Stumbling and Mumbling

Author: chris dillow   |   Latest post: Thu, 16 Aug 2018, 01:44 PM


For automatic stabilizers

Author: chris dillow   |  Publish date: Thu, 16 Aug 2018, 01:44 PM   |  >> Read article in Blog website

Simon has a good discussion on whether fiscal or monetary policy is better at stabilizing output. I'd suggest, though, that neither is in practice particularly good and that what we need instead are stronger automatic stabilizers.

I say so for a simple reason: recessions are unpredictable. Back in 2000 Prakash Loungani studied the record of private sector consensus forecasts for GDP and concluded that "the record of failure to predict recessions is virtually unblemished" - a fact which remained true thereafter.

The ECB, for example, raised rates in 2007 and 2008, oblivious to the impending disaster. The Bank of England did little better. In February 2008, its "fan chart" attached only a slight probability to GDP failing in year-on-year terms at any time in 2008 or 2009 when in fact it fell 6.1% in the following 12 months. Because of this, it didn't cut Bank Rate to 0.5% until March 2009.

Given that it takes around two years for changes in interest rates to have its maximum effect upon output, this means that monetary policy does a better job of repairing the economy after a recession than it does of preventing recession in the first place. And of course, as there's no evidence that governments can predict recessions any better than the private sector or central banks, the same is true for fiscal policy.

All this suggests to me that if we want to stabilize in the face of unpredictable recessions, we need not just discretionary monetary or fiscal policy but rather better automatic stabilizers.

In this context, I've long been attracted to Robert Shiller's proposals for macro markets. These would allow people vulnerable to recession - such as those in cyclical jobs or with small businesses - to buy insurance against a downturn. I can see why some of you might be sceptical about this: the sort of people who'd sell insurance against recession are the sort who'd be unable to pay out in the event of one. (As with all markets, so much hinges on precise details).

If private sector insurance markets don't exist, the job of stabilization is better done by government. The most obvious measures here include more progressive taxation - so that falls in income are shared with government - and higher welfare benefits, both for the unemployed and for those who suffer drops in hours.

There's something else. Another way to stabilize the economy is to ensure that there are fewer institutions that propagate risk - ones that turn small downturns into big ones. This means ensuring that banks are strong and well-capitalized, so that bad loans don't deplete capital so much as to prevent lending to other companies. Whether this is currently the case is questionable: UK banks capital ratios, for example, are still below the levels recommended by Admati and Hellwig.

It is measures such as these, rather than discretionary macro policy, which perhaps offers better hope for genuinely stabilizing output and jobs.

I suspect, though, that I'm making two more general points here.

One is that macroeconomic stability isn't just a matter for macro policy. It's also about the quality of institutions - the nature of the welfare state; how far financial institutions propagate risk; whether we have markets to pool risks or not; and so on.

The other is that the inability of policy-makers (and everybody else) to predict recessions is not some accidental contingent feature we can abstract from. A lack of foresight is an inherent part of the human condition. Policy must be based upon this big fact. This, of course, applies to much more than just macro policy.

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Over- and Under-reactions in politics

Author: chris dillow   |  Publish date: Tue, 14 Aug 2018, 01:29 PM   |  >> Read article in Blog website

You will all have had experience of somebody flying off the handle on the slightest provocation - brushing against them in a crowded pub, or pulling out in front of them in traffic. I suspect this everyday behaviour helps us understand politics.

What I mean is that there's a tendency to over-react to small offences and under-react to larger ones. We see this on both left and right.

On the left, compare austerity to Johnson's recent Islamophobic remarks. Yes, the latter has led to some deplorable attacks on Muslim women. But austerity has been many thousand times worse. Not only has it made us much worse off than we'd otherwise be, but it also caused Brexit (pdf) with the social divisions and poverty that'll result, and it might well have caused thousands of deaths to boot. And yet there isn't thousands of times more anger at Brexit than there has been about Johnson.

And on the right, the abuse Corbyn is getting for the very serious allegation that he's a terrorist sympathizer doesn't seem much greater than that Ed Miliband got for eating a bacon sandwich inelegantly. Ed_Miliband_bacon_sandwich

The ratio of outrage to cause is large for small causes, but smaller for greater causes.

There are two analogies here. One is with the certainty effect: people pay more to reduce probabilities of loss from 10% to zero than they do from (say) 50% to 40%. The other is with the Easterlin paradox; happiness is much flatter over time than are incomes or political freedoms (pdf). What we have in all these cases are moods being more stable than underlying stimuli: attitudes to risk, happiness or outrage.

Why? There are many reasons why we might over-react to small slights, such as a sense of personal insult, umbrage at the violation of a social norm, or the desire to grab attention. There are also reasons to under-react. One is cognitive; people don't make connections between social phenomena and so don't link arid Budget speeches to Brexit or to deaths. The other is a psychological coping mechanism whereby we distance ourselves from horrors. Stalin expressed an uncomfortable truth when he said that one death is a tragedy but a million is a statistic.

There is, however, a problem here. It's that of the boy crying wolf. If you are always complaining, nobody will take you seriously when you have a genuine grievance. The more noise you make, the less signal there is: if you make a fuss about a Labour leader eating a bacon sandwich, people won't take you seriously when you make graver allegations. Which might, I suspect, help explain why opinion polls don't change much from week to week: inattentive voters zone out from partisan complaints even if they might be warranted.

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Our broken politics

Author: chris dillow   |  Publish date: Fri, 10 Aug 2018, 02:08 PM   |  >> Read article in Blog website

Many of you believe that our politics is broken. I suspect this is right, in a particular sense.

What I mean is that pretty much all social institutions can be thought of as selection devices. The problem with politics is that these devices are working less well than they used to. Here are five examples of what I mean.

1. Parliamentary candidates used to be selected by mass-membership parties in which an ability to persuade or to build wide support was valued. Today, parties have been captured by fanatics and narcissists who select candidates in their own image; this problem has been exacerbated by the fact that there are bigger rewards on offer outside of parliament, which (at the margin) selects against some able people.

2. Ministers used to be selected as the most able MPs. Today, more premium is placed upon toeing the party line. The wretched Chris Grayling or Liam Fox thus occupy office because they are Brexiters, rather than because of any competence or character.

3. MPs used to see their role in Burkean terms - as being members of a "deliberative assembly" exercising independent judgment. In this way, the "hasty opinion" of the public was sometimes selected against. Today, with the rise of referendums and conception of politics as just another arena where the customer is king, this conception has declined.

4. We used to think that free debate would select for good ideas and against bad. As Mill wrote:

[Mankind's] errors are corrigible. He is capable of rectifying his mistakes by discussion and experience. Not by experience alone. There must be discussion, to show how experience is to be interpreted. Wrong opinions and practices gradually yield to fact and argument.

Today, this seems doubtful. People are asymmetric Bayesians. Confronted with opposing evidence, thy double-down (pdf) on their prejudices rather than yield to fact. Debate doesn't therefore select properly for better ideas. (The BBC's impartiality between truth and falsehood reinforces this failure).

5. Maybe there was a time when the media selected for intelligence or at least against egregious scumbags. Today, it doesn't. In the 90s, David Irving was shut out of the public domain. Today, though, he'd have lots of Twitter followers and broadcasters, desperate to attract the viewers and attention that comes from controversy, would no doubt invite him onto their shows - as they do with Bannon, Gorka and Farage. This lust for mindless controversy - what I've called politics as wrestling - means that buffoonish charlatans like Johnson get attention whilst decent thoughtful MPs such as Jesse Norman do not. (A lot of the left should also be blamed here for preferring the moralistic posturing of "calling out" to engaging with serious ideas.)

Now, I'm not pretending that there was ever a golden age of perfect deliberation. There never was. Politics has always had a share of duffers and crooks. I just suspect that its selection mechanisms are more dysfunctional now than in the past. Bad ideas and bad people are more likely to be selected for rather than against.

Our question, therefore, must be: how can we build better selection mechanisms? Paul Evans deserves huge credit for asking just this.

For me, at least part of the answer would be institutions (pdf) of deliberative democracy - mechanisms such as citizens juries which consider evidence and which help equalize political power by giving a say to the poor and downgrading the influence of the mass media. Paul Cotterill is right to call for a more Habermasian politics.

Merely saying this, of course, draws attention to the big problem here. Our current broken selection mechanisms serve the rich and powerful very well: why should they take a risk with deliberative, inclusive evidence-based policy-making? Perhaps, therefore, there is a tension between actually-existing capitalism on the one hand and a well-functioning democracy on the other.

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Labour's Bank of England problem

Author: chris dillow   |  Publish date: Wed, 8 Aug 2018, 02:29 PM   |  >> Read article in Blog website

Despite Jo Michell's criticisms of him, I fear that Richard Murphy raises an important point here.

To see it, let's assume Labour were to take power today. There is a pressing need not just for more infrastructure spending but for more current government spending - on the NHS, local government, courts, prisons and so on. Let's say that Labour does raise such spending, and therefore aggregate demand.

The Bank of England would regard this as inflationary. It raised rates last week because it believes "the UK economy currently has a very limited degree of slack". A fiscal expansion would eat further into this slack thus prompting the Bank to raise rates to suppress demand.

Of course, the Bank of England might well be wrong to believe this*. But even if it is, rates will rise in response to a fiscal stimulus.

In this sense, Richard is right to say that "austerity will remain in place", in the sense that we'll suffer ongoing weak growth and continued mass unemployment - the difference being that it'll be due to tighter monetary rather than tight fiscal policy. And he's right to say that, as things stand, Labour is leaving Carney & Co in charge.

In this context, the question of financing the extra government spending is a red herring: even if it were accompanied by higher taxes, there would be some rise in rates - remember the balanced budget multiplier?

The question is: what to do about this?

One solution would be to remove the Bank's operational independence or, less radically, to raise its inflation target: doing so might be justified as a means of offsetting the Bank's bias to over-estimating the Nairu.

It's easy, though, to see why Labour might be loath to do this. Doing so would invite its critics to invoke folk memories of Labour's failure to control inflation in the 70s.

It would also be only a temporary fix. Jo has a point when he says:

One doesn't have to sign up to a constant NAIRU to acknowledge that at some point higher demand is going to induce inflationary pressures. I sometimes get the impression this is not sufficiently acknowledged in MMT.

The constraint upon full employment is genuine - even if nobody knows for sure where exactly it is. Jo is therefore right to say that fiscal policy alone cannot achieve full employment.

He's also right to say we need a progressive supply-side policy - ways of boosting productivity, capacity and competition to enable the economy to grow without generating so much inflation. It is here that Labour's attack upon neoliberalism should lie: a national investment bank, worker democracy and even a citizens' basic income.

But, but, but. It is unclear whether such policies really can do much to boost trend growth. In a famous paper (pdf) John Landon-Lane and Peter Robertson argued that national policies can do little to affect trend growth, and Dietz Vollrath has shown that they can't increase productive potential very quickly.

This is not to counsel despair. Getting rid of the Tory-Centrist fiscal squeeze would be a good idea; a little higher inflation or interest rates would be no disaster; and lots of supply-side policies such as better education, stronger competition policies and worker democracy are good ideas even if they don't do much to raise growth.

Instead, we must remember the old Marxian question: how much can policy achieve within the constraints of capitalism? Yes, some of these constraints are illusory (such as capital flight). But some of them are not.

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Ownership in question

Author: chris dillow   |  Publish date: Tue, 7 Aug 2018, 01:39 PM   |  >> Read article in Blog website

What is the right form of ownership of a company? This is the question raised by Stan Kroenke's proposal to buy all the remaining shares in Arsenal - a move described by the Arsenal Supporters Trust as "dreadful".

Viewed through the lens of some conventional economics, the AST's objections seem misplaced because there are big pitfalls with dispersed ownership which can be solved by concentrating ownership into fewer hands.

One of these is a lack of incentives. If a firm has many shareholders, it accounts for only a small fraction of the wealth of each owner. No owner therefore has a strong incentive to go to the bother of improving the management. There's a problem of collective action: the costs of doing so are borne by a few active shareholders, whilst the benefits accrue to all owners. Arsenal-players-vs-Everton-e1517689977124

Another is asymmetric information. Outside shareholders often just don't know enough. They didn't stop RBS collapsing, for example, because they didn't realize just how terrible the business was.

For these reasons, the number of stock market-listed firms has been in decline for years - as Michael Jensen predicted in 1989.

Kroenke's plan fits this pattern. So the AST is wrong to object, isn't it?

No, no, no. The standard objections to dispersed ownership don't apply in this case. Arsenal's individual shareholders don't lack incentives; they have a passionate desire to see the team succeed far beyond their financial interest. Maybe more so than Mr Kroenke who - it is feared - might use Arsenal as a cash cow to finance his other "franchises". Nor is there much asymmetric information: Arsenal's shareholders get regular (and painful) updates on the team's performance every few days. That cannot be said of most listed companies.

In fact, there's a third difference - externalities. For many companies, outsiders don't care whether they succeed or not: when Phones4U went bust, people simply switched to Carphone Warehouse for surly service from spotty youths. That was no big deal. With Arsenal it is otherwise. Right-thinking people who don't own shares care deeply about their fortunes*.

For these reasons, I think AST is right to want to retain dispersed ownership. In fact, there might well be a case for going further, and favouring fan ownership (pdf) of football clubs.

Of course, the issue here is much wider than the matter of who should own Arsenal. It applies to all companies. There are four issues here:

- Who has skin in the game? More skin should mean more ownership, as it gives you sharper incentives to maximize the value of the asset. This is why there's a stronger case for fans to own clubs than players: players can and do agitate for transfers out of failing clubs, whereas fans are much more emotionally invested. In the same spirit, it is often workers or sub-contractors who bear the most risk of a company collapsing.

- Who knows the company best? These should own the business as they know best how to maximize its efficiency. It made sense for Richard Arkwright to own a factory because he knew the production process best - he'd invented much of it - whilst many of his employees were illiterate. Conversely, human capital-intensive businesses such as law firms are often owned by their employees and rarely by outside shareholders. I suspect this is sometimes a case for transferring ownership from outside shareholders to workers.

- How important is the company? Xavier Gabaix has shown that some firms are so important that their failures have macroeconomic implications. And Daron Acemoglu and colleagues show that networks (pdf) matter; firms that are the hub of networks can drag others down with them, whereas others aren't so important. The failure of RBS, for example, mattered much more than that of Carillion. For some firms, it's a matter of public indifference who owns them. For others, it does matter. The question of who should own banks is an important policy question. That of who should own fishmongers, not so much.

- Does the market for corporate control work? If it does, then ownership will flow to the people best able to maximize the value of the asset and policy-makers need not worry. Personally, though, I suspect this isn't the case. Takeovers sometimes fail horribly, in part because they are motivated (pdf) by some cognitive biases. And in other cases, credit constraints or problems of collective action might prevent more widespread worker or consumer ownership.

Of course, the best form of ownership will vary from business to business. There is, however, no assurance that the market will ensure that businesses do get the best owners. Which means that in at least some cases, the question of who should own an asset is a legitimate political question.

You might object to this that efficiency isn't the only ideal and that traditional property rights matter too. Maybe. But as I said yesterday, some bearded guy might have been right to point out that the two might conflict.

* Of course, fans of Sp*rs of Chelsea want to see them fail, but these by definition are not right-thinking people.

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The robot paradox

Author: chris dillow   |  Publish date: Mon, 6 Aug 2018, 02:08 PM   |  >> Read article in Blog website

"More than six million workers are worried their jobs could be replaced by machines over the next decade" says the Guardian. This raises a longstanding paradox - that, especially in the UK, the robot economy is much more discussed than observed.

What I mean is that the last few years have seen pretty much the exact opposite of this. Employment has grown nicely whilst capital spending has been sluggish. The ONS says that "annual growth in gross fixed capital formation has been slowing consistently since 2014." And the OECD reports that the UK has one of the lowest usages of industrial robots in the western world. Klgrowth

My chart, taken from the Bank of England and ONS, puts this into historic context. It shows that the gap between the growth of the non-dwellings capital stock and employment growth has been lower in recent years than at any time since 1945. The time to worry about machines taking people's jobs was the 60s and 70s, not today.

Of course, we shouldn't set much store by the precise numbers here: measuring the capital stock is a fool's errand. But these data are consistent with other facts. Households are saving less than they used to, which is not what you'd expect if they feared losing their jobs. Companies are still building up cash quickly and borrowing little, and of course real interest rates are low. All this is consistent with low capital growth.

If we looked only at the macro data, we'd fear that people are taking robots' jobs - not vice versa.

So why is investment so weak (a fact which long pre-dated Brexit uncertainty? There are thousands of firms that aren't investing in new tech, and therefore thousands of potential explanations. Among them are:

- There is, as Bloom and Van Reenen say, "a long tail of extremely badly managed firms (pdf)" which lack the confidence or competence to invest in new technology.

- The 2008 recession had a scarring effect upon animal spirits; it raised the fear of future recessions and so deterred investment.

- Fiscal austerity depressed aggregate demand and hence the motive to invest. And in squeezing real wages, it reduced companies' incentive to invest in labour-saving technology: this was one reason why investment boomed in the 60s.

- Talk of a robot age might be self-defeating, as it increases fears of future competition; why spend £10m on robots if a rival will undercut you by spending £5m on better ones in a few months' time? Maybe firms have wised up to Nordhaus' finding - that innovation doesn't pay very well except for a tiny handful of firms. (Hendrik Bessembinder has estimated that 4% of firms account for all of the rise in the US stock market since 1926).

Whatever the reason for low investment, we have a genuine paradox here - that whilst there's much talk of a robot economy there is little evidence of it in the data or on the ground. There might, therefore, be a mismatch between the vast productive potential that technology might offer us on the one hand, and the poor performance of today's capitalism on the other.

Marx famously wrote:

At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production...From forms of development of the productive forces these relations turn into their fetters.

One of the neglected questions of our time is: could it be that we have now reached this stage?

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Diversity: a rightist ideal

Author: chris dillow   |  Publish date: Fri, 3 Aug 2018, 01:30 PM   |  >> Read article in Blog website

The left does not have a monopoly of wisdom - or, if we judge by the row about anti-semitism, any wisdom at all. There is one great truth which, historically, rightists have known better than many leftists. It is that our knowledge and rationality (two different things) are seriously limited.

Hayek, for example, famously based his defence of free markets upon the fact that:

The knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

The economic problem, he said, "is a problem of the utilization of knowledge which is not given to anyone in its totality." In this, he echoed Edmund Burke:

We are afraid to put men to live and trade each on his own private stock of reason; because we suspect that this stock in each man is small, and that the individuals would be better to avail themselves of the general bank and capital of nations, and of ages.

To Hayek, free markets are a means of aggregating dispersed, fragmentary and even tacit information, and hence a way whereby we can avail ourselves of the general bank of knowledge.

We can of course add Michael Oakeshott to this tradition. As Jesse Norman points out (pdf), he too emphasized the limits of individual reason.

What we have here, then, is a powerful intellectual tradition - one which I think is validated by the research on cognitive biases inspired by Daniel Kahneman.

Which raises a paradox which I suspect is under-rated. It's hinted at by Will Davies. For conservatives, he says:

Often the deeper anxiety is that the traditional monoculture of the nation, which dates back more than 200 years, is being questioned by feminists and post-colonial critics. Thus another paradox of the free speech panic is that what gets termed censorship is often quite the opposite - namely, the opening up of scholarly debate to a broader range of perspectives.

The paradox is this. If you believe that knowledge and rationality is limited and partial, then it is you who should especially welcome the voices of feminists and ethnic minorities. Their perspectives form part of the "general bank and capital" of wisdom of which Burke spoke. Without them, we are trading only upon the stock of reason of old white men - which is limited. (I should know: I am an old white man).

Similarly - in the spirit of Will's piece - you should also welcome a diversity of mechanisms for revealing wisdom and knowledge. Yes, markets are one way of revealing these. But so too are scientific methods, peer review and academic debate. You should therefore regret the marketization of universities, as it overturns the wisdom of ages which is for them to be part of the non-market system.

There's something else that might follow from the Burke-Hayek perspective - a support for worker coops.

Hayek was right to say that markets are a way of mobilizing fragmentary and dispersed information. But as his LSE colleague Ronald Coase pointed out, markets are often suppressed (pdf) in favour of corporate hierarchies. Such hierarchies might well not be an optimal way of aggregating dispersed information: this might be because of path dependency or because firms suffer a form of bureaucratic capture by top managers*. Instead, it's possible that one way better using fragmentary information is to give workers more say in how the firm is managed. Doing so mobilizes their knowledge of small inefficiencies. It's a way of aggregating marginal gains through cognitive diversity.

My support for worker democracy owes less to Marx - who wrote little about post-capitalism - than it does to Hayek.

My point here is simple. It's that diversity should be a rightist ideal. If you take seriously Burke and Hayek's warnings about the limits of our cognitive powers, you should welcome the diversity of perspectives that comes with hitherto silent groups - women, workers and ethnic minorities - being given a voice.

Which poses the question: why, then, are rightists not championing diversity and coops?

One possibility is that there is a tension here. Ways of harnessing diversity - be it worker democracy or giving more voice to minorities - require us to abandon the wisdom of the past. There's a trade-off between availing ourselves of the general bank of wisdom of ages and of that of the nation. My personal preference is for the latter. So, in fact, was Hayek's - hence his essay, Why I am not a Conservative. Many rightists, however, seem prefer the former. Corey Robin says this is simply because their true attachment isn't to freedom or efficiency but simply to established hierarchy. I wonder: how would one prove him wrong?

* Competition does not eliminate such inefficiencies. We know this from Bloom and Van Reenen's work showing that there's a persistent long tail (pdf) of badly managed firms, and from de Loecker and Eeckhout's work showing that profit margins (pdf) have trended upwards since the 1980s and are widely dispersed.

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The Marxist Bank of England

Author: chris dillow   |  Publish date: Wed, 1 Aug 2018, 01:41 PM   |  >> Read article in Blog website

Does capitalism maximize the life-chances of working people? This old Marxian question is the context in which we should judge the Bank of England's interest rate decision tomorrow.

What I mean is that conditions for many working class people are poor. My chart shows one measure of this. It shows a wider measure of unemployment - the officially unemployed plus part-time workers who want a full-time job plus the inactive who want to work. There are almost 4.4 million of these - over one in ten of the working age population. As Danny Blanchflower and David Bell point out, under-employment is endemic. Wideu

Of course, some of this unemployment is frictional - employable people who are briefly between jobs. But it also means that hundreds of thousands of the worst-off - the unqualified, disabled, those with mental health issues - can't find work. This matters enormously because unemployment is a major source of unhappiness: the jobless are three times as likely to report low well-being as those in work*. In this sense, capitalism is still inflicting misery upon millions.

And not just upon those at the bottom of the pecking order. For the average worker, real wages are still lower than they were before the 2008 crisis. And they are barely growing at all - which tells us that unemployment a few months ago was not low enough to significantly push up wages.

Not only are we not seeing meaningful pay rises, we're not seeing much of what we'd expect to see in a boom. Not many employers are greatly improving working conditions (which are desperately bad for millions) as they should if they can't attract or retain staff. Nor are they investing much in new equipment to raise productivity: the volume of capital spending is barely growing. The innovations gap of which Simon speaks is still big.

In this context, what would the Bank be saying if it raises rates tomorrow, as most economists expect?

It would be saying that all the above is close to as good as it is going to get for workers: in May, the Bank forecast (pdf) that the narrow measure of unemployment will fall only very slightly over the next two years. It would be saying that mass unemployment is necessary to hold down inflation. And not just mass unemployment, but the things it entails - tyrannical bosses, poor working conditions and low productivity for those in work. This is all the more true because it's possible that a rate rise now would do more than usual to depress employment.

Of course, in a big sense the Bank is not to blame for this. It is not its job - and certainly not its job alone - to ensure a low Nairu. If it does raise rates, the Bank is just being the messager - the message being that actually-existing UK capitalism is unable to provide decent living standards for millions, and that genuinely full employment is impossible. This is a Marxian message.

Of course, it might be that the Bank would be wrong to raise rates. Personally I suspect that, with wage inflation not yet rising, the Bank can afford to wait before moving. Which means that if the Bank does raise rates tomorrow, it would be more Marxist than I am.

* As Joan Robinson said, the one thing worse than being exploited in capitalism is not being exploited.

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Lying for Money: a review

Author: chris dillow   |  Publish date: Tue, 31 Jul 2018, 01:23 PM   |  >> Read article in Blog website

Just as they tend to over-glamourize murders, so TV dramas over-glamourize fraud: remember the BBC's rather good Hustle? In the real world, though, both have something in common; they are squalid crude affairs committed mostly by inadequates. This is a message of Dan Davies' history of fraud, Lying For Money.

He shows that most frauds fall into a few simple types. There's the long firm - setting up a fake company to borrow money which you run off with; Leslie Payne, an associate of the Krays, was a master of this. There are pyramid schemes, most famously those run by Charles Ponzi but Dan treats us to the story of the Pigeon King too. Then are control frauds, whereby someone abuses a position of trust: rogue traders fall into this type. And then there are plain counterfeiters. My favourite was Alves dos Reis, who persuaded the printers of legitimate Portuguese banknotes to print even more of them - so many as to devalue the escudo. Lying

All this is done with the wit and clarity of exposition for which we have long admired Dan. His footnotes are an especial delight, reminding me of William Donaldson.

Dan has also a theory of fraud. "The optimal level of fraud is unlikely to be zero" he says. If we were to take so many precautions to stop it, we would also strangle legitimate economic activity. He calls this the "Canadian paradox". Fraudsters have, if only briefly, thrived there - not least by floating mining stocks. This is because Canada is a high-trust society; fraudsters exploit others' trust and the fact that dishonesty is the exception. By contrast, in low-trust societies people do business only with those they know well. That means less fraud, but also less business and more poverty. Trust, says Dan, is the basis of a prosperous commercial society - but it is also what fraudsters exploit.

If I have a criticism, it's that Dan doesn't much discuss the psychology of fraud - of how we fall victim to it. He writes:

Fraudsters don't play on moral weaknesses, greed or fear: they play on weaknesses in the system of checks and balances, the audit processes which are meant to supplement an overall environment of trust.

But is this wholly true? Some people are more vulnerable to scammers than others. I'd have liked Dan's analysis of why. He doesn't, for example, discuss Werner Troesken's fantastic history (pdf) of snake oil salesmen.

Also, perhaps we can extend Dan's work. He discusses outright criminal fraud. But there are similar types of behaviour which are legal - such as selling snake oil in 19th century America. Dan hints at this when he describes the justification for bans on insider trading and other egregious types of market manipulation:

If you stopped robbing people blind with stock pools and takeover rumours, you would attract more of them into the capital markets, to make more money overall by robbing them through trading commissions and management fees.

We can think of fund management fees as a form of legal control fraud; using a position of trust to enrich oneself whilst failing to provide the service implicitly promised. CEO pay also falls into this category.

Similarly, whilst the directors of failing companies such as BHS and Carillion who took millions of pounds in salaries and dividends were not guilty of a long firm fraud, their behaviour was not wholly dissimilar.

And cynics might add that newspaper columnists, think-tankers or politicians are similar to affinity fraudsters; they take money for misleading like-minded people.

The law of course makes a sharp distinction between criminal and non-criminal behaviour: that's what it's for. But I wonder whether the distinction is so clear in reality. It's not just criminals who lie for money.

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The politics of discovery

Author: chris dillow   |  Publish date: Sat, 28 Jul 2018, 12:30 PM   |  >> Read article in Blog website

Here's a theory. There are two different ways of thinking about politics and policy which are insufficiently distinguished; we can call them politics as imposition versus politics as discovery.

Most people think of politics as the former: how can I impose my will upon others? We can, however, think of it differently - as a discovery process.

This, I think, is what Paul Evans is doing when he calls upon us to rethink democracy. He's asking: what institutions and practices do we need to discover what people really want? Simple referendums, conducted against the background of an inadequate media, are not the answer.

But it's not just the political process that is or should be a discovery process. So too are some particular policies.

We lefties are sometimes accused of wanting to impose a system upon the economy. For me at least, this is the exact opposite of the truth. For me, socialism consists in part of creating means of discovering what works best.

Democratising public services, for example, is a way of discovering from workers and users how best to improve them. And encouraging various forms of coops - via public procurement, a national investment bank or tax breaks - is a way of discovering what forms of post-capitalist firms work best - a form of what Erik Olin Wright calls interstitial transformation (pdf). It's not at all obvious to me that actually-existing capitalism does an unimprovable job of discovering better forms of ownership and control, given credit constraints, path-dependency and capture by a managerialist elite*.

I'd put a citizen's basic income into this category: the question of the appropriate level, and any add-ons it needs, is one that could be discovered as we go along. It need not, and maybe cannot, be imposed in perfect form from the start.

This isn't to say that the politics of discovery is purely a leftist exercise. It's not. Michael Gove's free schools policy was in this vein - a way of experimenting to see what sorts of school work best.

And one under-rated argument for devolution and stronger local authorities is that they would facilitate discovery: if they follow different policies, we can see what works best.

We think of markets as discovery and selection mechanisms (pdf) - albeit ones that often don't work as well as they might. But a healthy political process would have such mechanisms too.

Which brings me to Brexit. Everybody is discussing the Brexit deal with the mindset of the politics of imposition - as if the deal will permanently settle in stone our relationship with the EU for ever more.

This of course is to misrepresent human life. Relationships change. The "transitional period" won't end in 2020. It'll carry on for as long as the UK and EU exist.

This is no mere pedantry. One of the key aspects of good negotiations is to see that agreements can be provisional, not final. Theresa May should be saying to all sides in the Tory party: "This isn't the final word. Let's give this a go. And if it proves to be as bad as you claim, we can change it." (Maybe she is saying this in private.) I'll grant, however, that this is more feasible for hardline Leavers than Remainers, as the EU might not want to renegotiate closer ties with so fractious and febrile a counterparty**.

If there is anything in what I say, it poses the question: why do we hear so much about the politics of imposition and so little about the politics of discovery?

One answer is that political discourse is dominated by those who believe they know the answers, and so don't need to discover them - which is of course a symptom of overconfidence. We do not sufficient self-police and self-criticize our views. And perhaps we lack the mechanisms and institutions to incentivize us to do so.

* It's odd how some rightists are so keen to point out that state functions are prone to bureaucratic capture and so silent on the possibility that private companies can be too.

** Yes, I know that we Brits tend to under-estimate the extent to which the EU is a rules-based organization (which I think is an argument for the Leave side). But rules can and do change.

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