflation undermines this by reminding us that the notion that incomes depend upon marginal product is an ideologized fiction. Although discontent for now is manifesting itself only in lukewarm support for an unimaginative Labour party from mortgage-saddled former Tories, there's no assurance people will remain so passive if inflation persists. The inflation of the 70s, remember, fuelled sincere talk of a "crisis of democracy", and earlier hyperinflations in Europe had nastier effects.

From the point of view of rentiers and some larger capitalists (if nobody else!) British capitalism was working well in the low inflation era. Why risk rocking the boat?