Stumbling and Mumbling

The Unaccountability Machine: a review

In every branch of Timpsons there's a sign from the boss saying "our colleagues in this shop have my total authority to do whatever they can to give you amazing service." Dan Davies' wonderful The Unaccountability Machine is the story of why there are no such signs in other organizations.

It's because, he says, decisions are now made by processes and systems rather than by identifiable individuals, leaving little space for people to use discretion. The result is the emergence of "accountability sinks", complex systems wherein it is difficult to pin blame onto specific people. This is why public inquiries into organizational failures take years and end up making hundreds of recommendations.

Rather than even try to look for accountability, says Dan, we should follow the advice of cybernetician Stafford Beer and not peer into the black box but instead judge organizations by their outputs. Hence the phrase "the purpose of a system is what it does", or POSIWID. Just as market outcomes are independent of individuals' intentions - selfish people can sell great products and nobody intends stock market crashes - so too are organizational outcomes. To take Dan's example, academics might merely want to expand knowledge, but the outcome of academic publishing is citations for academics and profits for John Wiley and Elsevier. POSIWID.

Such accountability sinks are not necessarily bad things. Embedding knowledge in a company rather than merely within individuals permits it to do difficult things and to cope easily with the departure of even the best employees: organizational capital is important. As Alfred North Whitehead said, "civilization advances by extending the number of important operations which we can perform without thinking of them."

But there's a downside. One of the great strengths of The Unaccountability Machine is its history of cybernetics. This teaches us to regard organizations as information-processing devices. And accountability sinks, when combined with striving for profit maximization, can result in disastrous losses of information.

One of Dan's targets is the leveraged buy-out industry. When a private equity company buys a firm and loads it up with debt, it is setting up a system in which the only information that matters is: will we be able to meet the next interest payment? That can force managers to increase efficiency. But it can also cause them to neglect longer-term investment, leaving them with shabby places like WH Smith or KFC that can't compete against rivals.

In a similar vein Roland Bénabou and Jean Tirole have shown (pdf) how "distorted decisions and significant efficiency losses" arise when companies incentivize short-term performance such as sales targets or traders' profits to the neglect of longer-term goals such as investment in training, R&D or goodwill. In cybernetic terms, such companies prioritize information about short-term profits and throw away that about the longer-term.

The classic case of this was of course banks' risky behaviour in the run-up to the financial crisis. Charles Prince, then CEO of Citigroup, said in 2007:

When the music stops, in terms of liquidity, things will be complicated...But as long as the music is playing, you’ve got to get up and dance.

Prince knew Citi was heading for trouble but he was incentivized to discard this information and to focus instead on short-term profits. As Dan says:

Any system which is set up to maximize a single objective has the potential to go bonkers.

The inability of companies to process information wasn't confined to banks, though. Paul Ormerod and Bridget Rosewell have found (pdf) that the pattern of corporate failures is similar to that of the extinction of species, and conclude that "firms have very limited capacities to acquire knowledge about the likely impact of their strategies."

Everybody will learn a lot from Dan's book, and I urge you all to read it.

That said, I have some quibbles. I'd have liked a little more clarity about the precise link between the cybernetic movement and the rise of accountability sinks? Did companies build such sinks deliberately, or did they just emerge (as so many things do) through trial and error? I'd have welcomed some case studies of particular companies to tell us.

A bigger quibble, however, lies in the class aspect. Dan says that the "great unremarked class struggle" of the 70s and 80s was that between capitalism and managerialism, which managers lost. Maybe they did then. But since the 1990s the UK has seen rising CEO pay amidst quite modest stock market gains, suggesting managers have fought back.

And this doesn't mention workers. The rise of accountability sinks was accompanied not only by big rises in CEO pay but also by worsening relative pay and conditions for many workers - be it those who suffer from the power-biased technical change described by Frederick Guy and Peter Skott or frontline workers who must face customers' frustration when impersonal processes lead to them being bumped off of flights, having their trains cancelled or having self-service checkouts that don't work.

If we apply the POSIWID principle to accountability sinks themselves, we'd infer that their purpose is to generate inequality.

There is, though, a massive paradox here. Corporate systems and processes have reduced employees and managers' freedom, agency and autonomy. And yet these values have for centuries been highly prized. "Free will is intrinsically the noblest thing we can have, because it puts us (in a way) on a par with God" wrote (pdf) Descartes in 1647, a view followed by many, including cheerleaders for capitalism such as Hayek and Friedman.

It was of course Marx who saw this paradox. The "laws of capitalist production" he wrote, take the form of "external coercive laws having power over every individual capitalist." And for the worker:

His labour becomes an object, an external existence...that it exists outside him, independently, as something alien to him, and that it becomes a power on its own confronting him. It means that the life which he has conferred on the object confronts him as something hostile and alien.

In this way, social relations between men become "in their eyes, the fantastic form of a relation between things." Man-made systems come to dominate and oppress their creators.

Perhaps Marx's greatest criticism of capitalism was not that it generated inequality and injustice - which existed long before capitalism - but that it created oppression whilst promising freedom.

It's not just this, however, that brings the legitimacy of capitalism into question. Dan's book raises a question posed 50 years ago by Stephen Marglin: what do bosses do? We used to be able to say that they invented things and built companies, but in accountability sinks they are mere functionaries presiding over processes they barely understand. People might admire and defer to entrepreneurs, but why do so to overpaid bureaucrats?

This was the question raised by Joseph Schumpeter back in 1943 when he wrote (pdf) that large corporations replaced entrepreneurs with "rationalist and unheroic" bureaucrats who are "ill equipped to face the problems, both domestic and international, that have normally to be faced by a country of any importance," thereby anticipating the political backlash against managerialism:

The capitalist process, by substituting a mere parcel of shares for the walls of and the machines in a factory, takes the life out of the idea of property...Dematerialized, defunctionalized and absentee ownership does not impress and call forth moral allegiance as the vital form of property did. Eventually there will be nobody left who really cares to stand for it—nobody within and nobody without the precincts of the big concerns.

People could tolerate unfreedom, inequality and rule by faceless bureaucrats when capitalism was at least delivering higher living standards. But after almost two decades of stagnation, the question becomes more forceful: what's the point of capitalism?

The end of modernity

Recently, I've been listening to a lot of Public Service Broadcasting, a side-effect of which has been to remind me of a big and largely overlooked difference between this Labour government and that of Tony Blair.

What I mean is that much of PSB's work celebrates progress and modernity. Their latest single is Electra ("the future of flying"); an earlier song was called (I believe in) progress; and they've made albums about the founding of the BBC and the space race.

This invocation of futurity and modernity draws our attention, however, to the fact that this is precisely what Starmer is not doing. As Nesrine Malik writes in an acclaimed article, "Starmer’s weakest feature is his inability to paint a rousing vision of our modern country."

Which is of course a huge contrast to Blair who in the 1990s could barely open his mouth without speaking of modernization, not only of the Labour party but of government and the economy: "modernising social security...is a central plank of building a modern Britain"; "modern application of progressive values"; "a modern education system and a modern NHS"; and so on. A collection of his early speeches was titled New Britain: my vision of a young country. And even today he believes - based perhaps more on faith than evidence - that AI can transform government. Alan Finlayson wrote in Making Sense of New Labour that:

If there is a single word that might capture the essence of New Labour's social and political project then it is 'modernisation'.

In this, Blair was treading the path of his predecessors. Harold Wilson famously spoke of the "white heat" of the technological revolution wherein modern technocrats would replace outmoded aristocrats as rulers of industry. And one of Thatcher's motives for trades union reform was precisely to give managers the power to modernise the economy.

With one or two exceptions (which I'll come to), however, the Starmer government rarely speaks of progress, futurity or modernity.

Why not? You might think it's because modernity has failed. We see this every day, be it in the legacy of modern car-centric town planning left by men like Konrad Smigielski or Robert Moses or in the fact that many of Blair's improvements in public services were subsequently reversed.

And indeed PSB remind us of the failures of modernity. The high-mindedness of the BBC's founders contrasts horribly with today's intellectual pollution that is Jeremy Vine or Laura Kuenssberg; the manned space programme petered out; and Amelia Earhart's Electra crashed.

Fans of the late James C Scott (of whom I'm one) will think there's a good reason for the failure of what he called "high modernist ideology." Planners, he said, had much less omniscience than they thought; people were not mere pawns to be pushed around; and societies and cities were just too complex to be controlled from the top down:

If I were asked to condense the reasons behind these failures into a single sentence, I would say that the progenitors of such plans regarded themselves as far smarter and farseeing than they really were and, at the same time, regarded their subjects as far more stupid and incompetent than they really were. (Seeing Like A State, p 343).

Granted, Scott might overstate his case, but he surely has a point.

But it's one that Labour doesn't seem to grasp. One of the rare modernist exceptions in the party's programme is the plan to build new towns. And its distancing itself from anti-fascist street protests betokens a distrust of decentralized popular action. Both betoken a flat rejection of Scott's thinking.

For good or ill, therefore, we cannot attribute Labour's rowing back from modernization to Scottian ideas.

Instead, I suggest there's another reason why Labour doesn't talk of modernity and optimism - economic stagnation.

Basic maths tells us that if the economy is growing by 2% a year then it will double in size after 35 years. That doesn't just mean we'll have more stuff. It means the economy (and therefore society) will be different: economic growth, as Eric Beinhocker and Joseph Schumpeter said, is a process of creative destruction and increasing variety.

A growing economy, therefore, delivers change whether we want it or not, and so we must look ahead to a different future. In a stagnant economy, however, there is less need to do so. Yes, John Stuart Mill wrote that a stationary state would have "as much scope as ever for all kinds of mental culture, and moral and social progress", but the recent racist riots show that he was too optimistic.

But there's more than mere maths behind the decline of modernity. Economic stagnation shows us that today's capitalism (whether you call it neoliberalism, rentierism or whatever) is failing most people. Our ruling class senses this if only as a barely articulated gut instinct, and so doesn't want to talk about the future simply because capitalism doesn't offer much of one. A big reason why the right talks so much about immigration is that to talk about anything else - climate change, the cost of living, failing public services, unaffordable housing, flatlining real wages and so on - would be to bring capitalism into question. And that it must not do.

Yes, Labour isn't quite as squeamish as the right. But even so, it has a problem. And it's reluctance to even articulate this is one reason for its silence about modernity.

It's that even quite centrist plans to restart economic progress and productivity growth require an attack upon vested interests - upon what Joel Mokyr called the "forces of conservatism". Tax simplification would put lawyers and accountants out of work; cutting house prices or shifting tax onto land will hurt landlords; tougher competition policy, the break-up of monopolies or measures to encourage business start-ups will be resisted by incumbent companies; and Nimbys will oppose infrastructure spending and housebuilding.

Modernization today, therefore, means something very different from that in Thatcher and Blair's time. Back then, it meant attacking unions and the poor; today, it requires attacking the rich and powerful. The centre-left resiles from such a prospect. Hence we have less talk about modernity.

But this comes at a cost. Although modernisation has often disappointed even in its own terms it has offered something - hope. And that is lacking now. We have a joyless polity which offers little optimism for either individual or collective action. That threatens to undermine the legitimacy of the existing order - and, as we saw with the racist riots, the backlash to this might not take a rational form.

Government as household: if only!

Many of us economists are bald. One reason for this is that for the last 40 years we've been tearing our hair out whenever politicians liken government finances to those of a household. Although Thatcher popularized this woeful analogy (as early as 1949) it lingers on in Labour. Rachel Reeves' claims that "there's not a huge amount of money there" and (inverting Keynes) that "if we cannot afford it, we cannot do it" both appeal to it.

You all know this analogy is wrong. For one thing, households can cut their spending without cutting their income but governments sometimes cannot do so because cuts in public spending depress economic activity and hence tax revenues*. And for another, governments (in the UK if not euro zone) can print money, and so there is always "a huge amount of money there". The constraint on public spending is real resources - doctors, builders, management skill - not money.

For these reasons economists often say that the household analogy leads to bad policy.

And often they are bang right.

But not always. If the government were serious about managing the public finances as if they were a household, policy would actually improve in some ways.

I say this because of reports that Reeves is thinking of using private finance to fund the building of the Lower Thames Crossing, in exchange for which they would receive incomes from the tolls.

The problem here is simple. The government can borrow in the gilt market at a real cost of around 1% (depending on the maturity of the loan). Private financiers, however, will demand a higher cost than this; they wouldn't invest otherwise. The government will therefore in effect be borrowing at a higher cost than necessary. That's like a household choosing to take on expensive credit card debt rather than extending its mortgage at a lower rate. As Daniela Gabor has said, Reeves is in effect handing out subsidies to private financiers.

Of course, that might be her intention. But it's not something a sensible household would choose to do**.

She is doing this because of another way in which she is not running the public finances as a sensible household would. I'm referring to the fiscal rules, one of which is that "debt must be falling as a share of the economy by the fifth year of the forecast."

No sane individual would adopt such a rule, and not just because they know that one should never rely upon forecasts. It's also because what matters is the sustainability of debt over one's lifetime, not over five years. (There are only two things that can go wrong in personal finance; either you'll outlive your money or your money will outlive you).

Any fool can reduce debt in the short-term by selling their house, paying off the mortgage and renting a place. Whether you should do that depends upon whether the cost of renting is cheaper than that of borrowing, all things considered. That's a tricky calculation. But it's one that households wouldn't make if they were tied by that "non-negotiable" fiscal rule; they would just cut their mortgage and not worry about the fact that they'll have to pay the rent after five years.

This, though, is exactly what Reeves is doing in thinking of handing over future toll revenues to private financiers; she's giving up long-term income in order to meet a short-term target. As the Institute for Government has said, the fiscal rule "does little to promote fiscal sustainability." No sensible household would behave like that.

Such an absurdity is the result of another absurdity in the fiscal rules; they ignore the fact that balance sheets have two sides - assets as well as liabilities.

A sensible household would want to increase debt if in doing so it could buy an asset which yielded more than the cost of debt (adjusting for risk!) Buying a house - thereby saving on rent - or a business can be perfectly reasonable things to do.

Not so for Labour. Reeves has said that nationalizing utilities “just doesn’t stack up against our fiscal rules”. Which is drivel. Many utility companies have dividend yields well above the 1% it would cost to buy them, so nationalizing them would generate a net revenue for the government.

No household would rule out investing in a business on the basis of the level of its debt without also considering the cost of that debt relative to the income stream it is buying. But that's what Reeves is doing.

Of course, there are good arguments against nationalization, one being whether the companies would continue to yield so much under state control***. But this is exactly the question a sensible household would ask: is this business really as good as it seems? Can we manage it well? It would not rule out buying merely by saying "debt, aaarghh!"

There's another way in which the public finances would be better managed if governments took the household analogy seriously. It lies in Sir Keir's promise to raise military spending to 2.5% of GDP.

To see how daft this is, imagine a family decided that it wanted to eat more healthily. It would not be so stupid as to set a target of raising the share of its income it spends on fruit and veg. It could do that by spending £20 on a single carrot. Instead, it would buy a greater volume of fruit and veg and less of something else. It would be explicit about what it cuts from its weekly shop, and it would pay attention to value for money. Neither of these obviously sensible actions are contained in Sir Keir's target, which provokes the thought that just as Reeves wants to give handouts to financiers so Sir Keir wants to give them to military contractors.

You might object that there's a limit to my descriptions of what a sensible household would do. Sometimes, households are forced into bad decisions, such as by having to borrow at high rates if their creditworthiness is bad. But this doesn't apply to the government now. The fact that the gilt market is willing to lend to it at a real rate of just 1% tells us that the government is free to act sensibly. That it is not doing so is a policy choice.

Nor is any of this to say that Labour should run a significantly looser fiscal policy. I don't think it should, simply because there isn't enough slack in the economy to do so: boosting growth right now should be the job of supply-side reform and regional policy, not fiscal policy.

Instead, my point is simple. It's that if the government is to treat the public finances as if they were household finances it should be consistent in doing so, as this would actually lead to better policy-making.

* I say sometimes because if interest rates are high enough, monetary policy can be loosened sufficiently to offset the impact of spending cuts. This, however, was not the case with Osborne's austerity.
** In practice, however, many households do exactly this by paying too much in fees to fund managers - but few of us think they should do so.
*** There are other arguments. One is that nationalization just gives a future government something to sell off cheaply to its cronies. Another is that - given the pisspoor quality of UK management - the companies will be badly managed whoever owns them and its better than capitalists get the blame than that the government does.