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Stumbling and Mumbling

Author: chris dillow   |   Latest post: Thu, 26 Nov 2020, 4:36 PM

 

"A great deal of ruin"

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"There is a great deal of ruin in a nation" wrote Adam Smith in 1777, suggesting (possibly) that countries can cope with poor policies. These are wise words, in many contexts.

Take for example, the NAO's claim that there is "likely to be considerable amounts of fraud and error" in the government's furlough scheme and the Resolution Foundation's estimate that the government has paid around £1.3bn to self-employed workers who in fact suffered no loss of income. No doubt this is sub-optimal, an element of ruin. But this is not in itself a decisive objection to the schemes. It was essential that people hit by the lockdown got quick support. And as the old saying goes: "Good, fast, cheap: choose two." In choosing "fast", the government sacrificed a little "cheap". It incurred some ruin. But this, I think, was a reasonable choice*.

To take another example, Tory MP Ben Bradley has claimed that free school meals vouchers are "effectively" a handout to a crack den and brothel. Even if this is true - and the evidence for it is less than overwhelming - so what? It is impossible, except at colossal administrative cost, to target help to the deserving poor and only the deserving poor. The question is what ruin do we want to incur - that of some help going to crack dealers, or that of some children going hungry? Many of us would prefer to err on the side of the former - and in an imperfect world we must err.

Economic policy entails trade-offs - a fact which holds even if there is no binding constraint (yet) upon government borrowing. For example, a small welfare state might incentivize people to find work, but it also imposes greater cyclical risk upon workers and indeed businesses. Or a vibrant market economy entails economic and social instability. We cannot avoid some element of ruin. Sometimes, we must choose which type of ruin to incur.

There's another form of ruin - ignorance. Michael Story and Stuart Ritchie describe how experts were initially wrong about Covid-19, for example in resisting the use of masks and calls for an early lockdown. Again, though, this form of ruin is inevitable: the world is complex and unknowable. We must choose which errors to make, what ruin to incur. Where we might justifiably blame the experts is not so much for being wrong but for exaggerating their knowledge.

And where knowledge is unobtainable - as it often is about the future - optimization is futile. We can only satisfice - which entails (with hindsight) waste, or ruin.

All this applies to policy-making. But it is not just states that contain a great deal of ruin. So too does the private sector - as anybody who has worked in it will know. Nick Bloom and John Van Reenen have shown (pdf) that in all countries there is "a long tail of extremely badly managed firms." Competition does not eliminate inefficiency. Ruin remains. Are-you-coming-to-bed-i-cant-this-is-important-5781839

This is not just because there are all sorts of obstacles to strong effective competition such as excess regulation or rent-seeking. Even where competition is strong and incentives to succeed are sharp, people fall short of optimality. We know this from the economics of sport. NFL teams have punted too much (pdf) on fourth downs; ice hockey teams don't replace their goalminders often enough when they are trailing; and golfers don't put as much focus (pdf) into birdie putts as par ones.

Markets are a great technology. But they are not the devices for achieving optimizing that simple-minded Econ101 tells us.

We must not, however, think that ruin is necessarily a bad thing. It's not. There's a trade-off between optimization and resiliency. Redundancy (ruin) can give us the flexibility to respond to crises**. Had the NHS had more beds and doctors before Covid struck, it would have coped better - but at the expense of "wasting tax-payers' money" in normal times. As João Ferreira do Amaral wrote (pdf):

There is I think a good case for keeping a system flexible to cope with surprise even if this mean more uncertainty and less efficiency.

There is, though, another form of ruin, of imperfection - the trivial fact that there are so many idiots in the world. It's tempting to try to engage with these. But often wrong. As Tim Harford has shown, myth-busting often doesn't work. Mill was wrong: wrong opinions do not "gradually yield to fact and argument." In many cases - where the opinions are those of obscure cranks - we should just ignore them. Haters are gonna hate and twats are gonna twat.

Not only is it better for the level of debate if we recognise that there is a great deal of ruin in a nation, but it's probably also better for our mental health as well.

* In fact, it also sacrificed some good. The RF points out that lots of hard-hit self-employed got nothing. For me, this is a less forgivable error.

** The converse is also true: in 2008 banks when bust because of their "optimized" portfolios.

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