Stumbling and Mumbling

The landlords' party

Owen Jones says the Tories are the “Landlords Party”. This is true in a deeper sense than the mere fact that so many Tory MPs are themselves landlords. It’s because fiscal austerity has contributed to rising house prices.

There’s a simple reason for this. Fiscal conservatism and monetary activism – to use Osborne’s phrase – means low interest rates, low expected rates and low gilt yields. And as the Bank of England said (pdf), this means higher asset prices generally. This is simply because lower rates mean that future rents are discounted less heavily, which raises their net present value. As Simon said:

Just as low real interest rates boost the stock market because a given stream of expected future dividends looks more attractive, much the same is true of housing (where dividends become rents). Stock prices can rise because expected future profitability increases, but they can also rise because expected real interest rates fall. With housing increasingly used as an asset for the wealthy, or even as a way of saving for retirement, house prices will behave in a similar way.

My chart shows the point. It shows that lower index-linked yields have been accompanied by higher ratios of house prices to incomes. Yes, fiscal austerity means lower incomes and hence lower house prices, other things equal. But in reality, that mechanism has been more than offset by lower interest rates. And yes, George Osborne hit buy-to-let landlords with higher taxes – which perhaps vindicates Phil’s point that the Tory party “has not been a suitable vehicle for the interests it's supposed to represent.” And of course, austerity is one of only many causes of low real yields – many of which are global. But it has contributed to low yields and hence higher house prices.

On balance, though, the Tories have probably been good for landlords. This explains one of YouGov’s findings (pdf) – that homeowners vote Tory. 53% of these voted Tory against only 31% voting Labour, whereas among renters Labour led by 51% to 32%.

Which brings me to a problem. High house prices are probably, net, bad for the economy.

Granted, they provide collateral and so allow potential entrepreneurs to borrow. But this mechanism is offset by others. Rising house prices encourage banks to lend against property rather than to productive new firms. High rents depress disposable incomes and so reduce demand for new goods and services. High house prices lead (pdf) to long commutes and less job mobility which depresses productivity. And rising prices incentivize “property development” rather than more dynamic forms of entrepreneurship.

I suspect, therefore, that the Tories are now rather like the party they were in the days of the Corn Laws: they represent interests which are hostile to economic progress.  

There is of course nothing original in the claim that landlords’ interests are a block on economic growth. As somebody once said:

Unearned increments in land are not the only form of unearned or undeserved profit, but they are the principal form of unearned increment, and they are derived from processes which are not merely not beneficial, but positively detrimental to the general public…The land monopolist only has to sit still and watch complacently his property multiplying in value, sometimes many fold, without either effort or contribution on his part!

That was Winston Churchill in 1909. Tories like to compare themselves to him. But in one respect at least, they are more reactionary now than he was a century ago.  

Political pundits' biases

Everybody agrees that political journalists and pundits were big losers in the general election. As Jon Stone points out, many of their cherished presuppositions turned out to be wrong.

Here’s a theory as to why. It’s because of deformation professionelle. Every occupation has a way of approaching issues which, whilst useful in many ways, also tends to distort their perspective. For example, engineers over-rate the extent to which everything is an engineering problem; lawyers put too much faith in the power of the law; and economists have traditionally over-emphasized extrinsic incentives.

Political commentators are no different. Their perspective too is distorted – a distortion is magnified by the sort of groupthink described by George Monbiot.  

One such distortion is that they pay too much attention to Westminster and too little to the ground truth of grassroots politics. For example, in his admirable review of his errors* John Rentoul says he under-estimated voters’ hostility to capitalism and desire for optimism and compassion in a leader. This might be because his antennae were too attuned to Westminster and insufficiently to the country.

This was an especially grave mistake because Corbynism is a different type of politics. It pays less heed to the Blairite virtues of day-to-day news management and more to building party membership, mobilizing what Phil calls the networked worker and getting out the youth vote (where “youth is anyone under 47).

John wasn’t alone in this of course. Jonathan Dean says of political scientists:

had we moved our gaze beyond Westminster-centred electoral politics to encompass, for instance, work by cultural studies scholars on the connections between youth culture and ideology, black feminists on race, gender and political solidarity, or literature on social movements and activism, we might have been better able to properly make sense of Corbynism.

Relatedly, pundits pay too much attention to personalities and too little to policy. They commit the error of which Richard Sennett complained 40 years ago:

A political leader running for office is spoken of as "credible" or "legitimate" in terms of what kind of man he is, rather than in terms of the actions or programmes he espouses. The obsession with persons at the expense of more impersonal social relations is like a filter which discolours our rational understanding of society. (The Fall of Public Man, p4)

Tom Mills points to a good example of this. The leaking of Labour’s manifesto was reported as a failure of Corbyn’s party management when it could instead have been seen as a set of popular policies.

Such a focus upon political leaders would not be so bad if it were clear-eyed. But it’s not. “Strong” leadership is seen too much in terms of party unity, and too little in terms of good, inclusive decision-making. We know now that May was gravely weakened by her excessive reliance on too narrow a group of advisors – but Westminster journalists were perhaps better at pointing this out in hindsight than they were weeks ago.

Finally (for now!), there’s been a tendency to regard politics as an exercise in marketing. Far too often, Corbyn and his policies were dismissed as simply “unelectable”. One happy effect of this election should be that Corbyn’s critics will speak less of electability and instead debate policies on their (de)merits.

My point here is not that political correspondents are uniquely biased: all professionals are. What I am doing, though, is raising questions about the BBC. How can we reconcile the organization’s supposed commitment to impartiality with the fact that its Westminster correspondents have particular biases?

* I don’t like the words “error” and “mistake”. They have connotations of deviation from a normal condition of being right when in fact in emergent systems such as politics, economics (and financial markets) mistakes are so common as to be routine. We should stigmatize mistakes less, but put more stigma onto the failure to learn from them.

The changing class divide

Social class has become less important as an influence upon voting behaviour. This is one under-appreciated feature of last week’s election.

Lord Ashcroft’s polls show that the social class AB split 43%-34% between the Tories and Labour. That meant Corbyn’s Labour got a higher share of the well-off’s vote than Blair’s Labour got in 1997, when it got 31%. Labour’s wins in Kensington and Canterbury are the most spectacular manifestations of this.

The difference between Blair and Corbyn is that Blair did far better than Corbyn among the working class. The DE group split 59-21 for Labour in 1997 but only 45-33 in 2017.

This seems to conflict with decades of conventional wisdom. A so-called “hard left” Labour leader has had support from a wider class base than a so-called “modernizer” who consciously tried for such classless support.

How can this be?  I’d suggest three reasons.

One is Brexit. The ABs voted 57-43 for Remain, whereas the DEs went 64-36 for Leave. May’s hard Brexit thus alienated some ABs, and made Labour’s softer stand on Brexit more attractive.  

Secondly, Corbyn’s domestic policy was one of universalism more than sectarian class war. His offer of free childcare and the abolition of university fees appealed to many ABs. By contrast, his failure to promise to raise working tax credits meant he was offering relatively little to the DEs. John Rentoul has a point that Corbyn was insufficiently radical – but therein perhaps lay some of his appeal.

Thirdly, Corbyn’s promise to tax the very rich appealed to those ABs (the majority) earning less than £80,000.  Reference group theory implies that people compare themselves with those like themselves. So, someone on say £50,000 a year might ask: “why is that idiot earning twice as much as me when he’s no smarter?” Many ABs, I suspect, are more aware than the DEs that many of the very rich are incompetent rent-seekers rather than the “wealth creators” of Tory myth. A DE voter, on the other hand, has almost no contact with the rich but is instead irritated by benefit claimants.

This tendency is exacerbated by another – that, as Rick said, the middle classes aren’t as posh as they used to be. Many work long hours in unfulfilling jobs for oppressive bosses with no hope of buying a decent house.  For them, Corbynite talk of rent controls and housebuilding was an attractive offer relative to a Tory party than was offering nothing.

It’s in this context that class still matters. Yes, the Tory-Labour split is no longer a class split. But this is because the class basis of Toryism has diminished. What we’ve seen in recent years is a hollowing out of the middle class. A rising take by the top 1% has been accompanied by the middlingly rich becoming less bourgeois: their incomes have fallen relative to the worst off, as I suspect, have their working conditions. This has made ABs more amenable to Labour.

In this sense, perhaps the Tories have a deeper problem than merely yet another laughably inept leader. Their problem is that they no longer articulate the interests of the class they once did, because that class has changed. Ironically, they have become the victims of the inequality that has seen the top 1% (or perhaps 0.1%) pull away from the rest of us.

Under-estimating Corbyn

Depending which opinion poll you believe, this election looks like being closer than the pundits expected. Blairites' belief that Corbyn was “unelectable”, and May’s idea that she could win a landslide without even turning up now look doubtful. Yes, they might be correct, but the confidence interval around those views now seems wider than it did a few weeks ago. (These people don’t often deal in confidence intervals, but let that pass).

This raises the question: why have his critics under-estimated Corbyn? (We might add to this list those Labour MPs who put him on the leadership ballot in 2015 believing he couldn’t win).

I suspect there are two cognitive biases to blame. One is deformation professionnelle – the tendency among all professionals to see things from the perspective of their own occupation. People inside the Westminster Bubble over-estimate the importance of playing by their own rules. They’ve thought that you win elections by occupying a perhaps mythical “centre ground”; by kowtowing to deficit fetishists and immigration-phobics; and by satisfying a managerialist conception of credibility. What this might have under-estimated is the popularity of: halfway sensible policies, a focus upon justice and living standards; and at least the appearance of basic humanity.

Another bias is the halo effect – the tendency to believe that someone with a few good qualities somehow possesses all virtues. In bad Hollywood movies, the villain isn’t just morally inferior to the hero but is also uglier and a worse shot. By this same reasoning, Corbyn’s faults such as poor management and terrorist associations led pundits to under-estimate his strengths such as personability and skill at campaigning and debating: his critics love to point out that Corbyn hasn’t changed his views for 30 years, but overlook the fact that this gives him the advantage of knowing his lines well.

It is of course trivially true that nobody’s perfect (a cliché proven by the fact that Rachel Riley supports Manyoo) and few of us are entirely imperfect. What’s not so much appreciated though is that success and failure is often not a case of people being good or bad. Instead, success results from circumstances favouring our virtues, whilst failure happens when they highlight our vices. A successful hiring decision isn’t so much one that finds the best person for the job as one that finds the right match. To take an example from Boris Groysberg (pdf), two managers might be of equal overall quality but if the firm is looking to increase market share, the good marketing man will be a better hire than the good cost-cutter.

Sometimes, of course, circumstances will change so that the same man will be both a failure and a success at different times: Steve Jobs’ difficult personality both got him sacked from Apple and drove the company to huge success; and Winston Churchill’s bellicosity made him a lousy peacetime politician but a great war leader.

Which brings me to one of several questions that is curiously neglected in this election campaign. Insofar as leadership is an issue, the question shouldn’t be: who’s the best leader, but rather: do circumstances favour Corbyn’s mix of strengths and weaknesses or May’s? Idle blather about leadership is not enough: we must instead ask about the precise technology whereby leaders affect outcomes.  

On writing for money

“No man but a blockhead ever wrote except for money.” Samuel Johnson’s words have for centuries fueled a prejudice that paid writing is of higher status than the amateur equivalent. This should be challenged.

What I’m thinking of here is what Fred Hirsch called the commercialization effect. When money changes hands, he said, unspecified mutual obligations are diminished: “the more that is in the contracts, the less can be expected without them.” This has recently been echoed by Michael Sandel (pdf):

financial incentives and other market mechanisms can backfire by crowding out nonmarket norms.

When we write for non-financial reasons – the love of it, the need to say something, whatever – we ask: is this true? Does it need saying? Writing for money, however, is apt to downplay these questions in favour of: can I get this past the lawyers? Or: Is this what my readers want?” And: "does this fit the space between the adverts?"

As thinkers such as Michael Walzer and Sandel have argued, the cash nexus can change the very meaning of goods. Paid sex, for example, is not the same as a one-night stand. In the same way, paid writing isn’t the same as free writing.

Personally, I suspect that a lot of my least bad writing – not just here but also in the IC - is stuff I’d write even if I weren’t paid to. My worse efforts have come when I’ve needed to fill space. Might the same be true of others?

Here’s a thought experiment: what sort of journalism would we see if people weren’t being paid to do it? We’d probably not see journalists harassing the bereaved; or phone-hacking; or heavy pro-Brexit bias; or the sidebar of shame; or so much anti-Labour bias; or so much neglect of poverty and inequality; or the tiresome attention-grabbing of the likes of Hopkins and Young; or attempts to blame Ariana Grande or Jeremy Corbyn for terror attacks. The paid media gives disproportionate attention to the concerns of billionaire newspaper owners, to rich editors, and to posh Londoners – and therefore neglects others. The cash nexus, unsurprisingly, empowers those with cash.

This isn’t to say it is wholly baleful. It can elicit some good writing. Without it we’d have much less factual reporting – though the paid media has long ago cut back on investigative journalism. And motive crowding-out is far from complete: I don’t apply lower standards to my day job than to the blog, and I suspect that many columnists would write what they write even if they were freed from the dull compulsion of the economic. And of course Twitter reminds us that misogyny, idiocy, cliche-mongering and racism can thrive without the paid media.

We can put this another way. Take Habermas’s notion of ideal speech. Among the criteria for this are:

(i) no one capable of making a relevant contribution has been excluded, (ii) participants have equal voice, (iii) they are internally free to speak their honest opinion without deception or self-deception, and (iv) there are no sources of coercion built into the process and procedures of discourse.

The paid media thwarts the second and third of these, and quite possibly the first and fourth too. In these respects, it coarsens the quality of democracy.

You might think all this is familiar stuff. However, the commercialization effect bemoaned by Sandel and Hirsch doesn’t just warp writing in the media. It also afflicts academia. In many fields (pdf), the profession has a replicability crisis: results that appear even in the best peer-reviewed journals are more fragile than they should be. As Helen Dale has said:

Shit papers that don't replicate peer-reviewed by people with ideological blinkers is clearly a significant issue, and not just in predatory journals. Shit books that no-one will buy published as CV-stuffers are clearly a significant issue.

A big cause of this are financial incentives. As Helen says, “publish or perish” rules produce perverse incentives; they encourage p-hacking, neglect of best statistical practice (pdf) and a following of intellectual fashion.

The question I asked of journalism can thus be asked of academic writing: would this appear if it weren’t for financial incentives and career concerns? Again, I suspect that in many cases the answer is: no. When clever people do silly things, incentives are often to blame.

I’m not offering any glib solutions here. What I am doing is echoing the young Marx. Money, he wrote, has a “distorting and confounding” effect on “all human and natural qualities”:

Money, then, appears as this distorting power both against the individual and against the bonds of society, etc., which claim to be entities in themselves. It transforms fidelity into infidelity, love into hate, hate into love, virtue into vice, vice into virtue, servant into master, master into servant, idiocy into intelligence, and intelligence into idiocy.

Of course, there are massive offsetting benefits to a market economy. But everything has a cost.

Unsayable truths

There are some truths that politicians find it hard to express – and this warps our political debate. This is my reaction to a piece by Janan Ganesh.

He accuses Labour and the Tories of an “indifference” to economic growth, because both parties believe that the vote for Brexit was a “cry for something more than the soulless quest for 2.5-ish per cent annual output expansion”. Such an interpretation, he says, is wrong:

The British did not brave the costs to vote for exit. They just did not believe there were costs.

As these costs become apparent, however, he warns, the country will become angrier.

For me, this is half-wrong and half-right.

It’s wrong because, as Simon says, economic growth will be higher under Labour. Its looser fiscal policy and lack of a daft migration target will raise growth, relative to what we’d see under the Tories.

True, Labour hasn’t hammered this message home. But this is because it’s a hard sell. It’s difficult to tell voters that migration controls will make them poorer. And the message that looser fiscal policy means faster growth unless fully offset by monetary policy might be basic economics. But it’s hard to get across when imbecile mediamacro demands that the “sums add up.” This is all the more the case when the country’s “leading” economic thinktank, the IFS, judges manifestos in what John Weeks calls a misguided “partial and static approach.”

I fear Janan is right to say that voters haven’t chosen to pay the cost of Brexit. But again, this raises the same problem of a truth that can’t be said by politicians. Pointing out that voters were wrong means you'll be seen as an elitist technocrat whose out of touch with the people. Yes, the LibDems are saying this – but look at their poll ratings. Politics is dominated by a mental model which sees voters as sovereign consumers. This means politicians can no more tell voters they’re wrong any more than companies can tell customers they are. Even when it’s true, it’s god-awful marketing.

I also agree with Janan that weak growth has fuelled public anger and will continue to do so.

But here’s the problem: at whom will this anger be directed?  So far, it has been at immigrants: for me, it’s pretty clear that stagnation contributed to the demand for Brexit. That fits the pattern described by Markus Brueckner and Hans Peter Gruener and Ben Friedman – for weak growth to breed insularity, intolerance and rightist extremism.

Worse still, this might remain the case if Brexit depresses growth. When people are confronted with evidence that they are wrong, they often don’t simply change their minds but become more entrenched in their views. As Tim Harford says, facts don’t necessarily change people’s minds. If we get Brexit, lower migration and weak growth, many voters won’t infer that Brexit is to blame. Instead, they’ll blame “elites” for mismanaging Brexit, and will demand even-tougher migration controls.

In this context, I regard the albeit slim chance of a Labour election victory with only tempered delight. My fear is that if it fails to stimulate growth sufficiently to offset the effect of Brexit or just on-going capitalist stagnation it, as well as migrants, will suffer the nasty backlash.

May's groupthink

I don’t think commentators have drawn the right inferences from the mess May made over social care policy.

The problem is not that she made a U-turn: if you’re heading in the wrong direction, a U-turn is a good idea. Instead, the episode reveals a fundamental failure in how May makes policy.

The Times reports that “few were asked in advance” about the dementia tax, and says the secrecy of May’s inner circle “has become notorious”. The FT reports a “senior Tory” as saying that the policy “wasn’t really run by anyone outside the inner circle.” And the Guardian says:

Conservative insiders under [Nick] Timothy and [Fiona] Hill talk of a disciplined atmosphere and often highly pressurised blame culture, where people from advisers to ministers fear receiving a dressing-down for stepping out of line or veering off script.

All this suggests to me three related errors. One is taking a decision in haste. Sam Blainey writes:

The social care proposals were, apparently, a last-minute addition placed there at the behest of Nick Timothy, the Prime Minister’s powerful joint chief of staff. But this means they will not have been stress tested to destruction. Consulting with your colleagues may be tiresome and dull, but an hour-long meeting to discuss some of the Tory plans would have allowed them to address and hammer out any problems.

Secondly, there is what the FT describes as a “disdain” for the advice of some “experts.” However, if you need a quick decision the natural thing to do is to adopt the proposal of someone who has gathered evidence and thought long and hard about the issue, as Andrew Dilnot has. Believing that one’s own snap judgment is better than his is an example of egregious over-confidence.

Thirdly, tight-knit groups lack the cognitive diversity to take good decisions; nobody in May’s inner-circle seems to have stood up to Timothy’s suggestion. As Iain Martin says, “Team May is way too narrow in its composition.” The FT quotes Lord Ricketts, former head of the Foreign Office:

Surely one of the lessons learned from this is that you can’t do this in tight secret groups without consultation and without talking to political colleagues.

In short, what we have is an example of groupthink. Irving Janis wrote:

The advantages of having decisions made by groups are often lost because of psychological pressures that arise when members work closely together, share the same values, and above all face a crisis situation in which everyone is subjected to stresses that generate a strong need for affiliation. In these circumstances, as conformity pressures begin to dominate, groupthink and the attendant deterioration of decision-making set in (Groupthink, p 12-13)

From this perspective, I find it hard to excuse May’s conduct. Politics is an activity is which some errors are inevitable: social affairs are complex processes which are often unmanageable and unpredictable; all large organizations such as government departments by their very nature contain some dysfunctionality; and there are what Harold Macmillan called “events, dear boy.” Faced with this, Prime Ministers should at least not add to these unavoidable errors by making avoidable ones. They should learn from history and from research into cognitive biases.

And this is what May hasn’t done: Janis wrote Groupthink way back in 1982. Anyone who aspires to be in a position to take decisions should know it. Yet May seems not to. She failed to avoid errors which were well-known to anybody who knew anything about the history and psychology of decision-making.

Mistakes I can forgive. Illiteracy and ignorance, however, are another matter.

You might think I’m making a partisan point here. I’m not so sure. May has done what Blair did when he went to war in Iraq: he too ignored well-known principles of good decision-making.

This alerts us to the possibility that our political system does not adequately weed out irrationalities. Last year, I wrote:

Chilcot…poses a systemic question: how can we ensure that political structures favour rational decision-making? This question will, of course, be ignored.

That looks like a rare correct prediction. And it’ll remain the case until the media and voters understand leadership better. “Strong” leadership isn’t about delivering diktats from on high. It’s about taking good decisions, which often requires openness, diversity and being awake to cognitive biases. It’s not clear that May can do this. And this is not entirely her personal fault.

Poverty, ambition & reference levels

I’ve written before about how inequality perpetuates itself through differences in confidence: people from rich backgrounds have the chutzpah to blag good jobs for which they are unqualified, whilst those from poorer backgrounds have confidence knocked out of them. However, a new paper by David Chivers suggests there’s another mechanism which can have the same effect – differences in aspirations.

He shows that people who are just above the poverty line are scared to take risks for fear of falling into poverty. This traps them into low-paying but safeish jobs. By contrast, risks are taken either by the rich, who can afford them, or the desperately poor who have nothing to lose.

Although Dr Chivers applies this to decisions on whether to become entrepreneurs in poorer countries, it resonates with me. Once I realized that I could pay the leccy bill and was in no danger of becoming homeless, all ambition left me. Rather than seek new, possibly better jobs and risk them not working out, I focused on keeping the safe job I had.

The analogy with Dr Chivers’ work lies in the importance of reference levels of income. For Dr Chivers, the reference level is absolute poverty. For me, it was the income we had as kids. As Malmendier and Nagel (among others) have shown (pdf), experiences in our formative years influence our economic choices years later.

This poses the question: how common am I? In one sense, of course, I’m not: there aren’t many that go from child poverty into Oxford. What I’m speculating is that those that do might be disproportionately likely to end up in middling careers. Having achieved a lowish reference level of income, we pootle along not chasing directorships or partnerships. We leave that to richer people who have higher reference levels: I suspect that a major spur to ambition is the desire to keep up with one’s father.

This isn’t to say we opt out of the rat race entirely: our fear of poverty stops us downshifting. It’s posh people who feel they can afford to take risks who give up work to become artisanal jam-makers.

As I say, this is speculation. It’s possible – and true for a few – that growing up poor can give a man a longlasting ambition to prove himself to the rich. But I suspect that for most of us anger can’t last a lifetime. Two factoids support my suspicion.

One Is the common claim that young professional footballers lack the drive to get to the top of their profession because they have too much to young. Having an income above the reference level set by one’s childhood saps ambition.

The other comes from research by Henrik Cronqvist and colleagues. They show that people who grew up poor but who invest in the stock market later in life buy stocks on lower price-earnings ratios. This is consistent with child poverty making people risk averse (though in this case the aversion to risk pays off!)

All this is consistent with a bigger fact – that more egalitarian societies have higher social mobility. There are many possible reasons for this, not least being that it’s easier to climb a ladder if the rungs are close together. One extra mechanism, though, might be that more equal societies give people from poor homes a higher reference level of income, which prolongs their ambition.

It’s also consistent with the fact that child poverty leaves lifelong scars – literally so.

If I’m right, the case for abolishing child poverty is even stronger than appreciated, because child poverty might hold back economic growth even years later by dampening ambition and entrepreneurship.

Now, I stress that I speculating here, And I know there are dangers in generalizing from one’s own case (at least in mine: doing so is fine for everybody else). But there is surely a question here. And because political discourse is dominated by people from posh backgrounds, it’s a question that doesn’t get the attention it should.

Who benefits from Mayism?

Theresa May claims there’s no such thing as Mayism. I don’t know about that. What puzzles me, though, is that there don’t seem to be any obvious Mayites.

To see what I mean, contrast May and Thatcher. Thatcher had two things which May seems to lack.

One is an idea of how to increase economic growth: for Thatcher, this meant smashing trades unions, deregulation, lower taxes and restoring profits to encourage investment. Whatever its merits, this was at least a vision which had some intellectual backing and keen and articulate supporters.

May, by contrast, seems to offer no such thing. At least two of her policies – hard Brexit and immigration controls – would (if delivered) depress growth. And she has little idea of how to offset this. Her infrastructure plans offer nothing much that Labour isn’t, and her industrial strategy is weak. In contrast, to Thatcher, nobody is seriously suggesting May has a plan to restore growth.

Secondly, Thatcher’s policies certainly benefited large client groups: businessmen who enjoyed weaker unions; property owners who saw house prices soar thanks to credit deregulation; City boys who won from financialization and lower taxes; people who bought their council houses at a discount, and so on. Thatcher gave us yuppies, garagistes and Loadsamoney.

Where are the Mayite equivalents? Which groups are going to profit from a May government? Yes, peddlers of equity release schemes might profit from people’s need to buy social care; and immigration controls will encourage people smugglers. But these are probably too narrow a client base to be a successful electoral base.

Of course, May will defend the interests of a decent minority: she’ll protect the rich from Labour’s tax plans, and financiers from the transactions tax. But it’s not clear whose interests she’ll actively advance.

Here, we must distinguish between interests and preferences. May will probably satisfy the preferences of those who want a hard Brexit. But those preferences are intrinsic rather than a means to prosperity. It’s not obvious which significant social group will be made rich by this.

Hence my puzzle. I’ve long assumed that politicians serve particular material interests, yet it’s not obvious whose May is advancing.

You might reply here that the state in capitalist society has always had to fulfil two often contradictory functions: to ensure the continued accumulation of capital via “business-friendly” policies; and to legitimate the system by placating non-capitalists. Whereas Thatcher focused more upon the former, May’s “red Toryism” is focusing upon the latter. She’s promoting the interests of capital by buying off hostility to capitalism.   

There’s some truth in this. But it misses two things. One is that popular discontent arises at least in part from the long stagnation of real wages. The other is that the current crisis of capitalism is not just one of legitimacy but accumulation: prolonged low investment tells us this. To both of these real problems, May is offering little solution.

This leads me to two possible different conclusions. One possibility is that Phil is right. The Tory party, he says, is “decadent”: “For decades, it has not been a suitable vehicle for the interests it's supposed to represent.” It’s not clear that the Tories can remain popular in the long-term if they’re not offering a way of enriching some client base.

Perhaps, though, there’s something else. Maybe all this reflects the befuddlement of a Marxist who’s accustomed to thinking of politics in terms of material class interests, and yet the world has changed so that preferences matter more than interests and identities (such as somewheres vs anywheres) matter more than class. Whether these shifts are happening or not, and if they are whether they are long-lasting or not, are issues about which I am uncertain.

So yes, I’m puzzled.

The fairness error

In the Wheatsheaf last night, I was struck by an obvious injustice. The pub was charging everybody the same price for beer, regardless of their income. This is obviously unfair: why should the millionaire picking up his children from the posh school pay the same as a low-wage worker? Beer prices must be means-tested, so the rich pay more.

Astute readers might spot a problem with that paragraph. It’s bollocks. It would be grotesquely inefficient for barkeeps to check everybody’s income before serving their Tiger*. A far easier way of addressing this unfairness – if such it be – would be to tax the millionaire and give income support to the poorer customer. This would have the same effect as means-testing – the millionaire would be less able to buy beer and the poor person more able – but would be more efficient.

You might think this is childishly obvious. It should be. But it’s not. People are judging manifesto promises in the same bonkers way as I’m alleging beer prices to be unfair. Take three examples:

 - Iain Martin says about social care: “Someone aged 25 should pay masses more tax so someone with a £1.5m house aged 75 gets free care? Really?”

 - Giving a winter fuel allowances to all pensioners, rich and poor, seems unfair – hence Tory plans to means-test the payment.

 - Labour’s plan to abolish tuition fees has been called a subsidy to (future) middle classes at the expense or poorer workers.

All these examples are of people making the same error I made with beer prices. They are expecting each individual transaction to be egalitarian and are overlooking the costs of doing so.

So for example, if you think it unfair that some rich folk get free social care, the solution is to tax them more: an inheritance or land tax would make sense for several reasons. The serious question is how to best pool the risk that some will need lots of social care and some not – a question the Tories haven’t addressed. If you think it unfair that rich pensioners get a winter fuel allowance, you should get them to pay higher income tax, not faff around with expensive and intrusive means-testing. And it posh people get subsidised by abolishing tuition fees, the answer is to get them to pay more income tax.

When it comes to judging inequality, what matters is the system as a whole, not individual actions. Expecting each individual policy to increase inequality would be inefficient, just like asking barkeeps to conduct means-tests. As Nicholas Barr says in a standard textbook on the welfare state:

It is frequently the overall system which is important...Taxation and expenditure should be considered together. (The Economics of the Welfare State, 2nd ed, p185, his emphasis)

Instead, the test of individual policies should be based in efficiency. Personally, I think winter fuel payments are daft: just have a higher state pension instead. Similarly, whether to impose tuition fees upon students is also a matter of efficiency: what’s the best way of financing universities? Do tuition fees (as I fear) have baleful effects upon the character of universities? And so on.  These are genuine issues. What’s not a serious concern is that specific policies are inegalitarian. In the cases I’m considering here, equality concerns should be tackled by the overall tax and benefit system, not by each single policy in isolation.

* Other beers are available. But they’re not as good.

The end of competition?

For years, economists have believed that competition tends to equalize profits across firms, as inefficient firms either learn from better ones or go out of business, and as new firms enter markets and so compete away high profits. Several things, however, suggest that we need to change our mental model, because this basic common sense intuition might be wrong.

A few things I’ve seen recently point to this. Jason Furman and Peter Orszag say (pdf) "there has been a trend of increased dispersion of returns to capital across firms" in the US. David Autor and colleagues show that there has been a rise (pdf) of “superstar firms” earning very high profits. And Andy Haldane, echoing Bloom and Van Reenen (pdf), has said (pdf):

An upper tail of companies and countries has maintained high and rising levels of productivity. These productivity leaders are pulling ever-further away from the lower tail. Or, put differently, rates of technological diffusion from leaders to laggards have slowed, and perhaps even stalled, recently.

All this is the exact opposite of what we’d expect to see if competition equalized profits. So what’s going on? I suspect that here, as everywhere, there are no mono-causal explanations. A few possibilities are:

 - Low interest rates and creditors’ forbearance mean that inefficient companies aren’t being killed off to the same extent they were in the 80s and 90s.

 - Credit market imperfections prevent efficient firms starting or expanding (though this should be less of a problem now than a few years ago).

 - Bad managers just can’t see how to up their game or exploit profit opportunities.

 - Tough intellectual property laws impede firms from learning.

 - Contrary to what Hayek thought, prices are not sufficient information. High prices don’t necessarily encourage firms to enter a market because they don’t tell us how long the profit opportunity from such prices will last.

 - Many profitable companies operate in niches which are big enough to offer nice profits, but too small or too specialized to attract entrants: each week, the IC describes dozens of such firms.

 - New technologies enjoy increasing returns to scale. As Stian Westlake and Jonathan Haskell say: “Intangibles are often very scalable: once you’ve developed it, the Uber algorithm or the Starbucks brand can be scaled across any number of cities or coffee shops.” This creates a winner-take-all effect.

 - Network effects generate an incumbency advantage. If I set up a more efficient supermarket than Tesco, I should win enough business to get by, and to force Tesco’s prices down. But if I set up a potential rival to Facebook, I face a tougher job. Because the value of a networking site depends upon others using it, Facebook has a more entrenched advantage.

If all of this is right, and these are long-lasting changes – which is a big if – then we need to ditch some old mental models and rediscover some others. We should abandon the idea that competition equalizes profits and restrains monopolies and perhaps return to some older Marxian ideas.

Marx thought capitalism tended to generate monopolies. Some of his followers, most famously Baran and Sweezy, thought this would generate a tendency towards stagnation, as those monopolies generated more profits than they could spend.

For a long time, these ideas were mistaken. However, at a time when we’re seeing superstar firms build (pdf) up massive cash piles amid talk of secular stagnation, perhaps we need to rethink their relevance and implications.

When bad arguments work

Many of the most common arguments against Labour’s policies are laughably bad – such as the claim that people earning a little over £80,000 a year will have to pay very much more tax; or the idea that higher top taxes wreck the economy; or the demand that individual spending plans be fully costed; or the notion that nationalization is a cost to the Exchequer.

In pointing this out, however, people like me are missing something important – that even lousy arguments have the power to persuade.

Robert Cialdini gives us an example of this in Influence. He tells of an experiment in which a woman tries to jump queues to use a photocopier in a university library. When she merely asked to jump in, 60% of people in the queue complied. But the question “May I use the Xerox machine because I have to make some copies?” got 93% to agree. Even a meaningless remark (why else would you want to use the copier?) elicited compliance.

What’s going on here is that the mere act of speaking has persuasive power. This has been corroborated by experiments (pdf) by Justin Rao and James Andreoni. They got people to play a dictator game in which one subject was given $10 and then invited to share some or none with somebody else. They found that in the straightforward game, dictators have an average of $1.53. However, when the third party asked for a share of the money, the dictator gave an average of $2.40. The actual wording of the requests didn’t seem to much matter. But say Andreoni and Rao, “the existence of a request matters tremendously.” They say:

Communication, especially the power of asking, greatly influences feelings of empathy and pro-social behavior.

The mere existence of messages, then, gets us to sympathize with the sender.

In this context, there’s a massive bias in the media. People earning over £80,000 might be only 5% of the population, but they account for much more than 5% of communication. This leads us to sympathize with them. Add in the fact that people tend to believe lies, and we get a big bias towards the rich.

It’s often said that many people oppose higher taxes on top earners because they hope (mostly wrongly) to become one themselves. But this is only part of the story. We sympathize with the rich not (just) because we hope to become rich ourselves, but because we hear so damned much from them.

There’s a nasty flipside to this. If we don’t hear from people, we tend not to sympathize with them. Separate experiments by Agne Kajackaite has shown this. She got people to work where the rewards went not just to them but to a bad cause (the NRA). She found that when people chose not to know whether the money was donated to that cause, they behaved more selfishly; they worked harder to make money for themselves. “Ignorant agents behave in a more selfish way” she concludes.

Thigh might well have political effects. Because the worst-off have less voice, we are relatively ignorant of their suffering and so less sympathetic to them. Support for benefit cuts isn’t based solely upon outright untruths, but upon a lack of sympathy for them caused by their relative lack of voice.

Most of us, I guess, can name far more people who are in the top 5% of the income distribution than in the bottom 5%. This introduces a bias towards the rich.

My point here is that the media’s bias isn’t merely conscious and deliberate. There are more subtle ways in which it serves the interests of the well-off.

Top taxes & growth

Rich people don’t like paying taxes. This is pretty much the only thing we’ve learned from some of the hysterical reaction in the papers to Labour’s plan to raise taxes on the rich.

Let’s remember the historical facts here. Low tax rates aren’t associated with faster growth – if anything the opposite. For example, in 1988 Nigella’s dad cut the top income tax rate from 60% to 40%. Since then, GDP per head has grown by an average of 1.4 per cent per year. That compares to growth in the 29 years before the cut of 2.6% - and that was a time which included top tax rates on earned income of over 70%. Much the same is true in the US; the economy there was stronger in the 50s and 60s when the top tax rate was 91% than it has been recently with lower taxes.

You can read this fact in three ways.

One possibility is that growth has slowed in the 00s for other reasons, and the slowdown would have been even worse, had taxes not been cut. For me, this runs into two problems: one is that some of the likely causes of slow growth, such as the banking crisis, might not be independent of top tax rates. Another is that supporters of lower taxes believe that other reforms in the 80s should have raised trend growth too – such as privatization, deregulation and the weakening of trades unions. If they did so, their effect was swamped by other things.

A second possibility is that lower top taxes actually cause lower growth. For example, they might incentivize financialization and hence greater financial fragility, or encourage rent-seeking such as jockeying for top jobs or CEOs extracting higher pay for themselves. Of course, higher taxes might cause some top-earners to retire or emigrate. But this doesn’t necessarily cause a big loss of output. If, say, Eden Hazard were to move to Spain in response to higher taxes here, Chelsea won’t field only ten players.

A third possibility is simply that – within reason - trend growth isn’t much affected one way of the other by changes in national economic policies.

To argue that higher top taxes are the “economics of the madhouse” requires a strong case for my third possibility and good arguments against the second and third. This, I think, would be very difficult.

All this is a story about economic growth. You could argue, however, that higher top taxes would reduce tax revenues even if they don't much affect GDP: as Alan Manning has said, tax-dodging is more sensitive to tax rates than labour supply.

Even here, though, the argument is moot. For one thing, as the IFS has pointed out, these are subject to huge uncertainty. And for another, in this context the fact that Labour’s so-called “tax grab” would impinge upon the “middle classes” such as doctors and headteachers isn’t a bug but a feature. Insofar as it does so, it’s a revenue raiser. Teachers and doctors are probably less internationally mobile than the mega-rich, and less able to use tax-dodging ruses. For the purposes of raising revenue, they are a large slow-moving target.

For me, the non-hysterical arguments against Labour’s tax plans lie elsewhere. You could argue that – with tax morale low partly as a result of the rise of individualism – they’ll decrease social solidarity. People will regard them not as the price for living in a civilized society but as a burden which subsidizes “scroungers”. Or you could argue that the revenue raised by taxes will fuel wasteful public spending. Or you might argue that redistributive taxation isn’t enough: we need to reduce inequalities of power as well as income. Or you might argue that the tax base should be shifted from incomes to land and inheritances*. And personally, I’m not wholly unsympathetic to the view that very high taxes diminish freedom – though  few people can consistently argue for this, given the general lack of support for liberty.

What you shouldn’t do, though, is argue that higher top taxes will wreck the economy. Other things might do that, but it’s unlikely that top taxes will.

Counterproductive austerity

Is austerity counter-productive even in microeconomic terms? I ask because the ransomware attack on the NHS seems to have been dues at least in part to a lack of spending on IT. The Register says:

The NHS is thought to have been particularly hard hit because of the antiquated nature of its IT infrastructure. A large part of the organization's systems are still using Windows XP, which is no longer supported by Microsoft, and Health Secretary Jeremy Hunt cancelled a pricey support package in 2015 as a cost-saving measure.

That “cost saving” might well turn out to have been no such thing. It’s possible that the cost of repairing the attack, cancelled operations and updating IT systems will offset the initial saving.

This is by no means an isolated example. Cutting prison staff looks like a “saving”, until prisoners either riot or re-offend upon release because of a lack of rehabilitation. “Savings” on flood defences become no such thing when we need to repair the damage done by flooding. Low spending on social care adds to NHS costs by keeping people in hospital. Cuts in psychiatric care add to police spending. A lack of spending on schools isn’t a saving if parents pay a hidden tax by donating money to schools. And so on.

In ways like these, austerity is counter-productive. It either means shifting the burden onto other public services, or increased spending later to pay for the damage done by cuts.

This is an entirely separate point from the Keynesian one, that austerity means weaker economic activity and hence lower tax revenues. Putting the two together, though, merely reinforces the point – that austerity fails, in the long-term, even in its own terms.

Now, I’m not complaining here only of Tory stupidity. A similar thing happens in the private sector. In the early 00s BP’s CEO John Browne cut maintenance spending. That raised profits. But only temporarily. The savings he made were swamped by the costs incurred when the Texas City oil refinery blew up.

Browne had an excuse. He was trying to impress shareholders who were daft enough to pay more attention to quarterly earnings reports than to the ground truth of dangerous refineries.

But who is the government trying to impress? It’s certainly not bond markets, who are happy to finance government borrowing at negative real interest rates. Instead, it’s political journalists with their silly mediamacro obsession with the “nation’s finances” and ignorance of the ground truth of whether austerity is in fact feasible in the long run.

In saying all this, I’m not arguing against restraining government spending. There is of course a case for rooting out waste and making sustainable efficiency gains. Identifying such gains, however, can’t be done by here-today, gone-tomorrow politicians and managers who care only about tough talk and impressing journalists or hitting short-term targets. Genuine, lasting restraint requires empowering public sector workers (who have both knowledge of ground truth and skin in the game to ensure efficient services in the future) to identify genuine waste. Austerity, when combined with managerialism, is just daft.

The bias against emergence

John Humphrys gave us a good example of the BBC’s bias this morning – and it’s not the sort you might think.

In discussing the Bank of England’s forecast that real wages will continue to fall this year, he asked (2”10’ in): “are we going to keep getting poorer because of Brexit?”

Now, I think Brexit is one the stupidest things this country has done for years. But it alone is only a minor cause of falling real wages (at least for now!). Three facts tell us so.

First, real wages have stagnated ever since 2007 – long before Brexit was heard of.

Secondly, we haven’t suffered a deterioration in the terms of trade. These have actually risen since May. Yes, import prices have risen. But so have export prices. Exporters are seeing fatter profit margins. Insofar as they share these with workers, real wages should rise for at least some workers.

Higher inflation alone cannot explain falling real wages. They merely pose the question: why aren’t workers getting protection from inflation in the form of nominal wage rises?

The answer, as Mark Carney said (pdf) yesterday, is that productivity is falling – which means a smaller pie for everyone – and that labour market slack gives employers’ the power to hold down wages.

Granted, these aren’t the whole story, and Brexit might be holding down wages by increasing firms’ uncertainty. But they are a big part of the story. Why, then, did Humphrys ignore them and focus on Brexit?

I fear that we have here is another example of a bias against emergence. Political journalists especially focus upon conscious political actions to the neglect of emergent processes.  Brexit is a political choice whereas other, perhaps bigger, influences on real wages are the complex unintended products of millions of dispersed decisions. So Humphrys pays the former more attention.

This is not an isolated example. Political journalists discuss fiscal policy as if government borrowing were set by Chancellors and overlook the (large) extent to which it is the counterpart of global emergent processes such as the savings glut and corporate cash-hoarding.

Nor is it confined to journos. Leftists sometimes blame rising CEO pay on bosses’ greed, as if the rest of us would turn down pay rises, and under-estimate the extent to which it is the result of partly-emergent processes such as globalization (pdf), deunionization, agency failure or managerialist ideology.

In this respect, the BBC has what John Birt and Steve Richards called a “bias against understanding.” In downgrading the importance of emergence, it stops viewers and listeners from understanding social phenomena.

If this bias merely led to ignorance, it wouldn’t be so bad. But it might have a more systematic effect. If we underweight emergence, we overweight the role of conscious individual agency. This causes us to exaggerate what politicians and business leaders can achieve if only they display strong leadership. And that, in turn, helps to sustain inequalities of income and power.