Stumbling and Mumbling

Bank holidays & productivity

Labour wants us to have more bank holidays. There might be a good economic case for this.

My chart hints at the point. It shows that, across 35 OECD nations, there is a very strong negative correlation (of minus 0.77) between annual working hours and GDP per hour worked. Countries that work less are more productive. The French, for example, are far more productive than the UK even though they spend all their time eating cheese.

The same correlation exists over time. We work only around half as much now as we did in the 19^th century, but we’re far more productive in those hours we do work.

Of course, correlation is not causality. A big reason for this relationship is that more productive societies use their greater wealth to take more leisure.

But this might not be the whole story. It could be that the imposition of shorter working hours can help to spur productivity. Parkinson’s law tells us this. It says that work expands so as to fill the time available for its completion. If a manager knows that he has a long week to fill an order, he’ll take that long week. A shorter week could sharpen his incentives to increase efficiency.

Also, if people are working longer they get tired and jaded and so less efficient. A recent study of call centre workers has found that productivity falls as working hours rise even for people working quite short hours. This corroborates evidence from a very different industry – British munitions workers (pdf) during World War I. John Pencavel writes:

Employees at work for a long time may experience fatigue or stress that not only reduces his or her productivity but also increases the probability of errors, accidents, and sickness that impose costs on the employer…Restrictions on working hours – those imposed by statute or those induced by setting penalty rates of pay for hours worked beyond a threshold or those embodied in collective bargaining agreements – may be viewed not as damaging restraints on management but as an enlightened form of improving workplace efficiency and welfare.

France’s imposition of a 35-hour working week, for example, did seem to lead to a boost to productivity.

Of course, more bank holidays alone won’t close the massive productivity gap between the UK and other countries. But they might be one of many policies that might help.

There is, equally, a very long tradition of denying this. Nassau Senior opposed the 19^th century Factory Acts limiting working hours because he believed that profits were made in the last hour. He was plain wrong (pdf). Mightn’t his 21^st century counterparts also be mistaken?

It depends upon your view of British bosses. If you think they’re clueless inflexible buffoons, then there’ll not be a boost to productivity, because they won’t be able to rejig working methods sufficiently. If, however, you think they are smart enough to justify their big wages and egos, you’ll be more confident. From this perspective, it’s the right who should be more welcoming of Labour’s proposals than the left.

So why aren’t they?  It’s because to them, managerial control is a good thing in itself.

Herein, though, lies the radical question posed by Labour’s proposal: should the job of increasing productivity – which should be our top economic priority – be entrusted wholly to managers, or is there instead a case for intervention by the state and (in different respects) workers? Even if Labour is wrong, it is at least asking a good question.

"Not enough money"

On the Today programme this morning John Humphrys repeated an ancient ideological trick of the right. He asked (1’24” in):

Why should the British taxpayer when they see that there’s not enough money for instance for hospitals or schools…why should they be expected to [spend on foreign aid]?

But why isn’t there enough money for schools and hospitals?

The answer, of course, is that the Tories have chosen to suppress spending on them. They could instead raise taxes to spend more on health: there’s a good economic case for taxing the moderately rich, and an even stronger one for taxing land more. Not doing so is a political choice.

And in the short-run there’s a case simply for borrowing to spend more on the NHS.

Whilst Humphrys was asking his question, others were reading reports that mortgage rates have fallen to a record low. They’ve done so in part because bond yields are near record lows. Government borrowing costs are negative in real terms: 20 year index-linked gilts yield minus 1.8 per cent, which means that for every £100 the government borrows today it need only repay £70 in today’s money. The simple maths of government debt means, therefore, that the government can both borrow more and reduce the ratio of debt to GDP over time.

If it makes sense to borrow to buy an over-priced house, doesn’t it also make sense to borrow to build new hospitals?

That the government is not doing so on sufficient scale is a choice. The overworked doctors depicted in Channel 4’s Confessions of a junior doctor are the result of policy decisions.

Which is why Humphrys’ phrasing is so odd. Simply saying there is “not enough money” invites the more gullible listeners to think this is an unavoidable fact rather than a free choice.

This, of course, is an old trick. The rich and powerful have always wanted underlings to believe their preferences and interests are natural and immutable. Aristotle’s idea of natural inequality (which persists today), the Divine Right of Kings, defences of slavery, Thatcher’s talk of “there is no alternative” during the 1980s recession and bosses’ crocodile tears about “unavoidable” redundancies, all fit this pattern. It’s part of system (pdf) justification (pdf). And there’s never a shortage of lackeys to promote the myth. As the old hymn (written by a namesake of Mr Humphrys) went:

God made them high and lowly,
And ordered their estate.

The Tories would love voters to believe that underfunding of schools and hospitals is a necessary result of big government debt. But this is a lie. And Humphrys is helping to propagate it – like all stooges down the ages.  

The conservative Left

In some respects, it is the right who are Marxists and we leftists who are conservatives.

Take for example, this characterization of Marx:

The dictatorship of the proletariat…is characterized by majority rule, extra-legality, dismantling of the state apparatus and revocability of the representatives. (Jon Elster, Making Sense of Marx, p448)

This is pretty close to Douglas Carswell’s position: support for referenda and the recall of MPs. By contrast, we lefties are more cautious about change. We no longer envisage the move to post-capitalism* as arising through one-off events but rather as a longish process of what Erik Olin Wright calls (pdf) interstitial transformation or Williams and Srnicek call accelerationism.

Accelerationists want to unleash latent productive forces. In this project, the material platform of neoliberalism does not need to be destroyed. It needs to be repurposed towards common ends. The existing infrastructure is not a capitalist stage to be smashed, but a springboard to launch towards post-capitalism.

Our vision of change is quite a conservative one. Like Oakeshott and Burke, we are sceptical of grandiose rationalist blueprints but instead see the move to socialism as much like the market discovery process - a process of trial and error, building on what works. And we distrust snap decisions taken in the heat of the moment and favour instead gradualism and cool scepticism. We now leave Leninist talk of “crushing saboteurs” to the far right. As we are less arrogant and cocksure than them, we’re more tolerant.

Carswell’s right to say he’s “pretty unconservative”. In fact, he’s probably less conservative than me.

There’s another sense in which I’m to the right of many on the right. My support for worker democracy rests perhaps as much upon my Hayekian influences as my Marxian ones. Hayek opposed central planning because he thought that economic knowledge was necessarily dispersed and fragmentary and so we needed some better mechanism than top-down planning to aggregate that knowledge. He thought the price system did the job. However, many economic decisions are taken not in the market but within organizations. They too need an information aggregation mechanism. That mechanism is workers’ voice.

One reason why I suspect this will work is that workers have skin in the game. Those with job-specific human capital or loyalty to the firm have skin in the game; they have a greater incentive to ensure the firm succeeds than do managers who jump ship or walk away with big pay-offs after lousy custodianship. Worker democracy is incentive-compatible. That’s a pretty conservative idea.

It’s right-wingers who support bosses and top-down planning who are out-of-date crude Marxists. We lefties have moved on.

In fact, there’s another reason why I at least am conservative. It’s that the things that conservatives profess to admire – sometimes I fear insincerely – can be best achieved under egalitarian modes of production. If you want real (pdf) freedom, you need a citizens’ income so that people are empowered to choose different kinds of lives, and you need to destroy corporate tyrannies. And if you want a proper-functioning dynamic market economy, you need to loosen capitalists’ power over the state and to overcome the coordination problems which retard innovation and investment under capitalism.

Many on the right have forgotten the virtues of old-style conservatism: an awareness of bounded knowledge and rationality, an appreciation of decentralization and a cherishing of freedom. We lefties, though, have now learned them.

* I avoid the word “socialism” so I don’t confuse those braindead right-wing bigots who equate socialism with central planning.

Neither inequality nor poverty

Was Blair right? Miles and Simon have been debating this.

Blair said (pdf):

I don’t care if there are people who earn a lot of money. They’re not my concern. I do care about people who are without opportunity, disadvantaged and poor.”

He walked the talk. Tax credits, more generous pensions, fuller employment and the minimum wage helped reduce poverty whilst his government did little to restrain the rise in very top incomes. Miles approves of this. And he has a good point: poverty is a great evil.

This, though, misses something – the maths. If the rich are getting richer and the poor are getting better off, then for a given level of income, somebody must be getting worse off. The “Blairite society” of super-rich but little poverty is one in which the middle class is relatively poor.  

This has its drawbacks – especially perhaps from a conservative point of view. As Deirdre McCloskey has argued, a bourgeois society embodies virtues of prudence, justice and regard for others. A Blairite “winner take all” society jeopardizes these: why work hard at school and university (and incur massive debt) when it’ll only get you grunt-work and no hope of a decent home? And an insecure and embittered middle class also threatens political stability. Back in 2013 Fraser Nelson wrote:

Our middle classes — the great stabilising force in our society — are falling fast. It’s hard to imagine the British bourgeoisie taking to the streets, but someday soon they might turn around and say: ‘Sorry, but we’re really rather mad and we’re not going to take it any more.’

Perhaps Brexit. Ukip and the rise of insular, anti-market sentiment vindicates him: inequality can be bad for economic freedom.

Of course, my concerns would be irrelevant if the Blairite society were to lead to faster economic growth and hence a growing pie for all. But this hasn’t been the case. Quite the opposite. Since the mid-90s, growth in GDP per head has slowed.

And it might have done so because of the Blairite shift. Simon’s right to say that the super-rich engage in rent-seeking. But this isn’t confined to the likes of Arron Banks meddling in politics. It also happens in the workplace: rising CEO pay has come at the expense of shareholders and workers. And there are several reasons to suspect that a big take by the super-rich reduces economic growth. Not least of the mechanisms here is that it leads to worse politics by reducing trust.

Miles might be right that it’s better to have a society of super-rich and no poverty than one in which there’s poverty and no super-rich. But this is a close call. And it omits a third option – a society in which there is both no poverty and no super-rich. It is this that we should be striving for.

Another thing: Yes, I know the Gini coefficient has fallen in recent years. But this tells us little: the Blairite society might have a low Gini because there’s a low gap between the middle class and the poor even if the rich are very rich.  

Against marginal product

David Moyes says Jordan Pickford has been a better player than Dele Alli this season. This set me wondering about marginal productivity theory.

To see my point, think about how we’d test Moyes’ claim. We could look at what the two teams did in games which Alli and Pickford missed. But there are too few of these to draw robust inferences, and doing so would be impossible for a player who hadn’t missed any games*. Instead, we could compare how Sunderland would have done if Pickford were replaced with a next-best alternative to how S***s would have done with a next-best replacement for Alli. In effect, we’re asking: what are their marginal products?

I suspect that Pickford’s marginal product consists in converting heavy defeats into narrower ones: this still leaves Sunderland relegated, only with a lesser goal difference. Alli, by contrast, has converted draws or losses into wins. That’s a bigger difference.

This, I think, highlights three problems with marginal productivity analysis.

The first is that marginal product is the result of a hypothetical question. For example, in considering my own marginal product, I ask: how would the IC do without me? That’s a hypothetical to which we cannot give a precise answer. This is true of much of neoclassical economics. As Noah says:

Demand curves aren't actually directly observable. They're hypotheticals - "If the price were X, how much would you buy?"

In this, he’s echoing Sraffa:

The marginal approach requires attention to be focused on change, for without change either in the scale of an industry or in the ‘proportions of the factors of production’ there can be neither marginal product nor marginal cost. In a system in which, day after day, production continued unchanged in those respects, the marginal product of a factor (or alternatively the marginal cost of a product) would not merely be hard to find - it just would not be there to be found. (Production of Commodities by Means of Commodities, pv)

Secondly, in football there’s a high ratio of noise to signal: performances are due in part to luck. This is true not just in football. Consider two men of equal ability who become CFOs of start-ups. One start-up becomes massive, the other struggles. The man who joined the former will be many times richer than the latter. But that’s more to do with fortune than with human capital or marginal product: firms don’t usually grow big because they've got a slightly better CFO than the firm down the road. Anyone who’s mind isn’t befuddled by Randian nonsense will know that our lives and incomes are the product of luck. But we know that people are terrible at distinguishing luck from skill – in part because they suffer from the outcome bias.

Thirdly, imagine a top goalkeeper were playing for a better side than Sunderland. His performances would then make a difference to his team’s points: a couple of great saves per game would convert losses to draws or wins, rather than 4-0 defeats into 2-0 ones. His marginal product would be higher.

This tells us that, in teams, an individual’s marginal product is beyond his control: if Pickford had better colleagues, his marginal product would be higher. A similar problem arises in many large firms. As the late Herbert Scarf wrote:

If economists are to study economies of scale, and the division of labor in the large firm, the first step is to take our trusty derivatives, pack them up carefully in mothballs and put them away respectfully; they have served us well for many a year. But derivatives are prices, and in the presence of indivisibilities in production, prices simply don't do the jobs that they were meant to do. They do not detect optimality; they aren't useful in comparative statics; and they tell us very little about the organized complexity of the large firm.

For me, flaws such as these mean that marginal product theory doesn’t make much sense as an explanation of wage levels. We should abandon it as a mental model in favour of bargaining (pdf) models. In these, matches between workers and jobs lead to surpluses, and the surplus is divided according to the balance of power.

In such models, human capital raises wages insofar as it generates surplus and gives its holders outside options which enhance their bargaining power.  But human capital and “marginal product” aren’t the whole story. All the things that affect bargaining power, such as technology and unions, also matter. Such models are consistent with the theory that inequality is due to the rise of superstar firms (pdf). They’re also consistent with the fact that minimum wages don’t destroy many jobs. And they help explain rising CEO pay better than marginal product theory.

What I’m appealing for here is for economists to abandon unscientific just-so stories and to think instead about the real world. In this world, wages are determined not by unobservable entities such as marginal product but by – among other things – power (pdf).

* S***s did well during Harry Kane’s injury. Few would say this is evidence that Kane is a poor player, and not should they.

On "mainstream" economics

“It doesn’t matter whether a cat is white or black, as long as it catches mice.” I was reminded of this quote from Deng Xiaoping by the debate between Simon, Brad and Unlearning Economics over the role of mainstream economics. For me, what matters isn’t whether economics is mainstream or not, but whether it does the job of explaining reality.

I’ll take three different examples.

The first is austerity. Brad’s right that some mainstream economists supported austerity. But so what? What matters is the strength of the arguments, not who makes them. And many mainstream arguments were weak. Reinhart and Rogoff’s claim that debt-GDP ratios above 90% reduced growth was just plain incorrect. And whilst Alberto Alesina was right to point out that there have been cases (pdf) of expansionary fiscal contraction, those cases aren’t relevant to the situation we’ve been in since 2010.

It looks as if austerity has depressed growth. That’s consistent with what Simon says is mainstream thinking about the economy at the zero bound, but also consistent with MMT*.

My second example comes from the day job: defensive stocks have for years done better than the textbook CAPM predicts around the world – a fact first pointed out by impeccably mainstream economists. This is a counter-example to Russ Roberts’ claim that “most economics claims are really not verifiable or replicable.”

There are (at least) three interpretations of this. The most mainstream, I suspect, is Frazzini and Pedersen’s (pdf) – that market imperfections (limits on borrowing) generate high demand for high-beta stocks, causing them to be overpriced. Alternatively, there might be a behavioural explanation: investors' lack of attention or overconfidence causes them to under-price defensives and over-price growth. (Is behavioural finance mainstream? I don’t give a damn). And even further from the mainstream is Falkenstein’s claim that there is in fact no trade-off between risk and return.

Which theory is most right? In one sense, it doesn’t matter. The fact that three different ideas both point to defensives doing well strengthens my belief that they’ll continue to do so.

My third example is inequality. It’s obvious that the simplest version of mainstream economics doesn’t explain a rising income share of the 1%: the idea that bosses are paid their marginal product fails because it implies that the men who brought down banks in 2008 should have had salaries of minus billions, which they did not. But what about the idea that inequality is due to superstar firms (pdf)? Or to agency failures? Or to shifts in bargaining (pdf) power? Are such theories “mainstream” or not? There might be a type of academic pedant who cares. But I don’t. What matters is: do they fit the facts? Do they do a better job than, say, Marxian theories?

What I’m trying to get at here is an agreement with both Simon and Unlearning Economics. I agree with Simon that economics should be a vocational subject which addresses real-world issues. But I also sympathize with UE. Economics should be more diverse simply because different perspectives help explain different problems: this is why we should study classical economic thought. The question is not: what’s mainstream? It is: what’s right?

* I’d be a lot more sympathetic to MMT if its proponents weren’t so damned longwinded.

The edge of competency

Watching some of Arsenal’s recent performances has been like seeing the debate about Syria – and not just in the sense that both are utterly dispiriting.

What I mean is that in both recall to me the wise words of Charlie Munger – that “knowing the edge of your own competency” is a great skill. And it’s a skill that has deserted Shkodran Mustafi lately. Against Palace, he attempted six tackles and missed all of them, often giving away free kicks in dangerous areas. And he and his team-mates have sometimes conceded goals by challenging for headers and missing them. In these respects, there’s a tragic contrast with Tony Adams. One of his many great abilities was knowing which balls he could win and which not: if he couldn’t win a header, he’d hang back and win the second ball rather than be caught out of position. Adams knew the edge of his competency: Mustafi does not*.

Which brings me to the Syria debate. This is a horribly complex problem: murdering children is of course a simple issue, but what we can effectively do about it is anything but. Any sensible discussion must have as its central tenet a recognition of the edge of our competency – the fact that we cannot predict the effect of interventions and that ground truth (which is what matters) is largely elusive. Unless you’ve devoted a lifetime to Syrian politics or military affairs, you’re very likely over-confident about your opinion of what to do.

Such recognition, though, is often lacking. Some debates tell me plenty about tribal divisions within the Labour party and zippety-diddly abut Syria.

What I’m complaining about here is a very common phenomenon.  To take another example, there was a piece in Monday’s Times by Libby Purves telling us why Cressida Dick was the right woman to run the Met**. Now, Ms Purves has many virtues, but an in-depth knowledge of the Met’s personnel has not hitherto been the most celebrated of them.

We might call it the columnists’ fallacy (or the PPEists’ error!) – a tendency to exaggerate one’s knowledge and to ignore the edge of your competency. Chris Shaw is right to complain that, very often, “gaps in knowledge and complexity are tacitly ignored.” I sometimes try to avoid this error and try to recognise ignorance in my day job – for example by claiming that we cannot know how great a problem is household debt or how worried we should be by the overvaluation of US equities. But nobody thanks me for it.

And herein, perhaps, lies the problem. Not only do pundits (and politicians) not recognise the edge of their competence, but there's little demand that they do. As Margarita Mayo says, humble people make the best leaders but it is arrogant narcissists who get hired or elected. 

Acknowledging complexity and ignorance is not something many of us want to do.

* I’m setting an impossibly high bar here. Expecting defenders to be like Adams is like expecting novelists to be Fyodor Dostoyevsky or singers to be Hank Williams.

** I’m picking this example simply because it’s the first that comes to mind. You can all no doubt think of other examples, by perhaps more serial offenders than Ms Purves.

The sporting life, & taxes

One question that was doing the rounds on Twitter over the weekend was: would you rather have a big trust fund or sporting ability that enabled you to earn similar money?

The question makes sense because a trust fund and athletic potential are both things we inherit from our parents. Both are, in Rawls’ words, “arbitrary from a moral point of view.” And both are forms of capital. One is financial capital, the other human capital. Granted, the concept of human capital does a poor job of explaining income inequalities, but it is useful to think of it when we are managing our own finances.

So, which would I prefer?

One big difference between the two is that, in sport, talent is never enough: the fact that Ravel Morrison is struggling to get into the QPR side tells us this. It takes discipline, work and dedication to parlay even the greatest raw talent into actual accomplishment.

One the one hand, this is an argument for preferring the trust fund: it saves you knackering yourself in the freezing rain every day. But on the other, it’s a case for preferring the sporting talent – because the sense of achievement when you do succeed is something the trustafarian will never enjoy. Happiness consists in what you’ve done, more than what you’ve bought.

This sense, however, is a two-edged sword. Even the most successful sporting career will contain many disappointments. In fact, the same drive for perfection that’s necessary for those achievements will guarantee dissatisfaction. Look at this interview with Sir Alex Ferguson, which came after he had won the Scottish Cup. Or look at Alexis Sanchez: he’s having a great season personally, but is reported to be unhappy. Both men embody the fact that ambition is ambiguous for happiness.

Something else, though, speaks against the sporting life. It’s what happens after it finishes. Huge numbers of successful sportsmen suffer divorce, bankruptcy and depression. And that’s not to mention an elevated chance of lifelong physical pain (pdf)*. Who wants to be a broken has-been in his late 30s?

On balance, then, it’s a tricky question of whether I’d prefer to inherit ability than money.

Which brings me to a puzzle. Anybody who’d take the money should – from one perspective** – want to tax inherited wealth more heavily than inherited ability. This is because inherited wealth is something for nothing to a greater extent than is inherited ability. What’s more, whereas the trustafarian – qua trustafarian – contributes nothing to overall welfare, the person of ability (be it sporting, intellectual or musical) gives us all something to value.

Voters, however, don’t see it this way. A recent ComRes poll (pdf) found huge support for higher top rate taxes but opposition to higher inheritance tax. How can we explain this, in light of the question I began with?

One possibility is that most people would prefer the sporting life. Welfare egalitarians would rather tax men who enjoy the deep happiness of genuine success than the man who suffers a sense of futility because of his inherited wealth. Another possibility is that voters think that most top incomes derive not from people making genuine contributions to society but from rent-seeking.

There might be other explanations. But these, I suspect, are the respectable ones.

* Though not all studies find this.  

** There are other arguments against taxing inheritances, though I find most unconvincing.

Immigration mechanisms

Jonathan Portes makes a vitally important point – that statistics are reality. Apparently arid numbers summarize the lived experience of real people. As Raymond Wolfinger said, “the plural of anecdote is data”. Statistics tell us about facts, whereas anecdotes are subject to sampling error.

Sadly, however, all this misses something – that it takes a theory to kill a theory. When Niall McCrae denies that migrants haven’t depressed wages by saying “Try telling that to my landscape gardener friend, who has been severely undercut by waves of east Europeans” he’s appealing for something more than just statistics. He needs a story.

Here are some I’d tell.

First, not all migrants are competing against native workers. Some are complements, and so help to raise wages. Polish roofers for example allow electricians to get more work done and so earn more. And Filipina maids allow women to work longer hours and earn more.

Secondly, even where migrants tend to reduce wages, there are offsetting mechanisms. For example:

 - The fall in wages should increase employment: if prices fall demand rises.

 - Immigrants spend their wages. When the Polish landscape gardener spends his money in Wetherspoons, he’s creating work and wages for bar staff.

 - The man who employs a cheap Polish landscape gardener has more money left over to spend on other things. This too should create jobs and raise wages.

Now, I’ll concede that these mechanisms are imperfect offsets. The price elasticity of demand for labour is low: we know this because higher minimum wages haven’t destroyed very many jobs. Migrants send some of their money home and so don’t wholly recycle it into the UK economy; and the savings made from employing migrants might be saved or spent overseas.

But then, other mechanisms come into play. If migrants do tend to cause weaker wages and aggregate demand, this should be offset by looser monetary policy. And it has been, at least in part: real interest rates have fallen as migrants have arrived. Nobody credits immigrants with cutting their mortgage payments, but perhaps they should.

And even if all this fails, there are still offsets – most obviously, rising minimum wages have mitigated any tendency for low wages to get lower.

All I’m doing here is spelling out mainstream economics (explaining why the lump of labour fallacy is a fallacy) and telling stories to explain a fact – that immigration (pdf), mostly, hasn’t (pdf) greatly depressed wages.

Yes, “migrants arrived and now my wages are lower” is a powerful story. But so too was “my son got the MMR jab and has since been diagnosed with autism. “ Both stories confuse correlation with causality. Which is not surprising. People are terrible at identifying causality in economics, and they pay insufficient attention to evidence that is important but not obvious.

Of course, it is the case that real wages have been under pressure in recent years. But why blame immigrants for this? There are many other culprits: weaker trades unions; fiscal austerity; financialization (pdf); the financial crisis; power-biased technical change; and all the things that have depressed productivity.

And let’s remember something else. It’s not just migrants who have entered the labour force in recent years. So too have older people: there are 2.2 million more over-50s in work now than ten years ago. Economically speaking, entering the labour force from retirement is the same as entering it from Poland. So why blame one for lower wages when you’re not blaming the other?

My point here is simple. Facts matter. But we must back them up with stories, with mechanisms. And there are plenty of these that largely exonerate migrants from blame for falling wages.

A right-wing case for taxing private schools

Sensible right-wingers should support Labour's plan to impose VAT on private schools.

Let’s start from the fact that Labour wants to “bash the rich”, and you’ll not convince them otherwise. The question therefore is whether to do this by taxing their incomes or taxing their spending. Yes, Labour will probably do both – but more of one should mean less of the other.

To the extent that VAT on school fees means lower top tax rates than would otherwise be the case, the right should welcome this. They believe that high top tax rates reduce the labour supply and increase tax-dodging – Laffer curves and all that. By contrast, the behavioural effect of VAT on private schools is small: the IFS has estimated a price elasticity of demand for them of only around -0.26. From the right’s point of view, therefore VAT is more likely to raise revenues and less likely to deter productive activity than higher top income taxes. In fact, it might even incentivize hard work, as parents will have to work harder to afford school fees.

Yes, the move would hurt hard-working families who are struggling to pay the fees. But income taxes hurt hard-workers too. The solution to this is to shift taxes onto land. But nobody wants to deny Englishmen their god-given right to get something for nothing by watching their house prices rise.

What's more, zero-rating school fees introduces a distortion into the tax system. It means these are cheaper relative to (say) cars or holidays than they’d be in a free market system. If you think the free market price system is a good signal of relative costs and benefits, you’ll want to remove this distortion.

Worse still, our current VAT operates as a form of protectionism. In making schools cheaper relative to BMWs than they’d be in a free market, it encourages consumers to shift their spending towards a domestic business. This is a form of industrial policy – a de facto subsidy to a sector in which the UK has a comparative advantage. Rightists such as Tim Worstall who oppose an active industrial strategy should welcome Labour’s promise to abandon such interventionism.

This raises the question: what might be the justification for giving private schools a tax break? One argument would be that they have positive externalities. They take pupils out of the state sector and so reduce the cost of state education. And their top-quality education provides us with the great leaders who have made our politics, media and businesses who have made us the envy of the world.

But if you’re a free marketeer, you’ll see this as a dangerous slippery slope. Yes, private schools reduce the expense to the tax-payer. But equally, people who eat healthily reduce the burden on the NHS. So why not tax fatty and sugary foods more heavily that healthy ones? But free marketeers are opposed to the latter. By the same logic, however, they should oppose the tax break for private schools. We could go further. People who obey the law save tax-payers the expense of police and prisons. So why not give a tax break for things that help people stay out of trouble, such as games consoles that keep youngsters indoors rather than out on the streets?

Once you start seeing positive externalities in private schools, you’ll soon see them everywhere. That’s a licence to intervene everywhere.

Right-wingers, therefore, should welcome Corbyn’s plan. And in fact, some do. Michael Gove supports imposing VAT on private schools. And Ross Clark says the schools only have themselves to blame for it. Being on the right doesn’t mean having to defend all privilege. Does it?

The paradoxes of plebiscites

In pointing out that re-joining the EU will be damnably difficult, Simon reminds us of the massive difference between representative democracy and plebiscitary politics.

One great virtue of representative democracy is that it allows for mistakes to be corrected. Wrong’uns can be booted out of office and bad policies can usually be reversed*. Under plebiscites, it is not so. These reveal the “will of the people” which must be obeyed. Whereas representative democracy is a system of checks and balances, plebiscites are battles of wills in which the victor wins permanently. As Mrs Thatcher said, plebiscites are “a device of dictators and demagogues.”

This is why there’s a big difference between Brexit and Trump: one can be voted out and his damage repaired; whereas in the other, this is much less likely.

Sensible polities set high bars for permanent changes, for example by requiring supermajorities for constitutional change. These help ensure that big changes will usually not be made in a fit of passion and regretted later**.  Plebiscites, by contrast, permit radical changes even with slender majorities.

The distinction between the two systems would not be so sharp if plebiscite campaigns were conducted rationally and honestly and votes cast by reasonable, well-informed citizens. But this, of course, was not the case. What we had was one of the foulest spectacles in recent British history, scarred by lies (pdf) and racism which resembled no more than toddlers screaming “I want, I want”, with the same narcissistic denial of reality and over-inflated sense of entitlement***. It was a triumph of the id over the ego. If anyone had wanted to design something to vindicate Jason Brennan, they couldn’t have done better.

To be clear, the issue here is not whether Brexit is right or wrong. It is: can we be so confident that Brexit is right as to make a (largely) irrevocable change on that basis? In a narcissistic age in which we've largely lost the capacity for self-reflection, the distinction between these two questions isn't sufficiently appreciated.

All of this raises some paradoxes.

One is that perhaps the biggest thing I’ve learned in my adult life is that social affairs are complex and that knowledge and rationality are tightly bounded. This should have led to greater antipathy to plebiscites and to more respect for checks and balances. In fact, we’ve seen the opposite.

Paradox two is that traditionally it has been Conservatives who have been most sceptical of radical change and most leery of passions in politics. And yet it is these who have embraced plebiscitary politics. It cannot be stressed enough that Conservatives are no longer conservative.

Paradox three is that all this is being pointed out by a Marxist, and Marxists have historically supported some radical and violent changes. In truth, though, this isn’t a paradox. The change we favour now is gradual and consensual. It is we Marxists who are cool-headed and reasonable, and our opponents who are hysterical anti-conservatives.  

* There are exceptions. For example, Thatcher’s sale of council houses was intended to be very difficult to reverse

** Again, this isn’t always so, as the US’s 18^th amendment demonstrated.

*** I’m not saying this applies to all Brexiters or even most. But theirs were the loudest voices and perhaps the ones that tipped the balance.

Wages & productivity

Would higher wages boost economic growth? They might, if the marginal propensity to spend out of wages is higher than that out of profits. However, Ben Chu suggests a different mechanism – that higher wages might stimulate growth via the supply-side rather than demand-side:

Perhaps wage increases will prompt higher productivity in firms that employ low-wage labour. Perhaps, in order to protect their profit margins, managements will be spurred into increasing the efficiency of their operations. Perhaps they will invest in more capital equipment to enable their workforce to produce more per hour of their time. Think of a hand car wash installing automatic equipment but retaining the same amount of staff, retraining them to operate the new machinery, and doing more business. This would make minimum wage increases positive for productivity.

Those words “doing more business” are important. Higher wages alone might merely induce capital-labour substitution, leading to unemployment rather than higher output. Which is why Ben is right to say higher wages must be accompanied by fiscal stimulus.

In this, he’s echoing Verdoorn’s law. This says that faster GDP growth is usually accompanied by faster productivity growth.

I’d like to believe this. But I’m not sure I do. For one thing, whilst the Bank of England research Ben cites finds that higher wages can lead to higher productivity, this is the case for only a minority of industries. And for another, Verdoorn’s law hasn’t been so strong recently. My chart shows that whilst there was a massive correlation between GDP growth and productivity from the 50s to the 80s, it hasn’t been so strong lately; productivity has been weak even relative to GDP.

This draws our attention to the possibility that there are several things that might throw sand into the wheels of the mechanism whereby higher wages might raise productivity, for example:

 - Uncertainty. If the car wash business is to invest in a new machine, it must be confident that the boost to demand will last. This requires something more than just looser policy – be it a looser inflation target, commitment to future easing or whatever.

 - Management quality. Do bosses have the skill to introduce new technology well? Bloom and Van Reenen have shown (pdf) that there’s a “long tail of badly managed firms” – but it is in these where productivity is lowest.

 - The fear of future competition. I suspect that one reason why capital spending has been low is that firms fear that their investments will be undercut by future, cheaper ones by their rivals: it’s the second mouse that gets the cheese. It’s not clear that fiscal stimulus will allay these fears.

 - Credit constraints. Another reason for low investment is that firms don’t trust banks to keep credit lines open in future. Again, fiscal policy doesn’t address this.

 - Weak profits. The hand car wash is probably only just getting by, and so lacks the means and motive to buy fancy kit. The care home sector, for example, is already teetering: why should it respond to higher minimum wages by increasing capital spending?

Now, I don’t say this to dismiss Ben’s idea entirely. Given that the Phillips curve is, to say the least, ill-defined in the UK, the cost of experimenting with fiscal loosening is perhaps low. And even if actual productive capacity isn’t terribly cyclical, estimates of it might be - and they are worth having even if we don’t get a renaissance in productivity. Erring on the side of loose policy seems to me to be better than erring on the side of tight.

The issue here is much bigger than it might seem. The question is: is capitalism cooperative or conflictual? Are the interests of workers compatible with those of capitalists or not? It’s this that divides social democrats from Marxists. Historically, the answer has been sometimes yes and sometimes no. I’m not sure which it is today, but I’d like to find out so I'd like to see Ben's suggestion tested.

Brexit as raising the inflation target

Friday’s figures confirming that real GDP grew by 0.7 per cent in Q3 seem to have confirmed Brexiters’ claim that “Project Fear” was wrong to have predicted an immediate adverse impact of the vote to leave the EU. There is, though, a point here which both sides are underplaying.

It’s that if we look only at the macroeconomic data, events since June look very similar to what would have happened if the inflation target had been raised last year, or if we’d shifted from an inflation target to a generous money GDP target.

What would have happened if we’d made that shift? The Bank of England would have cut rates, real bond yields would have fallen in anticipation of looser future monetary policy, and sterling would have fallen as a result. We’d also have seen a rise in inflation and inflation expectations. We’d have seen export orders and prices pick up in response to the weaker pound. And we’d have seen consumer spending rise, perhaps temporarily as people pulled spending forward in anticipation of rising prices in 2017, or perhaps permanently because of lower real interest rates.

We’ve seen all of this. So far, therefore, the observed macroeconomic consequences of Brexit look very much like a relaxation of the inflation target.

To a macroeconomist, however, such a relaxation would have been superior to Brexit as it would not have increased uncertainty about future trading rules and so would not have dampened capital spending: the volume of business investment in Q4 was 3.3% down from its peak in 2015Q3.

All of this suggests to me that everybody who thinks that Brexit has been a success so far should have been calling for a relaxation of the inflation target for years. Such a move would have achieved much of what we’ve seen since June, without the downside.

But I'm not sure they did this. Yes, many economists were arguing for such a relaxation. But I get the impression that these were more likely to be Remainers than Leavers. Brexiters were not, generally speaking, among the strongest advocates of changing the inflation target. Perhaps the opposite. To take one example, Ryan Bourne – who recently criticized Project Fear – has also accused the Bank for being too soft on inflation.

Of course, there is reason not to have wanted such a relaxation, especially recently. For example, if you believe the OBR’s claim that output is more or less at its potential level, you’ll think that such a move would generate inflation more than real growth*.

This, though, is also a reason to doubt the benefits of Brexit because if firms are at full capacity, we’ll not see much increase in export volumes or domestic output in response to higher consumer spending.

This leaves me puzzled. Brexiters who are cheering the economy’s recent strength should also have been longtime advocates of a higher inflation target. Everything the Brexiters are celebrating now could have been achieved with much less palaver by changing the inflation target.  But they were much less vocal in that advocacy than they were about Brexit – to say the least. This strengthens my view that calls for Brexit weren’t really based upon economics at all.

* Personally, I think the idea of an output gap is silly, but let that pass.

Brexit: the state capacity question

Most Leavers want to bring back the death penalty. This confirms Remainers’ prejudices that Leavers are a bunch of social conservatives who want to turn the clock back to 1955. I suspect, though, that there might also be a more interesting division here –  about attitudes towards the competence of the UK state.

What I mean is that I’m opposed to the death penalty not so much because of romantic notions of human rights but because I just don’t trust the state to distinguish between the guilty and the innocent. I doubt its competence, whereas its advocates are less sceptical.

Similar doubts contribute to me being a Remainer. I’m not sure the Great Whitehall Power Grab – David Allan Green’s term for the “Great Repeal Bill” – will be conducted wisely. I’m not confident that the process of transferring EU law to UK law – which has been described as "a civil service legal exercise on a scale that has not been encountered at any other time in our recent legal history" – will go at all smoothly. I don’t believe the government can implement immigration controls humanely or efficiently. I doubt that complex trade negotiations can go well, or yield great returns even if they do. I agree with Ian Dunt (who is compulsory reading) that the government’s attitude to Article 50 has so far been “stupid.” And the attractions of returning sovereignty to the UK are for me diminished by the likelihood that it will be exercised by buffoons*.

Herein lies an under-appreciated divide between some of us Remainers and some Leavers. On the one hand, some of us are pessimistic about state capacity. On the other, there are Leavers like Dan Hannan who decry our pessimism.

Yes, I know that all of my doubts about state competence could apply as well to the EU itself. But whilst I am a Marxist, I also feel the force of Michael Oakeshott’s scepticism of change (pdf)**:

The conservative will have nothing to do with innovations designed to meet merely hypothetical situations; he will prefer to enforce a rule he has got rather than invent a new one; he will think it appropriate to delay a modification of the rules until it is clear that the change of circumstances it is designed to reflect has come to stay for a while; he will be suspicious of proposals for change in excess of what the situation calls for, of rulers who demand extra-ordinary powers in order to make great changes.

This raises two paradoxes. One is that many Remainers cannot comfortably use this argument. The statist left, for example, needs to believe in state competence. And it cannot hide behind the claim that we would be well-governed if only the right people were in change, as this is silly managerialism.

The other is that the case for Remain I’ve sketched here is a conservative one and yet it is antithetical to the position of very many Conservatives, some of whom look more like fanatical cultists than the melancholy sceptics of Oakeshottian conservatism. Which just reminds us that, as Jonathan says, the Conservative party no longer believes in conservatism.

* I'm not sure my misgivings will resolved beyond everybody's doubt. Everything succeeds by sufficiently low standards, and fails by sufficiently high ones. 

** Yes, there might be a contradiction here. But as Niels Bohr said, the opposite of a great truth is another great truth. We should all be capable of having two ideas in our head at the same time.

Newt troubles

Why has the UK suffered weak economic growth for years? Is it because falling profits have choked off investment? Is it because there’s a dearth of good innovations? Or because of fiscal austerity? Or because the Bank of England has failed to target money GDP growth? Or because bosses are lazy mediocrities? Or because pessimistic (pdf) expectations have proven self-fulfilling? Or is it because the financial crisis had a long-lasting adverse effect upon the economy?

No, no, no, no, no, no and no. It’s all because of the great crested newt. In its demand to cut EU-imposed red tape, the Telegraph wails:

Under the EU habitats directive, which covers all 28 member states, [great crested newts] are a protected species. If even a small number are found, newts have to be fenced, trapped and relocated in the spring, which can cost £10,000 even for a small project. In 2011, George Osborne, the former Chancellor, said the directive placed 
“ridiculous costs on British businesses.”

Despite the fact that scholars of long-run growth such as Chad Jones, Philippe Aghion and Dietz Vollrath have been silent about them (AFAIK – I’d be happy to be corrected) it’s obvious that newts are to blame for sluggish growth.

Economists know nothing: well, what do you expect from so-called experts?

Well, maybe. Or maybe not. I know it’s a longshot, but perhaps – just perhaps – there’s another possibility here. Maybe red tape isn’t much to blame for weak growth.

One reason for this is that there really isn’t much of it in the UK. Rick says “the UK is already one of the least regulated countries in the world.” If you don’t believe him, try the Heritage Foundation, a group not famed for its sympathy for state intervention. It says our “regulatory environment is efficient and transparent.”

Another reason is that red tape isn’t what holds back economies. There’s pretty much no correlation between labour market regulation and productivity or unemployment.

Why, then, is the Telegraph banging on about red tape and ignoring the many stronger reasons for our economic malaise?

It might be that I’m missing the point. Protecting newts, like laws against bendy bananas, might not have grave effects, but they are examples of the silliness we’ll be rid of when we cast off the yoke of Brussels and bring sovereignty back to Westminster, where it will of course be exercised by wise and all-knowing legislators.

But perhaps there’s something else. For the last 30 years, the right has gotten most of what it wanted – lower taxes, weaker unions and less regulation. And yet macroeconomic performance – as measured by GDP growth per head – hasn’t improved. Their response to this has been a classic example of the backfire effect. As David McRaney says: “When your deepest convictions are challenged by contradictory evidence, your beliefs get stronger.”

Rather than question their support for “neoliberalism” or – God forbid – doubt the underlying health of capitalism, Tories exaggerate the harm done by remaining regulations. They learn nothing, and they forget nothing.

Worse still, as Brexit negotiations will steal cognitive bandwidth for at least the next two years, we face many more months of this. The great crested newt might be protected, but my patience is not.