Lesson from the banking industry: sometimes people need to be treated as people.

This article from the Economist struck me like a bullet on reading it today.  Not so much for the subject matter itself (US banking practices) but what the whole episode says about the modern world.  We have never had more data readily available on people – but we seem less able than ever to take decisions on their individual merits.  More data, less information.  This problem is usually shrugged off y economists and reformers with a laugh; it shouldn’t be.

The story starts in the US property boom, when banks were falling over themselves to offer mortgages, based on the vague idea that since these loans where secured on property, and property values always go up, you couldn’t have too much.  The banks stand accused of approving loans robotically, without any consideration of individual merits – and as a result often lending to people who could not afford to keep up with the repayments.  This accusation was commonplace, but, as the article points out, little effort seems to have been made to substantiate it against hard evidence.

Then came the crash, and many people who had taken out loans could not or would not keep up with the repayments – and stood at risk of having their homes repossessed.  And the banks once again stood accused of carrying out repossession without due care and attention, again on mainly anecdotal evidence.  This became a hot political issue, and the individual US states set about suing the banks, with the Federal government becoming involved too.  And now an umbrella settlement is proposed, to which the five main US banks and 49 out 50 state Attorney Generals have agreed to.  The banks are making a blanket payment to make the problem go away.

What remains characteristic of the whole story, from the original alleged malpractices right up to the settlement, is a failure to reconcile it to what actually happened to real people in real homes.  No attempt is made to distinguish between whether some banks are more culpable than others; and no attempt to distinguish between arrears that arise from people in genuine hardship, and those who are trying to beat the system.  All that is just too difficult.

And this type of thing is happening all around us.  Decisions are made about us using computer algorithms based on data that may or may not be accurate – or based on our membership of some or other broad group of people (men, women, over 50,  etc.) and the law of averages.  Companies calculate that it is cheaper that way.  To consider people as real people, and base decisions on the individual merits of the case, well that requires the intervention of skilled staff, and they cost a lot of money.

And so the flip side to ever advancing productivity (one of the things that makes skilled people cost so much) is that we are subjected to an increasing volume of de-personalised services and arbitrary decisions; and around the fringe a spectrum of fraud arises, as people learn to take advantage of system weaknesses.  I have been the subject of mild identity theft several times; this looks quite safe for the people who perpetrate it, since nobody bothers to find them – it’s just a cost of doing business.

But what’s the moral of the story?  We gain a lot from the increased wealth that arises because of all this added productivity.  And what’s more part of becoming a more equal society is that well off people like me can’t expect to have armies of people running around fawning on their every need.  So should I just stop whinging, and get on with all the things I can now do that would have been unthinkable in a previous age?

Up to a point.  I think there are two important consequences that many people overlook.  One big picture, and the other of more urgency.  The big picture point is that are are physical limits to economic growth, and it is no wonder that the pace of growth slows in developed societies.  Higher productivity means we consume more services with diluted human content.  But huge part of the pleasure we derive from some services is exactly because we get one-on-one attention from somebody (hairdressing perhaps, a personal trainer, dinner at a posh restaurant, and so on); as productivity advances, the proportion that these non-negotiable services comprise in the total economy rises – and so growth slows.  Economists refer to this as “Baumol’s Disease” after the economist who originally pointed it out.  But it is not a disease; it is the product of success – it’s the process of arriving at the promised land, so to speak – the place that is so good that progress is impossible.  An increasing proportion of services cannot be improved without detracting from their value, and people will resist buying them at any price; and that’s saying nothing of the distortion to incentives that arises from making decisions based on averages.  We can’t rely on economic growth to wash away society’s problems – we need to confront them more directly.

The more urgent point applies to the reform of public services.  Too many people assume that to make these more effective we must follow a similar process of sucking the human content out of them as we see in so many commercial services.  In some cases I’m sure that’s true; some Indian organisations are doing amazing things to improve the productivity and effectiveness of certain medical procedures by using economies of scale.  But in most cases the effectiveness of public services depends on joining up the dots; seeing people as people rather than collections of unrelated needs that can be picked off one by one.  An individual who is committing serial antisocial behaviour offences, may have mental health problems, addiction issues, a dysfunctional family life, educational under-achievement, and inadequate housing.  Just from listing them you can see how all these problems are interrelated and feed off each other.  We stand a much better chance of making progress if we design solutions based on looking at this individual and his exact personal circumstances and negotiating with him as a human being.  Productivity in public services is not about rate of throughput, its about solving problems and reducing demand.  This needs a completely different mindset than that needed from the commercial world.  Alas too much (though certainly not all) public service reform misses this key point.