The Master and his Emissary: is modern society too left-brained?

I have at long last finished Iain McGilchrist's The Master and his Emissary. It studies how the right and left sides of our brains differ, and develops the idea that there is a conflict between the two hemispheres that has wider implications in our society. It is a fascinating book that has changed the way I look at the world.

The first part of the book describes how the two brain hemispheres work. It is a brain structure that has evolved in vertebrates, with the left side being task-oriented and the right being aware of the environment. This simple idea is explored thoroughly by Mr Gilchrist, and he notices that in the modern world there is a bias towards the left hemisphere's way. It likes rules and calculation, while the right takes on emotions and context. Revealingly, early brain scientists described the right hemisphere as weak and useless. Our society loves the order that laws bring, and likes to pretend that nature operates under an analogous system to the human legal system - we are simply in the process of discovering its laws. The second part of the book takes this much further by trying to interpret the development of Western thought and art in terms of a conflict between the hemispheres. Classical Greece achieved a happy balance, before the left side took over following Plato. The theocracy of the Middle Ages was also very left hemisphere, before the Renaissance brought in right hemisphere thinking. The left hemisphere fought back with the Enlightenment, leading to a reaction with right hemisphere Romanticism until finally the left hemisphere triumphed with scientific materialism. This is very thought-provoking. But I did find some aspects of his argument lacking.

First is Mr Gilchrist's focus on the West. Other cultures are generally assumed to be much better balanced, with a small excursion into Japanese culture to substantiate this point. This has an annoying post-colonial aspect to it: the modern narrative that all the world's ills are down Western greed and exploitation. While this is a corrective to the attitude that saw Western civilisation as the only worthwhile sort on the planet, it still denies non Western peoples and cultures agency. Everything still comes back to the West. One of the things that the BBC series Civilisations did well was to show how we need to see Western civilisation in a wider, more human context. Mr McGilchrist's analysis would be stronger if he found parallels in his battle of the hemispheres in non-Western cultures, rather simply dropping into lazy West is bad, East is good thinking. In fact I don't this would have been hard to do. Perhaps the two most spectacular examples of left-brained extremism in modern times were Mao's Cultural Revolution and the Khmer Rouge's Year Zero. While both of these might have had some Western heritage there is surely much more to it than that. And what about the complaints from Asian leaders about Western decadence, which seem to boil down to us being too sentimental and right-brained?

A second issue is more serious. When exploring the evolution of Western thought he focuses mainly on art, and as the story progresses this focus increases, so that by the 20th Century art is pretty much all he analyses in detail. It also seems to be a rather skewed survey of art: I don't think there is a single reference to Impressionism, the movement that seems to have had more impact than any other in the last two centuries. Actually what I am more interested in is political thought and business practice. He hints at his view that Fascism and Stalinism were left-brained excesses - and yet his survey of art shows that things are never as simple as they appear at first, and I can see many right-brained aspects to Nazism in particular. Indeed if he had tried to take apart and compare Fascism, Nazism, Stalinism and Maoism instead of Surrealism and Post Modernism the second section would have been much more valuable

And it is through thinking about its application to political thought that I developed my biggest grouse with this book. It is too Right Brain Good, Left Brain Bad. The only real virtue he admits for the left-brain is effectiveness, and the only real vice for the right is corresponding ineffectiveness.  But I think there is more light and dark on both sides. What gave me this insight was watching Donald Trump. He is a right brain genius; he rejects rules, values belonging and always thinks in context (which is why he is so often appears hypocritical). It is more complicated than that of course - his lack of empathy is a left-brained characteristic, as his transactional way of doing business. But it got me to understanding that tribalism is a right-brained characteristic. It wasn't left-brained white intellectuals who used to spit at coloured children. There was something much deeper and visceral going on. And correspondingly it is the left hemisphere that builds bridges between tribes - it literally and metaphorically builds a common language. It was the Enlightenment that brought Jews into mainstream Western society, and Romanticism that led to their rejection until scientific materialism finally triumphed after the Second World War. Interestingly Mr Gilchrist does hint at this in a caption to one of the colour plates, of a 14th Century picture of the Resurrection of the Dead: "Grasp, the left hemisphere's means of control, is not intrinsically self-serving: it can also reach out to others. Here the life-giving force comes from the left side of Christ's body." There is dark and light on each side of the brain, and it is balance that we should be striving for.

But fundamentally Mr Gilchrist is right. We in the developed world are far too seduced by left-brained thought, and value right-brained insights too little. While there is no proper analysis of political thought in the book, one thing is extremely clear: modern liberalism is rampantly left-brained. This is the most searching critique of liberalism that I have read, and it does much to help me understand why it is failing. It does not put enough weight on emotions, on belonging or on context. Mastery of these things is why Mr Trump is so successful, setting up a strong emotional bond with his supporters. Liberal attempts to counter this are intellectual and dry. They sound clever but miss the point. People will not wake up one day and decide that the liberals were right after all. Liberals must put themselves back in touch with people's values and emotions. They claim they want to give people more control over their lives, but often they do the opposite: they try to make them conform to a set of  politically correct norms.

There is another important insight that I take from this book. Mr McGilchrist is right that too many people think that humans are machines - or use that metaphor to understand humanity. This is very left-brained. The most egregious example of this is the way artificial intelligence is being hyped. If humanity is a machine, the view goes, we will replicate it very soon. And yet we are nowhere close. There is an irony in this: scientific materialists, the arch left-brainers, do not believe that people were designed by a god, but that we evolved; but they act like believers in Intelligent Design. Humans were not designed by anybody, and that is why they are so hard to understand, and still harder to replicate. And then there is a supreme arrogance about the power of data. The world does not reduce to data. Data give you a small fraction of the past, and that is it.

A further reflection is that the duality of the brain is a very good way to think about effective management. You need focus, and you need awareness of the world. The two are incompatible (attempts to achieve awareness in a focused way usually end in disaster - of which the financial crash of 2007-09 is a particularly clear example) - so you have to do both and make them cooperate. Alas far too management thinking worships task-oriented achievement. Excessive focus is perhaps the biggest reasons why human enterprises fail.

This is a flawed book. But its insights are very powerful indeed.

 

 

You don’t run a national economy as if it was a business – understanding the productivity “crisis”

Economists, especially the macro sort, look down on ordinary members of the public when they suggest that a nation's finances operate in the same way as a household's. They have a grand name for it: "the fallacy of composition". And yet most of them suffer from very similar fallacious thinking. They imagine that running the production side of the economy is like running an individual business.

Economists are not good at looking beyond the aggregate statistics that describe an economy as a whole: total income (GDP or GNP), employment/unemployment, inflation, trade and current account deficits and so on. These numbers take on a  reality in their own right, rather than being statistical abstractions. This leads to a ludicrously simple mental model of what is happening behind them. It's a bit like understanding a car through the operation of the accelerator, brake, steering wheel and gear stick, without thinking about the engine. Economists imagine a national economy to be a bit like a single business, or perhaps an aggregation of similar ones, churning out all the things the people need. The more that gets produced, the more that gets consumed, and the happier we will all be, following the ideas of classical economics. Once you have reached full employment, the only way to increase production is to make the business more efficient by raising productivity. It is one of the central challenges to economic management in this classical view. And it is one Britain seems to be failing at. Commentators from right across the political spectrum (except the Greens, maybe) seize on poor productivity performance with their own favourite explanations.

But the economy is not analogous to a single business. To understand this we need to consider the different sorts of production activity that make up our economy. These divisions are largely my invention to convey the essential dynamics. Many actual activities are in two or three categories at once.

Let's start with the easy bit: what I will call commodities. These go beyond globally  traded things like oil and coffee to all goods and services that behave more or less as economists expect. Utilities might be an alternative name. These are most of the things sold at a supermarket, or basic cars, like a standard VW Golf, and the raw materials that make them. Services might include bank current accounts, household insurance and so on. Actual utilities a slightly more complicated, because they are distributed through networks that rarely compete with each other. All well and good, but what needs to be understood about these things is that from a consumer point of view there are diminishing returns. Your first fridge or car is really useful; your second one much less so. Not many people have three. That means demand is subject to saturation. Sales of white goods and cars rocketed in the 1950s and 1960s as people bought their first ones, but then slowed as most need came from replacements. This sea change for these and many other goods of the postwar light industrial revolution was surely one of the reasons for the economic wobbles in the 1970s, but one you will not hear mentioned by macroeconomists. A good definition of a developed economy is that it is one where most commodities have reached near saturation.

What are the consequences of this when we think about productivity? First, commodities are generally where advances in productivity have been the steadiest - production is relatively easy to automate and processes easy to redesign because there is little individuality in them. But as demand reaches saturation it means that workforces become smaller rather than more goods being produced. And that means that the weight of commodities in the total economy shrinks. First was agriculture, which used to account for the bulk of the economy, but now for about 1% or so. Next came manufacturing. And so on. How much of the total UK economy is in utilities? There's no hard and fast definition, but it could be down to 20%.

Now let's think about something else. Let's call them "bads". Direct bads are activities that are directly harmful; indirect bads are other activities we enter into to stop bad things from happening. Crime would be an example of the first, and police forces and security guards of the second. Into this category we might put armed forces and defence industries, a lot of the legal profession, regulators and compliance people, many consultants, and so on. We have little practical control over these activities, and they do not add directly to our wellbeing. An economy composed largely of security guards and armed criminals may have a decent GDP but it isn't a good place to live. More is not better. The fewer bads overall, the better the economy will function for the population as a whole.

Productivity is clearly relevant for indirect bads. If you can treat the same danger with fewer warplanes or policemen then clearly that's a good thing. But is this being measured in the economic statistics? And note that more productivity means the sector becomes smaller, like commodities but more so.

Next comes human services. The essence of these is human interaction. Economists' favourite example is the hairdresser. The economy would be more productive if we all shaved our hair off, but somehow that misses the whole point. There are plenty of other examples: most of education, health care and social work, for example. One fascinating study (by BBC Horizon) showed that longer and more sympathetic consultations with doctors produced more effective treatments (the treatment in question was a placebo, which proved more effective than conventional drug interventions, but that's an issue for another day). Productivity is a rather ambiguous concept for human services:if there is less waiting around and bureaucracy then that helps. But if you try to improve productivity by reducing the contact time with each client, you are likely to destroy the benefits of the service. This is not understood at all by economists. Trying to improve productivity in this way is how many public services are being undermined at the moment, with detrimental effects on society as a whole. But as a modern economy develops, human services, alongside hobbies and leisure, weigh higher, partly because we choose to consume more of them, and partly because there are few productivity savings to reduce the workforce. So the overall productivity of an economy (or at least the rate of productivity growth) will decline.

And then we have status goods and services. The primary purpose of these is to prove your status in society. The important point is for you own or use them when other people don't. Think of luxury goods like smart sports cars or designer handbags. The interesting thing about these is that there is an anti-productivity factor. The more labour involved in producing the product, the higher status it confers. Improving productivity is a delicate matter. And, of course, status is a zero-sum game. Rising volumes of status goods simply lead to an arms race of expensive products that does nothing to advance human wellbeing overall.

I could go on. There are rents, public goods and finance and so on, each of which produce a different twist to the productivity puzzle, but none of which follow the classical pattern of commodities. There are two key points to make. First, improvements in productivity in a modern economy do not lead to expanded production, but to a redeployment of the workforce. That redeployment usually goes to sectors with lower productivity (status goods or human services), which means that the benefits of the original productivity gain are limited. But human wellbeing could well advance faster than overall growth, if people have more time for life-enhancing human services, for example. This isn't a problem, it is a sign of a mature, successful economy. The second issue is that most economic activity is now in areas where productivity is practically unmeasurable because the outputs are intangible (bads, human services and status goods for example).

Look a bit deeper into Britain's productivity statistics and both of these become important. The poor productivity growth is now attributed to a "tail" of small businesses, just as you would expect if productivity savings are being deployed into status goods and human services. Meanwhile the two sectors where virtually all measured productivity growth has happened in the last two decades are finance and business services. These are both sectors plagued by bads, the undermining of human services and rents. It is hard to argue that this growth has advanced human wellbeing. All of which leads to an alternative explanation of Britain's low productivity. The British economy is simply further along the development path than others. In particular, unlike the Germany and France, we have run down export-focused commodity production, and that distorts any comparison.

There's a further insight from this way of looking at things. Advancing human wellbeing in a developed economy does not come from producing ever more commodities. It derives from producing fewer bads, containing status goods, and expanding human services. Depending on how pricing works, that is unlikely to lead to measured growth in GDP. But that is not a bad thing: if it simply arises from the freely made choices of empowered citizens.

Of course productivity is an important issue for individual businesses and public agencies - at the level where managers should know whether value is being created or destroyed. But macro-economists should take their own advice on the fallacy of composition: don't try running a national economy as if it was a business.

 

 

Economics for the Many – voices from the echo chamber

I promised you I would read and review Economics for the Many, a collection of essays edited by John McDonnell, Labour's Shadow Chancellor. The purpose of the book is to show that Labour is not trying to reheat failed ideas from the past - but it is brimming with new ideas fit for the 21st Century. It doesn't really succeed in that aim, but it does contain some interesting pointers.

My first idea was to review each article in about 200-300 words and produce a series of posts. That was how I started. But I quickly realised that this wasn't going to work. Most of the 16 essays are pretty poor, and readers would have been subject to long tracts of rather sarky criticism. And not much of a thread would have emerged. As I waded through essay after essay, I was gaining more idea about Labour's mythology, but little clarity on what they might do. Even when I could wholeheartedly agree with an essay, such as one supporting political devolution, something seemed missing. It was all too abstract; there should be a passion in ideas. And then, in Chapter 9, the book burst into life, with Democratic Ownership in the New Economy. I could even forgive the cringe-making comments about Jeremy Corbyn and Mr McDonnell, and claims of a  public uprising in the 2017 general election. It had passion, and pointed to practical examples of its ideas working. The central idea was local, grassroots-led action to develop local businesses based on local networks, using cooperatives, anchor institutions (like hospitals) and so on. The following essay, A New Urban Economic System: The UK and the US followed the same ideas and was less gushing but more convincing, again pointing to examples, including Preston in Lancashire. Both had a common thread: based on a think tank called the Democracy Collaborative that gets involved in real world projects, and which co-authored both articles. The book got a bit better after this, but the only essay to match this highlight was the last one: Rentier Capitalism and the Precariat: The Case for A commons Fund by Guy Standing.

This article had much the best overall narrative - developing the idea that capitalism had gone wrong, hoarding monopoly profits and creating a whole class ("the precariat") of insecure jobs. This made a nice change from banging on about austerity (a Tory word, somebody has pointed out to me, suggesting frugality and discipline). It reads like a Marxist tract, but a good one, and much of it could in fact have been written by The Economist. Even if it was fact free and exaggerated it created a strong narrative based on things that are clearly actually happening. Mr  Standing recognises that Labour is not doing a good job of appealing to the precariat, which is either politically apathetic, or taken in by socially conservative populists. Then he develops the case for building a "Commons Fund", which would pay a dividend, which would then develop into a universal basic income (UBI). This is the best constructed case I have read for this idea. It is interesting that it is the only place in the book where UBI, such a darling idea on the left, gets traction, and it is a very mild version of it. No hint here of it replacing welfare benefits.

Two other themes are worth mentioning. First is "financialisation", which was the topic of two essays (by Costas Lapavitsas and Johnna Montgomerie). This awkward abstract noun is taking its place in the left's lexicon. It covers a disparate variety of things, of which the most important is the expansion private debt. This is all part of the neoliberal villainy. The argument is that a lot of growth in the UK is built on private debt, and an influx of financial investment from abroad (typically in London property). This latter has created a high exchange rate which has helped hollow out productive business. There is clearly something in this. Where the essays break down is trying to work out what to do about it. If the process is to be reversed, and levels of private debt cut, then this will conversely be a drag on the economy. Unless it is simply replaced by public debt - but neither essay makes the case for that. The first essay gets the closest by advocating the creation of public sector institutions to take over lending. There may be something in this, but public sector banks have led to some of the biggest wastes of public resources around the world: the operating models are critical, and the essay says nothing about this. It just falls in with a general prejudice through the book that nationalised institutions are good.

Another theme is the development of online platforms, from Google and Amazon to Uber. This is clearly a worrying development,and it is very well described by Nick Srnicek, including the political difficulties of doing anything about it. A badly-written and excessively abstract article by Francesca Bria, who works for the city of Barcelona, takes this forward with the advocacy of more active management of data networks by city governments. This is something policymakers should talk more about. Some networks, such as Uber or Airbnb, could be replaced by locally managed cooperatives that retain profits locally without being less efficient - this dovetails with the Democracy Collaborative's ideas. Others are global issues, but here initiatives like the EU's GDPR can have an important impact.

What of the rest? Prem Sikka puts forwards ideas for improving the tax system. These aren't particularly new, and I don't actually think there is much low hanging fruit for extra tax revenues - but some of the perverse incentives of the system could be fixed. He advocates a version of unitary tax for multinationals, which I have favoured for a long time, but which the British political class has always shied a way from.  Ann Pettifor produced a disjointed essay with quite a lot of lazy rhetoric in it. Her main idea of a "Green Deal" might have a worthy objective but looks like an invitation to mismanagement. Barry Gardiner (Labour's trade spokesman) advocates a middle way on trade policy between protectionism and a free for all, which promotes human rights and helps "vulnerable" economies. Good luck with that. Rob Calvert Jump delivers a flat essay on models of business ownership that people who remember the nationalised industry disasters of the 1970s and the successes of privatisations in the 1980s will be more than a little surprised at. He offers no thoughts on why privately owned companies might be a good ownership model in many contexts. Christopher Proctor has an essay on rethinking economics, with a clear explanation and critique of classical economics (puzzlingly referred to as "neoclassical"), but then fails to develop any ideas about how it is to be replaced, beyond a collection of unexplained initiatives which he says need more work. Ozlem Onaran expands on one these: feminist economics. Actually I don't disagree with her idea that there should be more public spending on what she calls "social infrastructure", but a lot her logic was unpersuasive - one suspects a lack of challenge in the development of her ideas.

So what to make of it? Labour's critics will find their prejudices reinforced. There is no admission that Keynesian stimulus might not be appropriate in many contexts. Low productivity is always down to poor motivation, pay and social conditions, while process design and effective management don't get mentioned. The concept of creative destruction is alien. Most of the ideas are about the state doing things from the centre, rather than empowering individuals and communities. There is little thought on how effective management can be encouraged and the abuse of power curtailed. Facts are few and far between, and silly factoids make their appearance (the £93bn of "corporate welfare" for example in Guy Standing's). And all that rage against austerity and neoliberalism, when the politically uncommitted can see that there are some good aspects to both policies. The overwhelming impression is of ideas being developed in a leftist echo chamber without proper external challenge, for circualtion within that echo chamber. Still there is plenty of scope for liberals to share parts of the analysis and many of the solutions. Lib Dems passed something that looked very like Mr Standing's Commons Fund at its last conference.

For me though, the most important and exciting essays were the Democracy Collaborative's on building local networks to revive local and regional economies that have been hollowed out by modern economic policies. This involves a radical decentralisation of power and properly faces up to the challenge that modern economies face. If Labour's leadership really do pick these ideas up and run with them, I'll be impressed. There is clear scope for a coalition between socialists, greens and liberals here.

But I remain sceptical. Mr McDonnell's big idea at the last conference was the expropriation of shares in public companies to put in employee trusts to pay dividends to workers up to a point. This has little to do with any of the ideas in this book and looks like a gimmick. But we should welcome much of the new thinking nevertheless. These ideas need to be brought out of the left's echo chamber for the discipline of wider public debate.

Was austerity a horrible mistake? Three challenges to the left’s narrative

The Prime Minister Theresa May recently suggested that "austerity" was coming to an end. That word is one of the political left's most successful abstract nouns; that Mrs May is now using it shows just how successful it is. Alongside the word comes an austerity narrative that is nowadays largely unchallenged. This is that the programme of public expenditure cuts started by the coalition government in 2010 was economically unwarranted, and therefore "ideological", and that this foolish policy is responsible for the UK's weak economic performance in the years since.

Conservatives are unbothered by this austerity narrative. They peddle their own rival one: that the preceding Labour regime was profligate with other people's money and that the cuts were needed to stop public waste. They further, and tendentiously,  suggest that this profligacy is what led to the financial crash in 2007-2009. They feel no need to challenge the left's austerity narrative; they just ignore it. For Liberal Democrats, as part of the coalition, the austerity narrative is much more painful. They neither challenge the left's version, nor come up with one of their own. That war is over and the Lib Dems lost, but for the small number of people who care about what happened and why, should we meekly accept the left's version of events, and acknowledge that it was a horrible mistake?

The economic logic of the left's case is based on the idea of Keynesianism. In 2010 Britain was suffering a recession, with a collapse in output in 2008 to 2009 following the financial crash. A recession is a temporary dip in aggregate demand which can become a doom loop: lower demand cause job losses, which in turn reduces demand further. The quickest way to counter this is to stoke up government spending: this keeps demand going, stopping the job losses until confidence returns, the economy starts growing and the excess government spending is then cut back to restore balance (funnily enough left-wing economic commentators rarely talk about that second phase). This is what Labour did to a modest extent in 2009. But the coalition embarked on a massive programme of cuts in 2010, sucking demand out of the economy when demand was already weak. Instead of bouncing back from recession, as you would expect, the economy stayed at its low level with little or no growth for years, until weak growth eventually returned - the worst performance of any major economy.  America, the argument goes, was not as severe in its cuts, and bounced back much more quickly. Some commentators go as far as to project how much the economy would have grown at the average rate before the crash, to show a massive gap between now and where the economy could have been.

One of the reasons why this narrative is largely unchallenged is that the picture is actually very complicated, so that it is not particularly easy to pursue a considered argument. The winner is goes to the person that shouts the loudest in a dialogue of the deaf. I will sketch out three challenges, however, but I will inevitably oversimplify things to keep this post a manageable size.

Challenge 1: the size of the government debt was becoming unsustainable. The budget deficit in 2010 was in the region of 10% of GDP (with estimates at the time being even higher). This is truly scary, and promised a massive rise in the size of government debt: could the financial markets absorb it? And if they couldn't, there might be a financial crisis that would create an even deeper recession. The Greek crisis, which was emerging at the same time, was used an example. But Greece doesn't have its own currency any more. In Britain we can simply create the extra currency when push comes to shove: the government doesn't run out. This is what Japan has been doing for decades with little ill-effect. But Japan has a current account surplus, meaning that the Japanese spend less than they produce, and do not need foreign money to keep the system going. Britain had (and still has) a large current account deficit, which means the opposite: we are dependent on foreign money. So, the argument runs, if these foreigners lost confidence in the British economy because of an ongoing 10% budget deficit, with the free creation of money (and hence a higher risk of currency depreciation and inflation), then there would be a crunch. At best, the government, or private sector, would be forced to borrow in foreign currency, destabilising the economy. At worst imports would rapidly become unaffordable, leading to severe inflation. This is a very hard argument to get to the bottom of on either side. There was no stress in the market for government borrowing as things turned out. But was that because of austerity? Or  sign that austerity was unnecessary? There is a very good case that the government could easily have borrowed more for investment (in council housing, say), a more difficult case for simply open-ended funding of bureaucrats and benefits.

Challenge 2: the government actually moderated austerity to reflect economic conditions. The government's plans to cut spending announced in 2010 were never adhered to; what actually happened followed the trajectory proposed by the Labour Chancellor in 2010 to tackle the deficit and included in the party's election manifesto. Unemployment never got out of control, and overall employment recovered much more quickly than the overall income figures. A lot of the comments from left-wing writers on the scale of the recession and austerity does not follow the facts. Some even suggest that because austerity was slower than planned "it was a failure in its own terms". This really is disappearing up your own backside. The scale of the cuts to public services simply shows how far public spending had got out of step with tax revenues. The more serious left-wing counter to this is that though employment held up, its quality did not. Pay was squeezed, and a lot of the new employment was insecure. There was scope for more demand in the economy, they say.

Challenge 3: the economy before the crash was unsustainable. To me this is the lynch pin argument, and I'm disappointed that it is so rarely made. This runs in a narrow form and a broader form. The narrow form is that government spending was at unsustainable levels, both because it was running a deficit at the top of the economic cycle, and, more seriously, because so much spending was funded by bubble taxes like capital gains taxes and stamp duty, while more reliable taxes, like income tax, were actually cut. That left a massive gap when the bubble burst, which meant that spending cuts or tax rises were inevitable even taking the Keynesian argument into account. There was never going to be a good moment to make the adjustment.

But the broader argument is more important. There was something fundamentally unsound about the pre-crash economy. It depended too much on the financial sector, drawing in foreign money to invest in British property and other assets. This drove the pound up, strangling export industries and giving us that large current account deficit. Growth in the economy depended on two very dubious sectors: finance and "business services" - the supply to services to other businesses, often in the finance sector. A lot of the reported income turned out to be fictitious, generating huge losses in the banks which the government then had to bail out. This was the culmination of two or three decades of poor economic management, when instead of modernising the economy, Britain went on an orgy of financialisation - not only pumping up a socially useless finance sector and its hangers on, but persuading people to increase consumption by borrowing more. In this light, projecting growth rates from before the crash to after it, to show how far it should have grown, is nonsense. The sustainable growth rate has been near zero for some years. And this puts a severe limit on Keynesian policies: the economy simply couldn't bounce back to where it was before without creating another bubble. In fact with the finance sector flat on its back, such policies would most likely have done little to raise domestic incomes, but simply sucked in more imports and foreign money invested in British property. The rebalancing of the economy, advocated by politicians of the right, left and centre, is a much slower and more painful process. We simply do not have the skills that a rebalanced economy will need.

This is not to say that the coalition government did not make serious mistakes. The more subtle critique made by prominent economists is that the government should have borrowed to invest. In other words the austerity was necessary, but that it should have been balanced by building more infrastructure and (perhaps) developing schools and colleges (the universities did fine). The left-wing commentators who cite these economists (the likes of Joe Stiglitz for example) overlook this.

The problem is that the British economy is in a deep mess, and it will not be easy to break out of it. We cannot do so by trying to go back to the economies of the 2000s, still less the 1970s. We cannot even go back to how the 2000s might have been if we had been wiser (looking more like Germany for example). Trying to work out what this new economy looks like and how to get there is the big challenge facing all politicians. Meanwhile we should regard any arguments about the easy restoration of growth with suspicion.

Three things the EU needs to fix, and one that it doesn’t

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At a recent event organised by the Spectator, Matthew Goodwin, an academic who has made his name with studies of the far right, suggested that the European Union was falling apart, and that in time Brexit, for its trauma, will be seen as the right move for Britain. Supporters of the EU are so mired in the crises of the moment, from Brexit to the Italian budget to refugees to governmental corruption in east Europe, that they are not asking deeper questions abut the Union. In the spirit of moving the debate along, I want to talk about three fundamental problems that need to be fixed, and one that doesn't.

The one that doesn't is a lack of democracy. This is a nearly universal complaint, but it is a proxy. It is an old rule about complaints: often what people say isn't the real issue. In the EU's case the real issue is that people feel that they don't have enough say in key things that affect their lives, such as who can move into their neighbourhoods. The answer to that isn't making EU institutions more transparent and accountable, and still less directly electing officials. In practice these will tend to centralise power and create yet more aggravation from those who get outvoted. There is as yet no European polity, and little solidarity between Europe's extremes. These are necessary prerequisites for democratic structures. The European parliament is a democratic failure for this reason: the only useful purpose its elections serve is as a vehicle for protest votes - but that is because the voters don't care about the consequences. Decisions in the Union are made through a consensus or near consensus of democratically elected heads of state - which is as good as it is ever going to get. Instead we need to look at the issues that are causing the deepest friction, in particular the free movement of people, or the greatest institutional stress, such as corrupt and populist governments, or both, like the Euro.

Let's start with the free movement of people. This is so difficult is because free movement is in fact very popular. People like the idea that they can up sticks and move anywhere in the continent where the opportunities are better or the climate is nicer. This is, above all, what inflames passions amongst Britain's Remainers. And it is why Europe's politicians created the Schengen passport free zone. But for those people who find themselves surrounded by newcomers, it feels that they have lost control over an important aspect of their lives. And the biggest stress of all comes from people who originally come from outside the continent to live here, though we shouldn't forget the stresses created by Poles and Lithuanians in Lincolnshire, or British "expats" in Spain. There is an undoubted racist undertone to this, but liberals need to understand that behind this is the feeling that rural and small town residents have of lost control. Democratisation, in this case, means more local control on who is entitled to residency, work and benefits. Of course this would mean that those choosing to keep foreigners out should lose the benefits of having foreigners come in - but people need to make that calculation for themselves, rather than have it imposed on them from on high.

The next problem for the Union is the way that corrupt elites can take control of governments with weaker national institutions, and bend them towards favouring insiders. Often this is done under the guise of populism, as in Hungary and Poland; sometimes it is a bit more obvious, as in Bulgaria and Romania. The elites running these countries are able to take the benefits of EU membership while ignoring its institutional norms, such as free speech and the rule of law. The more skilled practitioners, like Hungary's Victor Orban, are then able to portray the EU's complaints as an outrageous attack on their own democracy. Here what is needed is a bit of rebalancing of EU institutions to give the majority more leverage. Time is on the EU centre's side: few things are more unpopular than corruption and sooner or later voters will endorse the rules-based EU institutions. But the majority need to be able to exert more subtle pressure on the backsliders than currently. The EU budget is an obvious place to start.

And so we come to the Euro. As with freedom of movement the problem is that the Euro both very popular, and has a capacity to create extraordinary friction. The Euro is popular because it is, for most people (Germany and the Netherlands excluded), a better store of value that any local currency would be, as well as a more flexible unit of exchange - two of the key functions of a currency. Meanwhile governments like the reduced cost of borrowing that the Euro brings. Germany and the Netherlands, meanwhile, derive much of their wealth from trade and doubtless appreciate that a floating currency would tip the terms of trade against them. And yet a single currency brings many problems with it, especially when combined with the fiscal rules that prevent countries from properly managing their business cycles. This can create unnecessary hardship, as well as dangerous frictions between the currencies haves and have-nots. The new Italian government is about to challenge the system to breaking point. It wants to loosen the fiscal rules to stimulate its economy, for which there may be a perfectly decent case, while at the same time rolling back reforms that would make the Italian economy more efficient. Interestingly, it is not finding this as easy as it thought, since its manoeuvres have raised its cost of borrowing without the EU institutions lifting a finger. But doubtless they will succeed in engineering a damaging confrontation. Most people think that they way forward is to create stronger institutions at the centre of the zone so that resources can be moved around within it more freely. The Germans object, though, and so there is impasse.

The solutions to each of these three issues are not clear. But what I think is clear is that they will require a new EU treaty of some sort. At the extreme it may mean closing down the existing union and creating a new one - or at least for the core countries to threaten this. That will require the crisis to deepen. They also mean that some of the fundamental rights and freedoms on which the Union has been built will have to be rethought. The sooner that people start that rethinking, the better.

But before we despair we must remember the things the Union does well. First is that it makes continental commerce easier, especially since the Single Market was instituted in 1992. Second, it is more effective than any national institution in taking on global multinational businesses, whose anti competitive practices are an increasing global problem. Third, they help its smaller members to stand up to bullying by countries inside and outside the union. Ask yourself why Vladimir Putin and Donald Trump dislike it so much? And fourth, it does regulation pretty well. A recent example of this is the General Data Protection Regulations (GDPR). This is a welcome push-back by the European public against the abuse of data by commercial and other interests. It is very unlikely that individual governments would have done as good a job. Their local political agendas are too full to make room; crucial elements would have been watered down by local vested interests. Even in Brexit Britain you hear very little protest against what is a very irksome set of requirements; people feel that something needed to be done. There are many other examples. And, of course, it makes sense if each country's regulations are compatible with each others. It is not that EU institutions are immune to special interests, but that it is better placed to handle them than national governments.

And there is such a thing as a shared European identity, based on a shared history. This may get stronger. Europeans used to see the rest of the world reflected in its own image - a result of its period of empire in the 18th and 19th Centuries. As other continents emerge from that shadow, Europe looks a smaller place - but it becomes more obvious what unites it. It stands against the free-wheeling capitalism of America, the totalitarianism of China, the theocracy of Iran and Saudi Arabia, and the cynical kleptocracy of Russia. It does so based on centuries of learning things the hard way. As the EU struggles with its raison d'etre something more cohesive should emerge. That is my hope.

 

 

There are alternatives. Theresa May is in deep trouble

Featured on Liberal Democrat Voice

Beware the superficial when assessing Theresa May, Britain's Prime Minister. Most of the time she seems very weak, but somehow she survives as her position is much stronger than it looks. Conversely this is punctuated by moments of triumph, when she seems to sweep all before her. This always precedes a major reverse. Yesterday as she closed the Conservative conference with a confident speech she looked strong, though perhaps short of triumphant. In reality she has never looked more vulnerable.

Of course the central issue is Brexit. I have generally given this an optimistic gloss, being one of the few people to say that it is going reasonably well for Mrs May. But there is now serious reason to question her judgement. Her claim that there is no alternative is now in question.

Mrs May has taken up a very risky negotiating strategy. She is sticking to her proposal, usually referred to as "Chequers", though it looks as it the government has stopped using that word to refer to it. This is a very complex fudge by which Britain accepts EU Single Market product regulation for goods, but not for labour and environmental standards, nor for the movement of workers, and a customs arrangement whereby Britain can collect both its own and EU tariffs at its borders, allowing the easy movement of goods to the EU. The idea is to have an open border between Northern Ireland and the Irish Republic, and allow the intricate supply chains that have built up between the UK and EU countries to continue. But the problem is that EU leaders are really not happy with this. It looks too much like "have your cake and eat it", where Britain can undercut EU labour and environmental regulations and compete unfairly. Not to mention getting all the benefits of a customs union while freely negotiating alternative tariffs with non-European partners. Smarting from what they see as the growing nightmare of the pick 'n mix relationship they have with Switzerland, and worried about signals they might give both to other countries in the union and those just outside, they are anxious to guide the UK down one of the clear institutional models that they have already developed.

That leaves a very dangerous stand-off. If neither side gives way there could be a potentially disastrous "no deal" on 29 March 2019. Some Brexit supporters are quite relaxed about that idea. They assume that a number of side-deals can be done to mitigate the worst impacts, like grounded aircraft, halted medical supplies, non recognition of driving licences and so on. That is much too complacent. Though many of the scare stories spread by Remainers can be dealt with like this, the relationship is much too complex for such deals to go far enough, and it looks a bit like the hated Swiss model anyway. And there is no side deal possible that will prevent huge difficulties for goods crossing borders. The prospect of no-deal is so daunting that it might persuade parliament to go for a further referendum allowing Brexit to be reversed, something that has started to worry Conservatives, to judge how keen they are to rubbish the idea.

The EU is in fact offering two alternative ways forward for Britain after the transition period ends on 31 December 2020 (or perhaps later...). The first is full membership of the Single Market as a member of the European Economic Area (EEA). This has supporters in Britain. It might be bent to accommodate Labour's "tests" and so allow a parliamentary coalition that excludes most Conservative MPs. But it means that Britain will be a rule-taker from the EU, and continue to allow EU workers in freely. Most of those who voted for Brexit, and even some who didn't, would surely not support it. The second way forward is to do a free trade deal along the lines of the one done with Canada (referred to as "Canada" or "Canada plus"). This is the real threat to Mrs May, because Tory hardline Brexiteers support it. Much worse, so do many others, as it looks much better than no-deal, as at least there is nearly two years of transition and quite likely more. It is possible that there will be  cabinet rebellion - or even a revolt amongst Conservative MPs that turns Mrs May out of the leadership.

Mrs May's objection to Canada is that it creates a problem with Northern Ireland, as the EU currently insists that there would need to be a boundary of some sort between it and the rest of the UK. The rebels' calculation is the the EU will give ground on this, not least because a no-deal would have a very hard impact on the Irish Republic. They have even come up with various fudges and fig leaves that might make it viable.

So there is a clear and coherent alternative strategy for Brexit to Mrs May's. But her position is  made weaker by something else. Her remarkable longevity as leader since the fiasco of the 2017 General Election was not just because there was no alternative Brexit strategy,  but because there was no alternative leader. Or rather, that the main alternative looked to be Boris Johnson, the former Mayor of London and Foreign Secretary. He was on manoeuvres this week, giving a speech outside the main conference that apparently went down a storm. I have accused Labour's John McDonnell of advocating candyfloss policies, but Mr Johnson makes him look like a serious civil servant. Now two serious alternatives as leader have now emerged: the Home Secretary Sajid Javid, and the new Foreign Secretary Jeremy Hunt, who is conspicuously more competent in that role than Mr Johnson ever was. Mr Johnson's position, meanwhile, is weakening. In a leadership election Tory members make the final choice between the last two candidates selected by MPs. Mr Johnson can't guarantee being in that top two (a bit like the similarly charismatic, but more competent, Michael Portillo when the system was used the first time). And even if he does make it, the members may well lose their nerve and vote for the alternative. Tory MPs may be prepared to risk starting the selection process.

Such a rebellion is still unlikely before March next year, though, since it is too close to Brexit day. Afterwards it could happen very quickly. They will need to get a move on. The next general election is very winnable for the Conservatives. Brexit will stay in the news for years after next March, but the political sting will be much less, especially if Mrs May can be scapegoated for the worst aspects. Remainers may be energised now, but they will run out of steam once the country has formally left. They are not at all clear on what they want after that - they have barely started to think about it. Labour are vulnerable. They have a leader who is regarded as nice, sincere but ineffective by most people, and as an evil villain by many others. They have some interesting policies but a lot of these haven't been thought through, and they will wilt under sustained attack. The group of advisers that surround their leader, Jeremy Corbyn, remind me of the tight coterie that surrounded Mrs May before her disastrous election of June 2017: clever but inward looking.

But the Conservatives have weaknesses of their own. Their membership is low and ageing. The Brexit brand, which they have taken ownership of, is toxic to many. A new, younger leader will help with this. But they also need time to prepare for their campaign. The party owed its unexpected victory in 2015 to years of careful preparation; they did so badly in 2017 because they went into it with no preparation at all. So Tory MPs need to get Mrs May out of the way as soon as they can. And then there is all to play for.

As alternatives start to look more viable, Mrs May's days are surely numbered.

Economics for the Many: Labour’s challenge to the orthodoxy part 1

In my last post I referred to a new book, Economics for the Many, a collection of essays edited by Labour's Shadow Chancellor John McDonnell. I am very interested in any new thinking coming from the left because I spy the possibility of a coalition between liberals and socialists - whether inside Labour or between Labour and another party or parties - since the right  seem to have run out of ideas and started allying themselves with toxic nostalgists. So I bought the book. My first idea was to read it all and produce a single review article. No doubt I would have come up with something along the lines of this rather dismissive review by the FT's Chris Giles. But the interest is likely to come from some of the details rather than the general thrust, so my plan is write a series of articles as I read it, a few chapters at a time. This is the first.

Introduction - John McDonnell

In my last post I was somewhat dismissive of Mr McDonnell as a Leninist more interested in candyfloss policies than promoting serious policy debate. Be that as it may, Mr McDonnell is keen to portray a picture of a ferment of new thinking on the left, which will produce a radical new orthodoxy, much as Margaret Thatcher ushered in 40 years ago. This collection of essays is part of the evidence, and his introduction sets out an overview..

As such it doesn't tell us very much. Some of the familiar left wing narrative pops up. Those two abstract nouns, neoliberalism and austerity, play star roles as the villains. The first as a process of alienation of economic management from human values, the second being ideologically motivated cuts that have left tragic consequences. These let to the “social murder” of Grenfell Tower, for example.

But is it candyfloss? Is it designed to give the impression of intellectual movement just to provide cover for a power grab? I have two concerns. Are they coherent? And in particular, do they point to a radical decentralisation of power, or in fact the a Chinese style centralisation, guided by a political commissariat? And secondly, are they actually workable? Do they form a credible basis for reforms in our economic management?

1.    Democratising Economics in a Post-truth World – Antonia Jennings

This isn’t a promising start. The basic thesis is sound enough. There is widespread ignorance about economics, and bafflement at the way it is talked about. I think it is a bit worse than Antonia Jennings, a member of the political think tank/charity ecosystem, suggests. Many of that minority who think they have a strong grasp of the subject actually don’t. This allows politicians to build up myths not based on sound economics. The austerity policies of the 2010 government is, of course, used as the primary example. The Brexit campaign of 2016 is used as another.

Her solutions, though, don’t measure up to the task. She suggests a number of nice ideas: improve education at schools and universities, bring more women into the profession, change the way economics is presented. But these feel hopelessly inadequate.

The first problem is that economics rests on a number of insights that are profoundly counter-intuitive. One is that an economy as a whole has to be managed quite differently from a household budget – the idea of living within your means works out in a very different way. Another is the idea of comparative advantage – which means that trade should benefit everybody. Alas these ideas are not only counter-intuitive, they have layers of understanding, which even trained economists argue over. Many, for example, have not got beyond the basic idea of "trade is good" to understand how a changing world might affect the benefits of trade. This will take much more than a bit extra schooling and more user-friendly language to fix, surely?

The second is the sheer political imperative to frame an easily digestible narrative. Austerity illustrates this. There is a perfectly economically literate case to be made for this policy – many economically literate politicians and civil servants, amongst others, supported it. The government did not attempt to make that case in public because the level of political debate did not permit it. The counter-narrative from the left that austerity was unnecessary and therefore an ideological attack on public servants and poor people is just as illiterate, and framed from the same political necessity. In fact there is a very challenging debate to be had on the subject with well-made arguments on both sides. What is rather depressing about the whole episode is that so few people are or were interested in having that argument out. It is too politically important for that.

Political polarisation is no doubt a strong factor here. It is much more effective to shout down and demonise your opponent than start a reasoned debate. Labour is part of the problem, or, more generously, a victim. What is the answer? I am tempted to say that it is greater political pluralism based on electoral reform – though that has brought its own problems elsewhere in the world.

So yes to reforming the economics discipline. But expectations on the political impact of this need to be moderated. The problem is more deep-seated.

In fact I suspect this chapter is more about maintaining that sense of outrage at neoliberalism and austerity, with the suggestion that both are founded on economic ignorance. A rather bitter piece of candyfloss.

2.    Labour’s Fiscal Credibility Rule in Context – Simon Wren-Lewis

Simon Wren-Lewis is an academic macroeconomist, who has advised the Labour leadership on its economic policies. He writes lucidly and is perhaps an example of what Ms Jennings is looking for in clearer economic discourse. His topic is the Fiscal Credibility Rule (FCR), an operating principle for tax and spending policy that was adopted by the Labour leadership before the 2017 general election to show that it could be trusted with the government finances.

He starts with an elegant description of macroeconomic policy before the crash. He then moves into criticism of the 2010 coalition government’s austerity policy, which he says strangled economic growth. This story is central to Labour’s narrative, and you cannot expect a balanced discussion of this in a book like this, published on the party’s behalf. Mr Wren-Lewis, anyway, has taken sides, in an example of something that Ms Jennings might have commented on but didn’t: academic economists take sides in policy debates rather than trying to tease out the disputed issues and resolve them. I’m not sure how much this tendency is due to the politically charged nature of the discipline, and how much this goes on generally in academia. It is tempting to rise to the challenge, but this is the wrong place to do it. His is a perfectly respectable academic argument that I happen to disagree with. But it matters more in understanding the past than in working out what to do in the future.

The feature of the FCR that Mr Wren-Lewis thinks is most innovative is the idea that when interest rates are near zero, the government should use fiscal policy to help restore aggregate demand back to the point when interest rates start to rise again. The article then takes a rather puzzling turn. He talks about Modern Monetary Theory (MMT – SW-L shows a real weakness for TLAs). This is an idea that has growing currency on the left, which suggests that the regulation of demand should principally carried out by fiscal policy, and not the manipulation of interest rates by a central bank. If that is the case then the FCR is a bit of a miserable compromise. He leaves it unclear as what he really thinks.

Another interesting point is thrown in as an aside: Labour’s fiscal rule does not include borrowing for investment. This would be a radical departure for the British Treasury, who like to manage government borrowing as a whole, whether it is driven by investment or not. Many academic economists, such as Joe Stiglitz, a Nobel Laureate often quoted by writers on the left, think that this is critical. If you read their critique of the 2010 coalition government closely, you will see that they don’t particularly criticise the aspects of austerity that made Labour supporters most angry – benefit cuts and reductions to the government payroll – but focus on the slashing of investment. An interesting debate is glossed over here: if fiscal policy is to be the main instrument for managing the business cycle, what balance should be taken by capital spending, and what by revenue deficits? I can see arguments on both sides, but it isn’t talked about enough.

For what it is worth, I agree with the central premise of MMT (which Mr Wren-Lewis points out is old-fashioned Keynesianism) – which is that fiscal policy should take up a full role in managing the business cycle, relegating central banks to support. But that invites a whole series of difficult questions, of which the role of capital spending is just one. A more important one is how do you tell when the economy is overheating, and so fiscal policy should be tightened? Mr Wren-Lewis simply suggests inflation – but in the modern economy inflation is no longer a reliable signal: dangerous imbalances in the financial system can build up instead. And there is an even bigger question: MMT in its simplest form implies a massive concentration of political power at the centre. For Leninists that is a good thing; liberals worry that this simply leads to incompetence and corruption.

But Labour aren’t going there yet. The FCR is actually rather a modest proposal, and sensible enough as far as it goes. But there is a much bigger debate to be had about how to manage the macroeconomy.

 

So a rather disappointing start, but many of the more interesting chapters were always going to be later on.