Stumbling and Mumbling

How our institutions work

The post office scandal is not merely a matter of a few bad bosses. It should raise questions about the very structure of our society.

It's easy to say that Paula Vennells was corrupt and/or incompetent and that the Horizon system was faulty. But this is trivial. Anyone who has switched a computer on knows that software is buggy, and countless thousands of people are stupid and dishonest: you could throw a brick from your house and hit a dozen of them - more in some parts of London. A well-ordered society has mechanisms which prevent such people getting power or doing much damage if they do get it. The Post office scandal shows that we lack such mechanisms, in at least four respects:

 - There's good evidence that companies actually select for psychopaths. People who are unusually concerned with status and power are precisely those who aim for the top of hierarchies (whereas many others of us just want to get on with our jobs), and psychopaths' superficial charm and fluency appeals to hirers. As David Allen Green says, "the likes of Paula Vennells are always with us and will always somehow obtain senior positions." This is consistent with a finding by Luigi Zingales and colleagues, that a lot more corporate fraud occurs than is actually detected. What's more, companies also select for over-confidence as they mistake "competence cues" - the right body language or the illusion of knowledge - for actual ability. (All this might also apply to politics).

 - Ministers failed to control or to replace Post Office management, believing - in a remarkable example of not understanding the function of ownership - that it "has the commercial freedom to run its business operations without interference from the shareholder." Ed Davey distinguishes himself from the other ministers merely by being so uncouth as to have blurted this out in public.

 - Police for years did not investigate the likely fraud and perversion of the course of justice by Post Office bosses. The fact that they have begun to do so since the screening of the ITV drama reminds us that the Met is more concerned with PR than with justice. 

 - The courts failed to acquit innocent sub-postmasters, for systemic reasons discussed by David Allen Green. This was not an isolated miscarriage of justice; it occurred over 700 times.

We should think of our main social institutions - markets, the democratic process, the legal system and so on - as selection devices. What we have here is evidence that these do not operate as you might think they should, not in one or two instances but systematically and persistently. The Post Office board and government ministers did not select honest or competent bosses. The police did not choose to investigate serious crimes. And the courts failed to correctly distinguish between the guilty and the innocent.

These, however, are by no means the only selection mechanisms which don't work as one might imagine they should. Politicians are selected for fanaticism rather than competence. Financial markets often do not select the best investment opportunities, which is why we have asset price bubbles and under-performing fund managers. Product and labour markets do not eliminate the "long tail of extremely badly managed firms" described (pdf) by Bloom and Van Reenen. Peer review often does not select the best academic research. And the media does not select for informed expertise.

Society's main social institutions, then, very often do not select the best or filter out the worst. Often, they do the opposite. What should we make of this fact?

One reasonable inference is that it is just really difficult to make good decisions with limited information and so there will always be a great deal of ruin in the nation.

If this were all, though, we'd expect to see political activity and debate focusing upon how we might improve such mechanisms.

But it isn't. Instead in recent years politics has been consumed with Brexit and other culture war issues. Which is of course yet another example of a selection mechanism: politics selects to focus on irrelevancies rather than more important matters.

This is part of a pattern. It's normal for people to neglect structural and societal forces and to pay more attention instead to individual humans. Which is why public anger is focussed upon Paula Vennells rather than the mechanisms that recruited and enabled her. People like a witch-hunt and are attacking Vennells in the same way that criminals attack nonces - to remind themselves that they are morally superior to at least somebody.

Even good people can inadvertently reinforce this tendency. In exposing the detail of the Post Office scandal there's a danger of missing the big picture. Both journalism (even when done well) and drama look more at human interest stories than at social structures.

And this suits the ruling class. It has long flattered itself that the system works because "good chaps" will be in charge. The fact that "good chaps" so rarely are - and that the Post Office merely joins a list of systemic injustices such as Hillsborough, Windrush and Grenfell - doesn't seem to undermine this complacency.

Which brings me to a concern. You might have noticed that I've avoided using the word "failure" to describe all these different selection effects. This is because they might not be failures at all. The fact that the powerful can enrich themselves at the expense of the powerless; that markets permit the incompetent wealthy to stay rich; and that politics is a clownish sideshow that avoids substantive issues all suit the elite perfectly well. Prem Sikka is right to say that the Post Office affair "has once again shown the UK to be a hotbed of corruption and cronyism where in pursuit of profits and private gains innocent people are bludgeoned to silence and submission."

It has thus shown what Marxists have long known - that law and justice are veils behind which lay exploitation and cruelty. The question for the establishment is how they might bring these veils back down.

On high-wage jobs

Everybody wants to create well-paid jobs. But this is not necessarily a good thing.

To see why, imagine a simple economy comprising farmers each of whom is comfortably above subsistence, enjoying both leisure, the ability to store food, and a few luxury foods. One of our farmers  then discovers a more efficient technique allowing him to produce more food with less effort. He's better off. And if he can sell this knowledge to others, he'll become even richer. In this case, economic growth and the creation of a high-wage job are indeed the same thing: our new economy comprises a well-paid farming consultant as well as more productive farmers.

But what if he cannot sell his know-how? What if other farmers can learn his techniques simply by looking over the fence? We'll then have a transition to a high-wage economy without the creation of a new job. This isn't a fanciful case. William Nordhaus famously found that innovators capture only a "minuscule fraction" of the social benefits of their discoveries in large part because they are indeed copied.

Our innovative farmer could get a high-wage job as a teacher and consultant only if he could prevent others from learning freely - by building a high fence (erecting a paywall) or by taking out patents and copyrights. Such devices would boost his pay but at the expense of lowering others' productivity relative to what it could be. Creating or preserving high-wage jobs, therefore, isn't the same as raising productivity.

Let's take a second example. One farmer then develops musical skill, so much so that the others happily trade some of their excess product to listen to his songs. In this new economy, everybody is happier than before. Farmers are getting something they value more highly than food - music - and the musician wouldn't be performing if he didn't enjoy it more than farming.

This illustrates an important point made by Eric Beinhocker in The Origin of Wealth. Economic progress, he says, doesn't consist merely in producing more of the same but in producing greater variety - a finer division of labour with a more complex economy. We are better off than we were in the 1950s, not because we have more lard and haircurlers, but because we have things people then couldn't get at any price - colour TVs, mobile phones, the internet and so on.

Note also that GDP does not necessarily capture this fact because it doesn't accurately measure some of the things we have that our grandparents didn't: think of our visits to Youtube and Wikipedia for example.

In this example the musician's job needn't be a high-wage one. If he prefers it to farming he'd accept less remuneration than he could get as a farmer. Even so, people prefer this economy to the one they had previously. Which tells us that economic progress can happen without the creation of well-paid jobs.

Now let's take a third example. Our society suffers a breakdown in social norms and rise in crime. One farmer then charges the others to protect them from theft and violence - so much that he earns more than he did as a farmer. A high-wage job has been created. But must of us would prefer the old society in which protection was unnecessary. Which shows that high-wage jobs aren't necessarily a sign of success*.

Again, this isn't a fanciful example. It describes the guard labour discussed by Samuel Bowles and Arjun Jayadev. Some lawyers, policemen, supervisory staff and middle managers exist only because of agency failures and conflict that would be diminished under different social arrangements.

Now take another example. A clever farmer finds a loophole in the contract with the protector which allows him to enjoy the benefits of protection without paying. He then sells advice to others on how they too can exploit this loophole. He has created a high-wage job for himself. But our society in aggregate is no better off. Those who don't use the loophole must either pay higher taxes to provide protection or get less of it. Our tax advisor hasn't created wealth, but merely diverted it to himself and his clients. Society would be better off if he were to direct his talents elsewhere, as the musician and more skilled farmer do.

It should be obvious that this example is also all too realistic: many tax advisors, accountants and lobbyists fit this model.

The point of all this should be clear. Creating high-wage jobs and economic progress are different things. Sometimes, we can have progress without a new well-paid job, as in my example of the musician or farmer whose innovations get copied. And sometimes high-wage jobs do not represent progress at all, as in my examples of protection workers or tax advisors. (The example of the innovator benefiting from intellectual property laws is a mixed case: if such laws are necessary to incentivize innovation the high incomes and progress go together, but if they are not the two are separate). Yes, wages are at least sometimes equal to marginal product, but it is the marginal product to the hirer not to the wider society.

All this is not to mention other cases of high-wage jobs that are inimical to progress. These include those which exploit information asymmetries such as fund managers who are, in David Blake's words, "genuinely unskilled." And they also include those who generate unpriced negative externalities such as bankers' risk pollution, carbon producers' environmental pollution or the media's intellectual pollution.

Of course, high-wage jobs would be a good thing if they are the result of genuine improvements in productivity. But not all such jobs are. Think about this statement:

If an economy is successful it has lots of high-wage jobs. We have lots of high-wage jobs. Therefore we have a successful economy.

Sounds reasonable? It shouldn't. It has the same structure as:

If an animal is a dog, then it has four legs. My cat has four legs. Therefore, my cat is a dog.

It's the fallacy of affirming the consequent. And it's the mistake that some advocates of a high-wage economy make. High-wage jobs must be the product of a thriving economy, not a cause of one.

* Of course, one could tell a story in which the protector extorts food from others whilst failing to protect them. Whilst plausible, I don't need this to illustrate my point, that even in a free society high-wage jobs aren't necessarily a sign of success.

Another thing. I've tried not to use words such as GDP, productivity and value. In my context (and many others!) these merely introduce unnecessary complications.