September 2013 – thinking liberal

Are the Muslims right about debt?

The Biblical invocation against usury, making loans for interest, has been discarded by the two older Abrahamic religions, the Jews and the Christians, though it persists in Islam. I used to think the prohibition was another obsolete idea, based on a misunderstanding of the usefulness of finance. But as time goes by, the more I come to see that the biblical fathers, or God if you prefer, were on to something. The dysfunctional nature of financial markets is one of the modern world’s most pressing problems.

This reflection comes on the fifth anniversary of the collapse of Lehman Brothers, which was the point at which the current financial crisis broke out into the open. This has lead to a flurry of newspaper comment. I was most drawn to an article by Gillian Tett in the FT, covering a talk given by Adair Turner, the former head of Britain’s financial regulator, the FSA. Unfortunately this behind the FT paywall, and I cannot find coverage anywhere else. Lord Turner produced a blog, but this only covers part of the subject matter, and not the most interesting bit reported by Ms Tett. Lord Turner says that we have not really come to grips with the failure of financial markets that became evident with the Lehman episode.

The most eye-catching thing about financial markets, which is the main point made in the blog, is the explosion of private sector debt. In 1960, according to Lord Turner, household debt in the UK was just 15% of total income; by 2008 it has risen to 200%. If you start to add up loans made by financial institutions to each other, then even that figure looks pretty tame (837% according to this rather good Economist School’s Brief on the subject – though this suggests a little confusion in Lord Turner’s numbers on household debt). But the statistic that hit me most forcibly was the claim that only 15% of the money that flows into financial products actually gets invested in proper wealth-creating projects.

Macroeconomists have long been dismissive of the significance of debt and financial markets in their imperious declarations about the state of national and global economies. These are just means to an end, and they all cancel out – one person’s debt is another’s asset; what matters is the real world of what is produced and consumed. Economists are reluctantly having to rethink this, though most would still rather divert the discussion into conventional subjects about austerity and money supply. Lord Turner’s 15% statistic, however, should translate the issue into one which even an old-fashioned macroeconomist can understand. There is a massive gap between what people set aside to save, and what is actually invested. Financial markets are meant to be the channel by which savings are turned into investments – but instead they are simply a smokescreen hiding a black hole, as it were.

Let’s pause for breath, and look at the problem from another angle. One of the critical points of economics, too often forgotten, is that money and financial assets have no intrinsic value. They are simply useful tools by which we can coordinate the process of producing work and consuming its output. You can think of it as being a bit like electricity. You cannot store it. If people want work now, and consume later at leisure, the simple act of putting aside money won’t do the trick. You have to persuade other people to be around to do the work for you when you want to do your consumption. The wider purpose behind financial products is to help us to do this, to balance our over-production now (i.e. saving) with over-consumption later, or vice versa. Theses activities depend on coordination with people who want to do the opposite, and that is what financial markets are meant to do. How? Through investment. Investment is work that is done now to produce things that can be consumed later. This allows production without consumption in money terms to be balanced by a real world equivalent. Maynard Keynes’s great breakthrough was understanding that the failure of the money and real worlds to match was the main cause of recessions.

So if 85% of savings are not actually invested, there is a problem. Where does the money go? There seem to be two main places. Firstly a lot of it consumed by intermediaries – those fat-cat salaries included – to no real purpose. Secondly a lot of it goes into inflating the prices of assets, real estate or financial assets, that exist already. In other words it is a colossal waste of time which simply serves to make a lucky few rich. And meanwhile huge volumes of debt are being created, much of which can never be repaid. Or, to put it another way, we have manufactured vast banks of financial assets which are not worth anything like what we think.

This spells trouble ahead, as this situation will only resolve itself through, one way or another, debt being forgiven and assets written down. The owners of those assets show no sign that they understand this; or if they do, they simply assume that it is somebody else that will pay. Meanwhile the best we can do is not to make things worse. Amongst other things that means continuing to make life miserable for the banks and the financial sector, and hope that, as they shrink, they concentrate on the more socially useful aspects of it work.

What those old Jewish and Christian fathers understood, and Islamic scholars still understand, is that debt creates moral problems by dehumanising the relationship between debtor and creditor. Financial assets are in fact human relationships between real people, which we are attempting to abdicate responsibility for. Alas though, it is unthinkable that our current economic system, with its manifold benefits, can be created or sustained without them. But we would all be better off if we understood the moral and personal implications, and consequent limitations, of financial assets and the markets through which we acquire them.

What is conference for?

At a fascinating fringe meeting this lunchtime at the Lib Dem conference in Glasgow, four parliamentarians from various parts of the world (Sweden, the Netherlands, Lithuania and New Zealand) expressed their admiration for our conference, or congress, as they preferred to call it. Clearly we must be doing something right. For those of a more reflective nature it can be a bit difficult to work out what it is all about, and therefore how it should be developed. Today’s debates have not made things much clearer.

But let’s start with yesterday. We had two debates of particular importance. First there was one on energy policy. At its heart conference was presented with a choice between two options, one ruling out the use of nuclear energy in all circumstances, and the other a grudging maybe. This went rather narrowly in favour of maybe, in a break from previous party policy, though there has always been a substantial body of opinion sympathetic to nuclear power. I voted with the maybes, but only after changing my mind several times during the debate. But this looked very good; two well rehearsed positions, each backed by weighty figures slugged it out. I was not alone in my dithering, but gave the leadership the benefit of the doubt. But it felt like a valid decision process and debate.

If that looked good, the same could not be said about the second important debate, on education policy, which covered student finance. This, of course, is the issue that has caused more grief to the party than any other over the last few years, with the party spectacularly reneging on a pledge to abolish student fees as soon as it entered coalition government. And yet there was no real debate. The leadership’s main critics had been headed off at the pass with a compromise. The motion was 108 lines of rambling detail, including 26 of preamble. This was cue for a series of speakers to talk about their particular hobby horses, consisting of a few lines each and no controversy. A couple of speakers who complained about this got quite a bit of sympathy.

And so to today. This morning’s debate on the economy had been widely billed as a key challenge to the leadership, underlined by the fact that party leader Nick Clegg himself “summated” in the ugly conference jargon. The motion was another quite long one, at 76 lines, carefully crafted by the leadership to head off various lines of criticism. There were two amendments, equally carefully crafted by opponents of the leadership. What the party was trying to do was resolve a deep controversy over the coalition’s economic policy, which has not been accepted by large swathes of party activists. This controversy has been headed off at previous conferences by what looked like shady political manoeuvring. Critics of the leadership were led by an organisation called The Social Liberal Forum (SLF).

Regular readers of this blog will appreciate that I have been generally supportive of the government’s austerity economics, notwithstanding widespread criticism. But credit is due to the SLF. Their criticism, focused by the intelligent Prateek Buch, in spite of a lack of formal economic training, has been measured and careful. They have not fallen for the naive Keynesian arguments so popular on the left, but instead focused on investment, research and housing. Apart from a flirtation with loose monetary policy, which unfortunately infected one of the amendments, it is intellectually pretty sound. It is not very far from the official leadership position, and I am disappointed that the leadership of the party did not do more to include them in the way they did for their critics on student finance. Instead they engineered an artificial confrontation.

What they should have done was to coopt these moderate critics and instead turn their firepower on the full-blown Keynesians. These were represented by just one speaker, Helen Flynn, who actually made a good, intelligent speech, but who was completely ignored by pretty much everybody else. No ordinary party representative would have understood why it was these arguments had been rejected.

Thanks in large part to a very able final speech by Mr Clegg, who responded to the debate rather than trot out pre scripted sound bites, the leadership easily won. But the whole episode was highly unsatisfactory.

This debate was followed by a motion on cohabitation rights, which amounted to 49 lines of preamble to one of actual policy, which was the adoption of proposals made by the Law Commission. Still it was admirable policy which inspired no real controversy.

The next big set piece was on tax policy. This motion was backed by a more detailed policy paper and was a model for future policy resolutions. This huge area of policy was covered by just 67 lines, with just 5 lines of preamble. The economy of verbiage worked because it was clearly strategic. At the centre of the debate was another choice: this one on the top rate of tax, whether it should stay at 45% or return to 50%. This was clearly something the party needed to get get out of its system. The leadership favoured the former option, but did not overplay its hand; they won by a very narrow 4 votes. Not that this matters all that much. If the party is lucky enough to be part of another coalition government after the next election this will clearly be up to whichever party it teams up with. What is clear from both this and the energy policy debate is that offering conference this type of Option A or B choice greatly improves the debate and gives the membership a feeling that it is helping to decide something. Amendments to motions, by contrast, rarely provide satisfactory debates.

The day concluded with a motion highly critical of the Bedroom Tax, about which I blogged yesterday. The party leadership were completely absent, clearly giving the impression that they thought government policy was indefensible, but without having the guts to confront it openly. The motion was passed unanimously, but it was entirely unclear as to whether this would have much effect. A bit of a lame end to the day.

Lib Dems tend to be very self congratulatory about this supposedly democratic way of adopting party policy by a biannual meeting of self appointed activists. Scepticism is in order, but I think the process is of real value in keeping members and activists involved. But this does not inevitably follow from the constitutional processes. It matters a lot how the party’s various leadership bodies choose to use them.

Beveridge, the Bedroom Tax and community politics

Yesterday at the Lib Dem conference in Glasgow a noisy group of protestors gathered outside the entrance. I couldn’t tell exactly what they were protesting about, except that I caught a reference to the so-called “Bedroom Tax” on a banner. There were fewer protestors braving the wind and rain this morning, but some of them got close enough to press leaflets about the Bedroom Tax into our hands. By the time I reached the security tent at entrance to the centre the rain had pretty much destroyed them, and I accepted the the scanning machine operator’s offer to throw them away. The Bedroom Tax has become the centre point of left wing criticism of the coalition government. It refers to the withdrawal of housing benefit from social housing tenants who are deemed to be living in bigger properties than they need. The rule has applied to private sector tenants for some time. I have not been following the issue closely, but I don’t particularly trust the complainers to report the matter fairly. But it stinks of an arbitrary change of rules that has left unforeseen misery in its wake.

Let’s change the scene to yesterday afternoon’s speech by party president Tim Farron. This speech attempted to stake out some ideological space for the party. He celebrated the consensus forged after 1945 by the great Liberal William Beveridge. His master plan to deal with the nation’s great ills (poverty, lack of decent housing, poor health, unemployment, and lack of education) did indeed evolve into a social democratic political consensus, which gave the country the NHS and social security, amongst other national,systems. According to Mr Farron’s narrative this consensus was destroyed by the malign Margaret Thatcher, with Tony Blair and Gordon Brown completing its demise. Mr Farron wanted to re-establish Beveridge’s ideas into a new consensus. Leaving aside the impossibility of forging a political consensus on the issue, he then went on to combine this idea with that of developing the party’s commitment to community politics. This struck me as being inconsistent, but I did not pay it too much attention at the time. But it became clear from a comment I made on Facebook that many Lib Dems cannot see the inconsistency. To me this sums up the ideological problem that the party faces, and I need to explain why.

The Beveridge consensus represents a bold national programme which was implemented through a series of national policies enacted by Westminster politicians to confront a series of systemic problems. Community politics is the opposite. It is about finding local solutions to problems that can be clearly identified with particular people. This is not about the local implementation of national standards and policies. There is a fundament conflict.

So what has this got to do with the Bedroom Tax? It is a problem that has clearly been begotten by the sort of national policies favoured by advocates of the Beveridge consensus. To meet the problems of inadequate housing it was felt necessary to create a system of housing benefit that was designed nationally although administered locally. This evolved into a system where massive sums of taxpayers money was being poured into the pockets of landlords with rather doubtful social benefits; the benefit simply provided an incentive for landlords to raise rents. This was difficult to reform though, so not much was done. But eventually it was deemed to be unaffordable. And hence a series of arbitrary changes to the rules were made to save money, which affected many poor people who had adjusted to the system as it was, and for whom change meant hardship. This included the Bedroom Tax.

To me this is what happens when national, centrally imposed systems collide with the complexities of world they are trying to change. It was not so much that the systems were badly designed, but that the bad design took so long to fix, and when the fix came it had many unforeseen consequences. What if municipalities had designed there own systems of housing benefit out taxes they themselves raised? It is difficult to see that they would have dug such a deep hole for themselves. For one thing it would have hit crisis point much earlier.

But what if housing benefit was merely part of a community run system of aid that was centred on the needs of individuals, rather than a set of arbitrary national rules run by a series of separate agencies each reporting to a different minister in Whitehall? This is where community politics should lead. But it is incompatible with the system of nationally run social democracy…which is where an invocation of Beveridge leads.

Most Lib Dems are very comfortable in principle with the idea of locally administered solutions. But they have little idea of the costs these have to national institutions and power structures, that they simultaneously want to preserve. Invoking Beveridge’s legacy does not help the party to make that necessary transit . Instead most prefer to occupy a soggy middle ground with elements of both. For as long as they do they will be struck by more bedroom taxes.

Paddy lords it in Glasgow

“You’ve dropped some paper!” A shout came from behind me as I was wandered dazedly around the labyrinth that is Glasgow’s SECC, where this year’s Autumn Lib Dem conference is being held. I turned round to discover that is was no less a person than former Lib Dem leader Lord Paddy Ashdown who was calling out. And I had dropped accidentally dropped one of the many handouts that conference goers pick up. This one on plain packaging for cigarettes; or Battersea Power station; or from retailers fearing the effect of a new law on minimum pack sizes of cigarettes.

As I picked up the offending litter, Paddy went on to ask his assistant loudly about whether he had to wear a suit for this evening’s rally. He duly turned up at the rally wearing a suit. But no tie. But then party leader Nick Clegg was tieless too, though the evening’s host, Orkney & Shetland MP Alistair Carmichael, wore one. Paddy was first of a series of speakers, but for me he stole the show. It wasn’t so much what he actually said. He invoked memories of truly inspiring leadership in days when the party was a much lesser force. More than that, Paddy is one of the few current politicians that really seems to get it when it comes to understanding the need for a radical decentralisation of power, though that did not enter into his speech tonight.

There is an irony in this. Paddy had a very imperial style of leadership when he was in charge. Some members complain that Mr Clegg ignores the party membership but that is as nothing to how Lord Ashdown was.

Nick Clegg’s speech was chiefly remarkable because he spent more time attacking the Conservatives than Labour. We are starting to get the hang of this coalition business. He also put in good word for public sector workers. He is trying to distance himself from that species of villain that people on the left like to call “neo-liberal”.

What else? There are a number of food vendors in the SECC, and yet I could find only one sandwich that did not contain ham, bacon, or cheese. I’m going to have to bring my lunch in if I want to keep the saturated fats down. And they wonder why life expectancy is so low here.

The battle the Lib Dems’ soul

On Saturday the Liberal Democrats’ main annual conference starts, this year in Glasgow. As this parliament moves from mid-term to end-game, the party’s professionals will no doubt want us to focus on the fight for survival at the next General election, scheduled for 2015. I am more worried about the party’s soul.

Being part of a coalition government has been a searing experience for the party. It remains strong in some areas, but it is much weaker through most of the country, as members, activists and supporters have drifted away. In national opinion polls the party languishes at about 10%, or about half the level it achieved in the last General Election in 2010. It used to be that the party was ignored as an irrelevance. That problem has been solved, at the cost of it coming under relentless attack from all sides: from the party’s coalition partners, the Conservatives, from the Labour opposition, and less attached observers generally. Most of this criticism is not particularly fair, but that’s politics. It is a necessary stage in the party’s evolution if is ever to be a major political force. But it is not entirely clear that the party will survive the experience. If it is to survive, the party will need to have a clear idea of what it is for: otherwise it will fail to recruit new activists and win back the people that have drifted away.

The party’s leadership, and its professional staff and advisers, seem to concentrating on another question, however. And that is the case that the party needs to present to voters in 2015. There is some clarity on this, as suggested by the party’s slogan: “Stronger Economy in a Fairer Society”. Framed positively, it is actually a double negative, contrasting with Labour’s alleged economic irresponsibility, and the Conservatives’ focus on making lifer better for the rich. This is fine as far as it goes: negative messages have a wider appeal than positive ones, and it should help the party benefit from the negative campaigns the other parties will wage on each other. But it is not enough to rally the faithful. Firstly because many are not convinced that the Coalition’s economic policies have been right, and secondly because, without spending more on public services and benefits, it is not clear to many how society is to be made fairer.

And here, I think, we come to a much wider crisis in British politics. Politics is increasingly the domain of a professional political class who have spent their entire working careers in politics or at its fringes. They pick up their ideas on policy from a series of lightweight think tanks and university politics departments. Their main concern is to compete with each other to attain the status and prestige of office. They operate within a series of assumptions about what government is and how it works: that it is about adopting the right policies at the centre of government, passing the necessary laws in parliament, and then getting the civil servants to implement them. Missing from this are two things: any clear idea of how power can or should be devolved away from central government, and practical skills in the design and implementation of policy. It seems to be quite fashionable amongst political types to blame the civil service for policy failures at the moment. And yet civil servants are often asked to implement policies that have not been thought through, and which are often contradictory. The politicians and their advisers don’t seem to see it as their problem to resolve the contradictions, as this carries political risks.

And this criticism applies to the Liberal Democrats as much as it does to the Labour and Conservative parties. The party’s MPs are mainly professional politicians with little experience in either the outside world, or even in local government. They are surrounded by like-minded professionals who want to be MPs themselves. They are charming, intelligent people – but do they really understand how to make things work? Or what motivates the army of amateur enthusiasts that the party needs to keep going?

What I think is needed is for politicians to hold a different model of government in their heads: one that pushes political power away from the centre so that local communities can solve problems for themselves. That sounds like advocating support for motherhood, but it means rejecting generations of accepted social democratic wisdom, which sees issues in terms of generic problems – crime, healthcare, unemployment, etc. – rather than people. The old Liberal Democrat idea of community politics is a very good place to start this revolution – and no other political party has a better tradition to build on. But neither the party’s national professionals, nor, I am afraid, its younger activists seem to have much idea of what this is all about.

So, in Glasgow next week, I will not be paying so much attention to the grand set-pieces – though I will still follow them with interest – but I will be looking for any signs of bigger ideas taking hold: ones that will shape the party’s soul, and offer the country at large real hope.

Us, them and Europe

Britain’s membership of the European Union used to command almost universal assent from the country’s intellectuals. Just how far this has changed was made clear to me by a recent BBC Point of View talk by the philosopher Roger Scruton. He concluded a thoughtful series of talks on the nature of democracy with what amounted to a diatribe against the European Union as an “unaccountable empire”. Mr Scruton is a serious man, and his criticism of the EU needs to taken seriously by supporters of Britain’s membership like me. .

The essence of Mr Scruton’s talks is that democracy is based on a series of institutions that allow opposition and argument. He criticises Egypt’s Muslim Brotherhood for claiming that its attempted imposition of a theocratic regime was democratic, when they were undermining the very institutions on which any democracy has to be based. Mr Scruton goes on to say that these institutions can only be sustained where a country has a sense of “us”, of identity that tolerates opposition with a sense of it being all in the family. But “there is no first person plural of which the European institutions are the expression”. He goes on to suggest that this because the EU is based on an international treaty that supersedes elected legislatures, and becomes incapable of being modified. He uses the EU’s free movement of peoples as his prime example, as many Britons are unhappy with so many people from other EU countries taking up residence here. He goes on to say that “democracies need boundaries, and boundaries need the nation state”, painting a picture of nation states coming together from a bottom up sense of togetherness and neighbourliness, shaped by shared language and culture – which the EU lacks.

I have two immediate reactions to this. Firstly I am very uncomfortable with the suggestion that our feeing of “us” and “them” are simply matters of historical and geographical fact that we should adapt to – and the all Britons are “us”, while Brussels bureaucrats are “them”. To me this has a rather scary overtone of the 19th Century idealisation of the nation state, based on language and culture. This movement led to the unification of Germany and Italy, and myriad calls for self-determination which led to the breakup of the Austro-Hungarian and Ottoman Empires. It helped usher in, from 1870 to 1945, 75 of the most disastrous years of war, conflict, forced migration and genocide in our continent’s history. Unscrupulous politicians played up on peoples’ sense of “us” against “them”, and tried to impose this on the continent’s tangled patchwork of languages, cultures and nationalities.

And if we think that Britain is exempt from all these continental complexities, I wonder if a Northern Irish person of Catholic heritage really thinks that government from Westminster is by “us” rather than “them”. And Scotland’s most successful political movement is based on the idea that Westminster is not “us”, and poses a threat to the country’s coherence. The first person plural is not a matter of received fact, but has to be built patiently out of liberal principle. And in the modern, highly interconnected world we must be inclusive. It is not as if Britain’s history is that of being an isolated island nation: we have been a hub of European and world politics; the country used by a the pinnacle of an empire that covered a quarter of the world’s surface, and for two millennia it been part of a highly interconnected European history. Britain is a trading nation and an international hub; we have to accept the responsibilities that go along with that or we will not appreciate its benefits.

As it happens, since being a teenager I have felt a strong affinity with the European project, and have ever since felt that the European institutions have been a political expression of my first person plural. And neither is it true that the European treaties have been fixed and unchanging; they have been subject to democratic pressures from below.

My second reflection is that the European Union is something of a lightning conductor of political discontent – and that removing it will not actually remove the discontent. When I look at technically fully independent countries like Australia, I don’t see places at are any more at peace with themselves and the world around them than we are. True, Australia has recently benefited from a good run of economic prosperity – but at the cost of big mining corporations running riot across the countryside (for people worried about wind turbines, just look at the open-cast mines marching across the Hunter Valley in New South Wales),and who have such political clout that they are able to overturn tax proposals that they don’t like. And the politics of immigration are just as toxic. Australia (and I could also use those other Anglo-Saxon bastions of New Zealand or Canada) finds itself at the mercy of an interconnected world, and it is by no means clear that they are better off outside an international federation like the EU. Britain’s problems would not go away, or become any more tractable, if it left the EU.

But having got all that off my chest, I have to admit that Mr Scruton has put his finger on a real problem, which is that EU institutions have lost popularity, and often seem beyond political accountability. His use of the free movement of people as an example is very telling. This idea lies at the beating heart of the European Union, but it creates a lot of tension. And unlike many supposed EU generated problems, like over-regulation, it’s for real. In Lincolnshire, where Mr Scruton was born and where support for the anti-EU Ukip is high, there have been real impacts from the influx of east European migrants in search of work. And yet freedom of movement has had real economic and personal benefits. And it is not just in Britain that anti-EU feeling, in large part directed at free migration, has been building up. This is all hobbling areas like energy policy where EU level action is increasingly warranted.

In the long run the answer is for Europe to develop a stronger sense of “us”. This may already be better developed than Mr Scruton allows, but it remains very patchy. I believe that there is enough of a sense of common values and history to provide a basis for this. One of the best ways for a Briton to feel European is to travel to a country like U.S. or, for slightly different reasons, Australia. But it needs to be promoted by liberal politicians, and is the work of generations.

A referendum on EU membership, the policy of our Prime Minister David Cameron, remains an enticing idea. The consequences of a “no” vote would be disastrous, but the pro-EU forces need to be rallied, and the institution’s legitimacy must be reaffirmed. I am also coming round to the idea of another of Mr Cameron’s ideas: a British Bill of Rights. This would mainly give a British label to core European principles, but it could also set clear British constitutional limits to European power, much as Germany’s Basic Law does.

But the bigger truth is that we must move on from the 19th century idea of an all-powerful sovereign nation state. We have to develop the legitimacy of multinational bodies like the EU; we also need to devolve power to more localised levels, especially in bigger states like Britain. This requires fresh thinking on the institutions of democracy. Roger Scruton is right to remind us that democracy is about more than voting, and requires a sense of common identity, but in the end he is not helping us to adapt the world where humanity now finds itself.

Positive linking: what do networks mean for public policy?

I ndependent and identically distributed. This assumption about data subject to statistical analysis is so routine that most students reduce it to the acronym “IID”. It means that the data follows a normal distribution and a routine set of analytical tools becomes available for the calculation of such things as confidence levels. Most of the evidence used by economists and other social scientists to support their theories is based on this type of analysis, and an IID assumption in the data. And yet human societies do not behave in accordance with this assumption; most of the choices we make are based on choices that other people have made, and are not independent. They are subject to network effects. It is a problem that most academic economists would rather not acknowledge. But the implications are profound.

This reflection comes to me after reading the book Positive Linking by Paul Ormerod. In this book Mr Ormerod attempts to show that all modern economics is deeply flawed because it ignores network effects, and that in future public policy should promote “positive linking”: promotion through network connections, rather than simply the design of incentives. He is only tangentially concerned with my worry over statistical analysis: he is more focused with the models built by economists based on rational people (or agents in the jargon) making independent choices based on an analysis of their options and preferences. These theoretical models lie behind the bulk of modern economic analysis, such how people might respond to taxes or changes to interest rates.

Unfortunately it is a very disappointing piece of writing. The language flows well enough, but it is full of repetition and digression. This sort of style probably works better orally than on the page, where it is a drag. But it is worse than that. His main concern seems to be to debunk conventional economic analysis rather than to promote a clearer understanding of networks and their implications. This verges on the unhinged sometimes, and you do not get the impression that arguments of the defenders of conventional economics get a fair hearing, and therefore that they are dealt with adequately. There are a lot of illustrations and “evidence”, but these are used anecdotally rather than to build up a coherent logical case. There are many digressions, for example about the rise of Protestantism in Tudor England. These seem to be included because they are good stories rather than taking his argument forward. The debunking of conventional economics is all rather old hat, though, and it has been done more coherently and entertainingly by authors such as Nasim Nicholas Taleb (of Black Swan fame).

The diatribes and digressions leave Mr Ormerod with inadequate space to develop his “twenty-first century model of rational behaviour”. His suggestions about how this might work in practice are left to a few pages at the end, and even this tends to drift into diatribes over how things are done now. For example he claims that sixty years of centralised, big-state social democratic government since the War has been a failure – on the grounds that unemployment is much the same on average as beforehand. But you can easily argue that this is the most successful period of public government in world ever – look at the rise in life expectancy, for example. Neither is it all that clear that everything, or even most things, these governments did was based on conventional economic models of human behaviour. Instead of explaining the religious dynamics of 16th Century England, he could have spent some time and space developing his argument here.

What a pity: because in the end I think he is right, and his suggestions for the way forward are sound. It isn’t that government since the War has failed, it is that its methods have run their course, and its policies now only seem to benefit an elite. Conventional economic analysis has more going for it than he suggests, but they are a blind alley now. But many economists and policy makers are in denial, to judge by the public debate – though some clear network-based ideas, like “nudge” theory are making their presence felt.

But there is a problem at the heart of the new twenty-first century network thinking, which Mr Ormerod acknowledges but dismisses too easily. The new models have weak predictive power. The point about normal distributions and the IID assumption that they are based on is that they produce a relatively tight distribution of data around a mean and few extreme results – “thin tails” in the jargon. There is a sleight of hand here: statisticians’ use of randomised data make their analysis sound more robust than it is; the IID assumption in fact makes the data tightly constrained. Consider a random walk, comprising a series of steps forward and equal steps backward. If the probability that your next step will be forward or backward is always 50% each, and the direction of earlier steps does not affect the direction of the next step, then this is an IID assumption. It sounds truly random. But you are unlikely to get very far from the starting point, which isn’t really very random at all. If your next step was more likely to be in the same direction as your last step than not, then you can end up anywhere. That’s real randomness, but it isn’t IID. There is no normal distribution. What looks like a soft assumption is in fact a hard one.

So it’s not just a question of changing the maths and updating the models. It is about accepting that social systems are fundamentally more unpredictable than we have previously accepted. It is not hard to see why policy makers and social scientists have struggled to accept this. I like to describe this by invoking the idea of “zeitgeist” – the spirit of the time, a ephemeral and unpredictable quality that in fact runs at the heart of everything. This is closely linked to Mr Ormerod’s ideas of networks, since it is networks that sustain the zeitgeist.

What to do? Mr Ormerod offers some useful rules of thumb. He also suggests investing more into research of network effects, which is self-interested but sensible, so long as we do not expect this to yield insights of anything like the theoretical precision of conventional methods. But ultimately his big idea, which he does woefully little to develop, is much greater delegation and localisation of decision making. Amen to that.