1. Morality is weak against power. If there is any moral truth at all, it is that the mass murder of innocent civilians is wrong. But when it happens, the “international community” does nothing to stop it. Stalin’s famous sneer - “The Pope! How many divisions has he got?” is true.

On a more prosaic level, a similar thing is true of bosses’ pay. A periodical fit of morality might stop one or two individuals from taking their bonuses. But a serious and systemic reduction in bosses’ pay requires a shift in the balance of class power.

2. Policies are often a mix of morals. Take for example the welfare cap. Is this moral, because it stops feckless scroungers fleecing the tax-payer? Or is it immoral because it threatens to make children homeless? Morality alone does not adjudicate. The issue is about the facts of the policy or about how the issue is framed.

3. Morality can distract us from structural explanations, and hence serve a conservative function. Take for example someone who doesn’t want to work. He might look like one of the undeserving poor. But is he? It could be that his “laziness” is an endogenous preference. Surrounded by mass unemployment – and perhaps brought up amidst it – he believes there’s no chance of work and so he adapts his wants to his circumstances. Is he undeserving or not? Again, morality does not adjudicate.

4. “Morality” just poses unresolved questions. Take high pay. Is this unfair because it betokens inequality, or is it fair because it represents (in the unsubsidized economy) a free and voluntary exchange between individuals? Adjudication is a matter of moral debate; those leftists who think it isn‘t miss the point.

But as Alasdair MacIntyre pointed out, we have lost the faculty for such debate with the result that our moral judgments are little more than emotivist spasms. 

There is, though, an alternative here.

The left should appeal more to efficiency. For example, the problem with bosses’ pay and bonuses is not that they are unfair, but that they are economically inefficient and the product of power, not merit.

And, I’d add, the structure of capitalism – at its current juncture – is inefficient, not (just) unfair.

In this sense, Emma is missing something. She’s right to want an alternative to a managerialism which tries, feebly and ineffectively, to work within the confines of capitalism. But the alternative is not a moralism which threatens to keep the left within a ghetto of impotent self-righteousness. There is a third possibility – Marxism.

The weaknesses of the "big society" should not blind us to the policy and political dead end of the "Big State". The public won't vote for the prescription that central government is the cure for all ills for the good reason that it isn't.

Although this is seen as “Blairite” it is also consistent with a more radical leftist tradition of scepticism about big government is a longstanding tradition on the left such as guild socialism, anarchism, market socialism or Marxism.

And such scepticism is valid. In some respects (not all – I just highlight the flaws), the state does not promote leftist ideals:

» It is not very redistributive. The difference between the Gini coefficient for post-tax income (that is, income including benefits after direct and indirect tax) and original income is only seven percentage points: 38% vs. 45%. The tax rate for the middle quintile, at 27%, is not far short of the 32.6% on the top quintile. To a large extent, therefore, the state redistributes income within the working class. And this has an unpleasant effect. It leads to a “divide and rule” the working class, with some public workers and benefit “scroungers“ being stigmatized. 

» It is insufficient to protect the interests of the vulnerable. The state can be – and often is – captured by people hostile to the worst-off with the result that benefits are cut.

» The state serves the interests of the rich whilst attacking the poor.  A man who, in his mental distress, tries to kill himself is imprisoned for damaging property. A man who, with a more respectable mental disorder, wrecks the economy merely loses a knighthood; those who say Fred Goodwin broke no law miss the point – that there are no laws against capitalist vandalism.

» The state serves as a lightning conductor, which deflects criticism away from capitalism – for example, when the crisis is blamed upon Labour’s deficit or weak banking regulation rather than the flaws of capitalism itself. 

» The state is run according to the same dysfunctional ideology than runs business – hierarchical managerialism. However, in the private sector its flaws are mitigated by the forces of competition whereas they are much less so in government. The upshot is that the state offers indifferent value for money.

It is in light of these flaws that we should read Sunny’s claim that spending cuts won’t make the government unpopular. Very many working people are not opposed to cuts because they do not regard the big state as their friend. And this is for a good reason.

Granted, David’s analysis and solutions here would be rather different from mine. But he is posing a good question. The tragedy is that, in our anti-political political culture, this question will be ignored.

In the last 12 months, RBS’s share price has underperformed the market; it has also underperformed two of its three main peers – HSBC and Barclays but not Lloyds.

Insofar as Hester’s job is to raise the value of RBS for the tax-payer, he has failed in the last 12 months.

But is the share price the relevant measure of performance?

In one powerful sense, yes. A share price assesses the overall value of the firm. It is (almost) always possible to point to something good that a CEO does; it would be remarkable if a base salary of £1.2m did not buy some competence.

The question is: are the things he’s doing sufficient to raise the overall value of the company? The share price is a good gauge of this.

For example, RBS justifies the bonus by saying, among other things, that “all core businesses are now profitable other than Ulster Bank“ and that “RBS’s balance sheet has been reduced by more than £600 billion since 2008” (a good thing, apparently).

But it’s possible to return a company to profit and shrink its balance sheet by jeopardizing its future performance – for example, by selling off useful assets or by worsening customer service and so driving business away.

The share price is a measure of whether the “improvements” a CEO has made will lead to lasting gains. RBS’s price fall suggests this is in doubt.

To a large extent, the value of firms is beyond the control of CEOs. “Management“ functions rather like witchcraft. It’s a set of rituals which are wrongly supposed to have effects on the outside world. When, by happy chance, those effects materialize, the witchdoctor takes credit. And when they don’t he blames external malevolent forces.

In a sense, bosses are paid a fortune not so much to motivate them to great performance, but to buy off terrible performance. It’s just an extreme manifestation of the efficiency wage argument.

And this might partly lie behind Hester’s bonus. Robert Peston says the Treasury feared that Hester and the board would have resigned if it had vetoed a bonus.

Now, whether this threat was serious or not, and whether the resignations would have been anything worse than a short-term inconvenience, are separate questions. The point is that this shows that bonuses are a reward for power, not performance.

—
A longer version of this post is here.

The other is statistical discrimination; employers believe (rightly or not) that a particular group is, on average, less able and so are reluctant to hire from that group.

However, a recent experiment suggests that there’s another form of discrimination that is harder to eliminate – a simple lack of Bayesian reasoning.

Researchers first got people to perform some mental rotation tasks, and then split the performers into two groups. In one group, which they called K, 43% were top performers (who got 13 or more of 24 right) and 57% poor performers.

In the other group, called L, 14% were top performers and 86% poor ones.

A separate group of people were then given a choice. They could take a small sum of money, or they could gamble on an individual being drawn from group K or L where they would win €20 if the performer were top but nothing if they were not.

Obviously, in this gamble one has a 43% chance of winning if you can choose from group K.

But here’s the thing. Subjects were told that the draw from group L was rigged, in such a way that someone would be drawn from group K and if s/he were a top performer, a top performer from L would also be picked. This means that subjects had a 43% chance of winning, whether they drew from group K or L.

However, despite knowing this, subjects preferred to bet on group K. In other words, they paid attention to base rate probabilities (43-57 vs. 14-86) even though they were irrelevant. This is Bayesian conservatism.

This is not taste-based discrimination, because K and L are neutral terms. Nor is it statistical discrimination because subjects’ actual odds of  success were identical in both groups. It’s plain irrational.

This might have nasty implications in labour markets*. It suggests that group labels stick to individuals, even if the particular individual does not have that particular attribute. So, for example, if an employer is loath to hire women for fear they will leave to have children, he might be reluctant to hire even women who could prove they have no such intent; though lesbians earn more than straight women, they earn less than men. Fannie Hurst’s line that a woman has to be twice as good as a man to go half as far might, therefore, be true.

In this sense, stereotypes are dangerous not merely because they can be self-fulfilling, but also because they damage the life-chances even of people who do not conform to them.

—
* The standard objection here is that hiring decisions have bigger stakes than lab experiments, and so people are more likely to behave rationally. I find this objection implausible, partly because many hiring decisions are taken by people who are using other people‘s money, partly because of the Yerkes-Dodson law, and partly because of casual empiricism; look how many idiots are in good jobs.

This is that the use of the word “demand” – which has long been common on the left and among trades unions – is a terrible rhetorical strategy. People who make demands are tiresome – demanding! – and unreasonable.

The very use of the word is therefore a turn-off.

We know that people’s attitudes are shaped by the way in which options are framed. The left’s use of “demands” is a counterproductive frame.

The right, and the capitalist class, knows this. Read pretty much any rightist blog, and I doubt you’ll see their policy proposals regularly framed as demands, as James and the left so often do. And, of course, employers have for years made “offers” – how generous! – whilst it is unions that make demands. But this is not necessary. Unions could easily reframe pay “demands” as reasonable offers: “our members are offering to work for one-200th of the salary of the chief executive.”

So, how might  “demands” of the sort that James makes be reframed? Here are three possibilities:

1. An assertion of rights. James says we should have a right to recall MPs who break manifesto promises. But why frame this as a “demand”? Why not instead say that the breach of such promises is tantamount to a breach of contract and thus a violation of basic democratic rights? Framed this way, it is manifesto-breaching MPs who are making unreasonable demands – demanding to stay in office despite lying to voters.

2. Stress the benefits of the policies.  For example, egalitarian policies such as taxing the rich or nationalizing utilities can – if you insist – be presented as a way of increasing aggregate demand, by redistributing income from savers to spenders.

3. Use the language of inevitability and necessity; you don‘t have to demand what will happen anyway. Marxists, of course, used to do this, to the chagrin of champions of free will such as Isaiah Berlin. But the trick has long since been copied by the right. It has claimed (reasonably) that bank bailouts were necessary and (less reasonably) that public spending cuts are. And of course every boss trying to justify mass layoffs does so by claiming they are necessary.

The left should relearn this trick. Rather than “demand” change, it should point out that things can’t go on as they are, and so change is necessary.

Now, in saying all this I’m not picking a fight with James; his post actually comes close to doing what I’ve suggested. My beef is instead with the left’s lazy and dangerous repetition of the “demand” frame.

- Joey Barton provokes “fury” by saying that suicide is selfish, with some of his critics invoking the weasel work “inappropriate“.

- Over 30,000 people complain to the BBC about Jeremy Clarkson’s “shoot the strikers” comment.

- Luis Suarez gives Fulham fans the finger, and they faint like Victorian spinsters.

- Emma West has to spend Christmas in prison, supposedly for her own safety after she gets death threats for her racist rant.

These events all tell us something sad about the British people – that many of us have become illiberal prigs, quick to take offence and to condemn.  I suspect there are three related pathologies underlying this:

1. Narcissism. Events are interpreted through a me, me, me prism. They give us the opportunity to demonstrate our delicate sensibilities and our “moral compass.“  This approach excludes curiosity. It stops us asking: “why did s/he do that?” (The answers are, in order, because: he’s got a point; he’s got a book to sell; he’s been abused for the last hour; she’s probably mentally ill.) We are all newspaper columnists now – in the sense of having a self-absorbed moralistic incuriosity.

2. Infantilism. We have become like children, desperate to seek protection against things that upset us. We’ve lost Samuel Johnson’s manly attitude to freedom: “Every man has a right to utter what he thinks truth, and every other man has a right to knock him down for it.” Instead, we now look to the “authorities” to knock him down.

3. A hatred of disorder. Richard Sennett has described how people respond to chaos and uncertainty by constructing a “purified identity”. Instead of embracing uncertainty and learning from it, “threatening or painful dissonances are warded off to preserve intact a clear and articulated image of oneself.” This warding off consists of demanding that dissonant experiences be suppressed.

I say all this for a reason. When I said yesterday that the public’s hostility to redistribution was due to cognitive biases, some rightists replied that this was typical lefty arrogance. But what they ignore is that public attitudes are also hostile to liberty too. For me, both are a matter for regret.

Even small differences in initial confidence can result in diverging patterns of human capital accumulation between otherwise identical individuals.

As long as initial differences in the level of self-confidence are correlated with the socioeconomic background [which they are]…self-confidence turns out to be a channel through which education and earnings inequalities are transmitted across generations.

The gist of their thinking is straightforward. Say you have two people of equal cognitive skills, but one is over-confident about his ability and the other under-confident.

The over-confident one is more likely to stick with a subject during the early steep phase of the learning curve – believing that “I can master this if only I apply myself” – whereas his under-confident is likely to give up, thinking the material too difficult for him / her.

Alternatively, the over-confident student might choose “difficult” academic subjects at high school, which qualify him / her for entry to some elite universities, whilst the less confident one would choose less academic subjects which disqualify them.

Important and powerful as these are, they are not the only ways in which class differences in confidence can affect outcomes.

There’s also:

- Overconfident people might select into occupations where there’s a high pay-off to the lowish probability of success, such as management, law journalism or politics. Less confident folk, under-estimating their chances, might prefer occupations which yield less skewed rewards.

- People misperceive overconfidence as actual ability. The overconfident job candidate is thus more likely to get the job than the more rational one.

- “Posh white blokes” can – perhaps unwittingly – manipulate the social awkwardness of others for their own advantage, and thus progress at work.

The bottom line here is clear.

In a class-divided society, the very notion of meritocracy is incoherent, because merit in the sense of academic achievement or career success might be the product of an overconfidence which is, initially at least, irrational and unjustified.

We’re not being deafened by this opinion. Nor were some traditional defenders of the rights of property owners much outraged by the Dale Farm evictions: compare the Mail’s coverage with the generally sympathetic reporting it has given to other people who broke planning laws.

Such double standards are, of course, not unique.

Many on the right think that the unemployed should travel to look for work, but want immigration laws to stop them crossing national borders when they do.

And in 2008 many of those who had spent the last thirty years telling us to stand on our own two feet and singing the virtues of free markets suddenly discovered the virtues of state aid.

As Ross Clark says, “our free market system tends to become rather less free when powerful people are in danger losing money.”

Now, you might think I’m going to say that this shows that many Tories are just hypocrites.

I’m not. Hypocrisy is ubiquitous. You can find it on the left as well as the right.

Instead, there’s another point here – that there’s a conflict between tribalism and self-interest on the one hand and freedom on the other.

The problem with freedom is that it doesn’t just promote our own interests. It can harm these interests;  laisser-faire required that banks collapse, with unpleasant externalities. And it can promote the interests of people who aren’t in our tribe.

Freer planning laws help ‘pikeys‘ as well as Daily Mail readers. And the freedom to work where you want is good for foreigners as well as Brits.

This means that the cause of freedom is ill-served by tribalism and self-interest. And because the latter are significant forces in politics, we cannot hope that freedom will thrive.

By this I don’t mean that it has the wrong policies. Errors in policy and administration are inevitable. I mean instead the sheer number of unforced errors that it has made.

Fox is just continuing a pattern, for example:

- Theresa May gives the impression that she’s basing policy upon a story that’s not only a pack of lies, but not even her own lies. Did she really think she could get away with this?

- David Cameron appointed Andy Coulson as his press secretary, despite his being associated with allegations of phone-hacking.

- Andrew Lansley has been unable to explain the point of his NHS reforms; what exactly is the problem to which they are the solution?

- The huge number of “u-turns” the government has done suggests a lack of forethought and/or an inability to prepare public opinion for its policy announcements.

- When Michael Gove closed the Building Schools for the Future programme, it took him five attempts to name the schools that would be affected by this.

- Recent policy announcements, such as on weekly bin collections and raising the motorway speed limit, have been on trivial matters – the sort of things a tired government in its fifth year of office might do, rather than the significant changes we’d expect early in its term.

- The government has failed to find the genuine efficiency savings it promised.

These episodes seem to confirm Zoe Williams’ assessment, that we’re looking at a government with “no idea what governing entails, let loose on a system with no clue about its structure and mechanisms.”

Considering the Tories are supposed to be the “natural party of government”, they seem remarkably bad at governing.

Which brings me to a hypothesis. Could it be that its incompetence arises precisely because it believes it is the natural party of government? Cameron and his colleagues think they are entitled to rule, and this causes them to under-rate the importance of working hard and following procedures such as ensuring that ministerial meetings had civil servants present.

This is compounded by another error. If you think your policies are simple common sense, then you’ll believe them to be self-evidently right, and so won’t bother thinking about details and counter-arguments.

You’ll ignore the fact that governing is not like bashing out a 1000-word column before breakfast.

His five point “plan for growth“ consists mainly of temporary tax breaks and the pulling forward of public investment. This would be OK(ish) if our problem were merely a cyclical one of temporarily weak demand.

But it is not. We also face the problem that a combination of slower productivity growth and the investment dearth mean that might well face years of sluggish growth – and the “tough fiscal rules” Balls advocates would merely exacerbate this.

Balls, though, gives little hint of being aware of this. He seems to be in a pre-crisis mindset which imagines that economic growth can be achieved if only policy-makers do the right thing. But what if it can’t? What does a leftist economic policy then look like. As Hopi asked:

What is a progressive social democratic party actually for, if it is not able to spend more money than in the past?

I’d suggest four possibilities:

1. Given that investment opportunities are scarce, we must
make the most of the few we have. This means investment mustn’t be held back by red tape or by a lack of finance; Adam Posen’s call for a state bank is thus worth considering. But we shouldn’t be too optimistic about what these can achieve.

2. There’s a case for limiting top pay. The point here is not merely about fairness. One lesson of the collapse of the banks is that high pay doesn’t work. It doesn’t call forth “talent”, but rather destructive rent-seeking and risk-taking.

3. There’s also a case for more redistribution to the lower-paid and unemployed. It looks as if the main problem for coming years will be a lack of demand for labour more than a lack of supply. Worrying about blunting work incentives in this context is silly.

4. Workplace democracy. Again, another lesson of the banking crisis is that top-down organizations can fail badly; naturally, given his Brownian managerialism, Balls cannot see this. Managers should be seen not as superheroes capable of transforming organizations but rather as custodians and administrators, and be selected and paid accordingly. Note that I regard worker democracy as a means of increasing equality in part by curbing top pay.

What’s more, with public spending likely to be squeezed, it is vital that we make the most of every pound that’s spent. This requires that public sector workers have more control, as it is they more than managers pursuing vainglorious strategies who know the detailed nitty gritty of how cash is wasted.

Now, you might object here that I’m seeing my favourite hobby-horses here. Maybe. Please suggest alternatives. The key point, though, is that Labour must ask what social democracy looks like in hard times.

Not only did Balls not answer this question, he didn’t even ask it.

However, it’s becoming clear that, in this regard, Labour was merely reflecting a censoriousness culture.
Take these examples:
- two men were jailed for four years for (unsuccessfully) using Facebook to try to incite a riot.
- The London Philharmonic Orchestra has suspended some musicians for writing a letter
- a man has been imprisoned for trolling.

To these cases we might add the disproportionately hostile reaction to Johann Hari’s activities. His sins were small compared to the crimes of, say, serial drunk-driving or being Toby Young, and perhaps indicative of a troubled mind rather than malevolence.

And if you don’t like his journalism, the solution is not to make a fuss, but to not buy the Independent – a feat which 99.7% of the British people perform each day.

What interests me is: why is there this intolerance? I suspect there are three separate things.

One is technophobia. From Mary Shelley writing about the frightening power of electricity to people sheltering from wi-fi in West Virginia, some people have been scared by the power of new technology. Judges, who have never been comfortable with modernity, merely continue this pattern. In believing Facebook to have occult powers, they treat its misusers far more harshly than they would idiots making comparable remarks in the pub.

Another thing, which applies to the Hari case, is a mix of tribalism and envy. Rightists celebrate the embarrassment of an opponent, whilst Leftists – bizarrely – envy Hari his job.  Both lead to a loss of perspective.

There is, though, something else which links all these cases. They corroborate my fear that we have lost the conservative disposition – the recognition that the crooked timber of humanity does bad and silly things and that we should tolerate this.

In its stead is the belief that people should conform to an ideal of buttoned-up, restrained respectability. So the LPO expects – contrary to centuries of evidence – musical ability to coexist with sensible political opinions; judges expect that Facebook users will not be hotheads; and the Twitterati convinces itself that columnists should somehow have standards higher than those of mere shills.

And when reality hits these silly ideas, the response is an outrage comparable to that of Victorian ladies whose delicate sensibilities have been offended. And in all this, toleration and liberty are lost.

As Richard and Duncan say, the economists provide no strong evidence for this.

Their concerns that the rate is “making us less attractive as a destination for both foreign investment and talented workers” certainly don’t jump out of the data.

Emigration actually fell last year, prime London house prices are rising and in the year after April 2010, there was £40bn of investment into the UK – bang in line with the average for 2001-05*.

There’s another data point which seems to contradict those economists: in the 22 years we had a 40p top tax rate, UK GDP growth averaged just 2%. That compares to the 2.5% growth we had in the previous 22 years – a time when the top tax rate hit 83% on earned income.

Granted, there are countless other things that affect growth. But many of these are things that supporters of low top taxes would expect to have boosted growth after 1988, such as weak trades unions and the absence of the wage and price controls we had in the 70s.

Of course, these facts don’t settle the matter. But they do draw attention to a possibility – that low top tax rates do not obviously promote growth, and might even retard it.

There are three reasons for this:

1. Low taxes have ambiguous effects on labour supply. Yes, they increase the returns to work, thus making work more attractive. But they also increase post-tax incomes, thus making leisure attractive. One effect of the cut in taxes in 1988, for example, was to allow older investment bankers to take early retirement in the 90s and 00s. Empirically, it’s not clear which effect dominates

2. Insofar as low tax rates do encourage greater work effort, this needn’t be productive. Low tax rates encourage greater competition for senior jobs, which might divert effort away from productive labour and towards rent-seeking and office politics and might encourage a “yes-man“ mentality that leads to groupthink and poor decisions. Or they might encourage excessive risk taking and speculation, which ends in a financial crisis.

3. Even if some people do stop productive work as a result of higher taxes, the loss is often second order. Imagine a good CEO were to quit because taxes were too high. You’ll have to imagine it because, AFAIK it hasn‘t actually happened. The firm would hire a replacement. The loss of GDP would be the difference between the CEO’s managerial ability and that of his successor, which will probably be small.

Which brings me to my biggest complaint against those economists. To worry so much about the 50p tax rate at a time when real incomes are being squeezed, unemployment is rising and some benefit claimants face real hardship is to display a rather warped set of priorities.

—
* Yes, FDI is sharply down from 2005-07, but that was the peak of a boom/bubble.

An apparently humanitarian policy by the west has, therefore,  exposed its earlier lack of humanitarianism. Pessimists might add that this could mean that in supporting the overthrow of Gaddafi, the west has helped install a regime which has a grudge against us.

These are examples of what Edward Tenner called the revenge effect - how our actions can rebound to bite us on the arse.

This is pretty well-known for technological changes. For example, the invention of powerful pesticides and antibiotics has led to the evolution of resistant pests and bacteria, or catalytic converters reduced smog but increased emissions of nitrous oxide. But it’s also true of policy generally.

For example:
- US support for the opposition to the Soviet occupation of Afghanistan in the 1980s helped to strengthen Islamic extremism, and thus diminish US security in the long-run.

- Governments’ promise to maintain full employment in the 50s and 60s led to over-investment and wage militancy and hence to inflation and a profit squeeze in the 70s which led in turn to mass unemployment.

- The “great moderation” of the 90s and early 00s encouraged banks to take on more risk, which led to the crisis.

You can add other examples. Note that revenge effects are a subset of unintended consequences. Unintended consequences can be benign or operate in different realms from their cause. Revenge effects are consequences of a policy that serve to undermine the objective of that policy.

Can anything be done to reduce such effects?

One possibility is for policy-makers to recognize that people are not merely passive subjects of policy, pawns to be manipulated. Instead, they have agency of their own, and so respond to the changed incentives created by policy change; the Lucas critique has general applicability.

This, though, is not enough.

Two things suggest revenge effects will often occur. One is simply bounded rationality: we just cannot foresee the consequences of policy.

The other is that revenge effects can take years or even decades to come through. They will therefore appear a long time after policy-makers have left office: I’m thinking here of central bankers as well as politicians. And this means that policy-makers don’t have the incentives to anticipate revenge effects, even if they do have the cognitive resources to do so.

- Economists are worrying the west is heading for Japan’s fate – decades of a near-stagnant economy.
- Some of the ultra-rich in France and the US are calling for higher taxes on themselves.
- Conor Pope points out that the British people just aren’t interested in politics.

To see the connection, contrast Japan on the one hand and Arab states on the other. In some of the latter, economic stagnation has led to violent revolution. Japan, however, has enjoyed relative social stability. Why the difference?

A big factor is equality. Many of the Arab states that have seen revolution or unrest have/had huge inequality, of political power as well as incomes or consumption (pdf).

Japan, by contrast, is more egalitarian; its “lost decades“ have been accompanied by low profits and relatively modest CEO pay, rather than by mass unemployment. This matters. People can tolerate slow growth if they feel “we’re all in it together”, but not if they see others getting very rich whilst the majority suffer. 

It’s in this context that we should understand the rich’s request to pay more tax. This – whether they know it or not – is an attempt to forestall unrest by showing that everyone is suffering. It is, as the French say, a “gesture of national solidarity”. The stress here should be on “gesture”; a levy of 3% on incomes over €500,000 is nugatory from the point of view of orthodox macroeconomics.

The function of the tax and benefit system is not merely to achieve justice or economic efficiency, however we define these. It is also to legitimate the system, to buy off unrest. Bismarck and Roosevelt understood this. But I fear that right libertarians, with their focus on freedom and efficiency alone, tend to forget it.

And this is where our third point – Conor’s claim that the British people are apathetic – enters. How much the rich must pay to buy social peace depends upon how likely a revolt is. In France, where they take to the streets at the drop of a beret, unrest is a perennial threat. In the UK, it is less so. It is therefore no accident that the rich in France are more keen to see higher taxes than their British counterparts.

This also helps explain why al-Assad, Mubarak and Gaddafi have got into trouble. In dictatorships, it’s impossible to distinguish between genuine support for the (rich) rulers and falsified support. As a result, dictators can never judge how much they have to buy off opposition. And their colossal egos lead them to over-estimate their genuine support and thus to under-bribe the public, with the result that they are prone to revolution.

Herein lies one of the virtues of liberal democracy, especially from the point of view of the ruling elite. Insofar as this produces a less distorted image of public opinion than dictatorship, it enables the rulers to better judge by how much to buy off that public.

The presumption is that if only we can get the right policies – the right fiscal policy (whatever it is), banking reform, tax and regulatory policy, whatever – then the economy will grow as normal.

I doubt this, on several grounds:

1. Some of the growth since the 1980s came from a rise in households’ debt-income ratios as these adjusted upwards following the relaxation of credit constraints. Although I’m not as convinced as some that consumers are over-indebted, this process is now over.

2. History shows that recoveries from recessions and financial crises are often weak.

3. Gravity works against the UK. We export more to Spain and Italy than we do to all four BRICs.

4. In one important respect, the economy was running out of oomph even before the crisis. In the five years to the peak in 2007Q4, real business investment grew by 4.4% a year. In the previous 20 years – which encompassed a sharp recession, remember – it averaged 5.3% a year.

5. The factors behind this slowdown haven’t disappeared. These include: a realization (thanks to Nordhaus’s research) that investment in innovations is rarely profitable; the migration of low-wage projects to emerging markets; and a slowdown in the rate of monetizable innovations.

The thing is, I’m not sure that there’s much that policy can do about all this. It’s not good enough to “set the private sector free” because it doesn’t want to invest anyway. And it’s not enough to fix the banking system or set up a state bank, because the problem is a lack of demand for credit, not just supply.

And “confidence”  is a red herring; the problem is that there is a genuine dearth of investment opportunities, not that firms are unwilling to see them.

If I’m right, or even nearly so, there are implications here for both politics and the markets.
For politics, it suggests the task is not (just) to promote growth – which might not be greatly possible – but to adapt to an era of slower growth. For the markets, this suggests a fundamental reason for permanently(ish) lower equity valuations: that future growth will be lower. 

I was disappointed. Instead, Luke says:

We must begin to admit that we were fiscally irresponsible for years, in order to gain the trust of the public again, at least on the economy. Not only is it important in order to win elections – fiscal responsibility is the right thing to do.

Now, I’m no fan of Gordon Brown. But if there’s one thing he shouldn’t apologize for, it’s “fiscal irresponsibility.”

My chart shows the story*.

It shows that the public sector’s financial balance is very largely the mirror image of the corporate sector’s one. This shouldn’t be surprising, because for every borrower there must be a lender, and so across all sectors of the economy (which includes foreigners) net borrowing must be zero.

The fiscal deficits of the mid-00s were, then, counterparts of a corporate surplus. And – I would add – the result of them. Companies’ reluctance to invest meant there was a tendency towards weak economic activity generally, which in turn added to government borrowing.

I say that the causality runs from the corporate surplus to government deficit, rather than vice versa, for two reasons.

First, the 00s were, generally, a time of low and falling real government bond yields. This is the exact opposite of what would have happened if high government borrowing had crowded out corporate spending. It is, though, consistent with a lack of demand to borrow – a lack of investment.

Secondly, the weakness of capital spending was not a UK phenomenon but a global one. Back in 2005 Ben Bernanke was worrying that “many advanced economies…face an apparent dearth of domestic investment opportunities.”

Faced with firms’ reluctance to invest, budget deficits were pretty much inevitable. Had Labour tried to be “fiscally responsible” and cut spending or raised taxes, we’d have just had higher unemployment. Labour, then, shouldn’t apologize for the budget deficits.

Yes, it spent badly. And yes, you could argue that it might have been better to have a mix of tighter fiscal policy and looser monetary policy – though as this would have exacerbated the housing bubble, this is arguable. But the deficits were the least of Labour’s sins.

This said, I’ve nothing against telling lies for political purposes. But I’m not sure a false apology would promote Labour objectives.  In the debased world we live in, “fiscal responsibility” does not mean higher taxes on the rich or a clampdown on the corporate welfare state created by slack procurement policies and addle-brained public-private partnerships.

Instead, it means cuts in jobs and benefits.  “Fiscal responsibility“ then, has the precise opposite to what I’d hoped Luke’s post would be about – it serves to shift the Overton window rightwards.
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* This should be familiar to regular readers. But as Luke doesn’t address it, it’s clearly not familiar enough.

Take the challenge for the right first. Moore suggests that the Left might have been right to regard free markets as a “set up” in which “the rich run a global system that allows them to accumulate capital and pay the lowest possible price for labour.”

Now “set up” is a crass simplification: capitalists do not have such sophisticated conspiratorial powers. But the rough point holds. “Market forces” are a domain in which power relations play out – and a combination of globalization and technical change in recent years has further enhanced the power of capital over labour.

One of the great intellectual failures of classical liberalism has been the inability to see this, a failure to see that power exists in markets, as well as the state.

But there’s a challenge to the left as well. Moore rightly cites two examples of how money and power collaborate against  the interest of ordinary people: the way in which the response to the credit crunch and euro debt crisis entailed a bail out for bankers but austerity and redundancy for workers.

But the thing about these episodes is that the state has been a key player in effecting this redistribution towards the rich. The free market right and the statist left are, then, guilty of similar errors. Just as the right fails to see that “free markets” can be a means whereby capitalists exercise power over workers, so the statist left fails to see that the state can also be such a means.

As Moore concludes:

One must always pray that conservatism will be saved, as has so often been the case in the past, by the stupidity of the Left. The Left’s blind faith in the state makes its remedies worse than useless.

The question for the left, then, is: what can be done to prevent capitalists from capturing the state? It is not good enough merely to win elections on a social democratic platform; New Labour merely reminded us of has the limits of this strategy. Instead, some forms of radical institutional change are needed to disempower both capital and the state.

It would, of course, be absurdly pretentious and hubristic of me to pretend to have answers here – though worker ownership and control (of which there are many types) must, surely, be part of the answer.

-  The IMF has warned (pdf) that the euro area’s debt crisis has “potentially large spillovers” to the rest of the world economy.

- Governments in developed economies next year will engage in the largest concerted fiscal tightening for 30 years. There’s not much chance of this growing our economies.

- Germany’s ZEW indicator has fallen sharply, signalling that the country’s economic growth will slow markedly.

- Yesterday’s results show that in the last nine months, Apple spent more on building up cash and bond holdings than it did on R&D. This is a microcosm of a widespread fact in western economies – that a dearth of investment opportunities is causing firms to prefer to hoard cash, even at nugatory interest rates, than to invest in real activity.

Yes, these are facts about the world economy, not mere local ones. But they matter for us in two ways. The obvious one is that they threaten to depress our exports.

The less obvious is that these global clouds are adding to UK firms’ reasons not to invest. All this matters because, with public and consumer spending going nowhere, exports and investment are our only hopes for growth.

And these hopes are dimming.

Now, granted, there are reasons for optimism; the adverse effect of the parts shortages created by Japan’s earthquake should wane, boosting output in coming months; the recent fall in oil prices has raised real incomes (of firms, not just households); and emerging markets should grow well.

However, the UK is badly placed to benefit from the latter; last year, we exported more to Spain and Italy than we did to the BRIC countries.

The real problem for George Osborne is not that he’s being sucked into the “hackgate” scandal. It’s that it looks increasingly as though now is a bad time to be tightening fiscal policy.

Much of his book is a description of how economic change in the last 30 years – deindustrialisation and the rising power of capital – has destroyed the livings standards and communities of the old working class.

Of course, if your experience of change has been pretty uniformly of change for the worse, then you will come to value tradition, to favour the known over the unknown, and to be sceptical about such change. You will become small-c conservative.

Enter Blue Labour (pdf). This, says Craig Berry, endorses a conservatism of “tradition, defensiveness against undemocratic change, and the valorisation of associative bonds.” As Maurice Glasman puts it:

Democratic politics, according to this view, is the way citizens come together to protect the people and places that they love from danger…
This always generates a rich and complex politics that is as much about cherishing what you know and love as about the pursuit of progressive ends. That is why Labour politics has always been radical and conservative.

From this perspective, Blue Labour is the antithesis of New Labour with its enthusiasm for change, modernization and newness against the “forces of conservatism.“ It also represents a rediscovery of Marx’s insight that capitalism consists of the “constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation.”

But we’ve been here before. For the 160 years between the French Revolution and the Attlee government, there was another class that was the victim of economic change – the landed interest. For this period, it was under threat from the rise of capital and then the rise of an egalitarian movement.

And its response to this was just like Blue Labour’s – to develop a conservative disposition, which valued tradition and was distrusting of rationalist innovation. It was Michael Oakeshott who wrote (pdf) that “change is a threat to identity“ but it might have been Glasman.

This conservatism was profound, coherent and attractive. But it did not prevent the landed class from losing much of its relative wealth and most of its political power and prestige. Of course, the decline of the landed aristocracy was largely a relative phenomenon; even at their low point they remained very rich.

Nevertheless, this raises the question: what power does ideology have in the face of massive social and economic change?

You could argue that conservative ideology did protect the landed class by preventing a violent revolution – though this view rests upon an untestable counterfactual.  But it’s also possible that even the best political ideas are weak in the face of economic power. If so, then Blue Labour is, as Left Futures says, mere “waffle.”

And this raises another question: how should we regard the decline of the working class? Is this due to “superstructural” factors – Thatcherism and the “neoliberal project” – that might be resisted by good political ideas. Or is it instead due to fundamental “base” factors – the increased power of capital unleashed by the emergence of a massive labour supply in emerging markets – that might overwhelm the puny force of ideas.
In this sense, one’s attitude towards Blue Labour should rest, in part at least, upon one‘s attitude towards classical Marxism.

That speech produced what Sue calls a “gasp of horror” from the disabled and the Left generally.

You shouldn’t need me to point out that complaints about benefit abuse is an example of the right’s “small truth, big error” rhetorical trick. But I will:

- According to the last DWP accounts, benefit fraud cost £1bn in 2008-09. That’s less than the cost of the DWP’s own administrative errors, and much less than the amount of benefits that people are entitled to but do not claim.
- From a Keynesian perspective, benefits serve a useful counter-cyclical function in stimulating demand. They are a roundabout way of boosting the profits of Lidl and Primark.
- Insofar as people don’t want to work, it could be that this what Jon Elster called an adaptive preference. Having tried and failed to get work, people reduce their cognitive dissonance by coming not to want work. People aren’t unemployed because they don’t want to work, but instead don’t want to work because they are unemployed.

So, why did Miliband ignore all this and instead take cheap shots at the worst off?
The defence of him is that this is the sort of political posturing a Labour leader must undertake in a world in which floating voters and the gutter press have irrational prejudices. As Septicisle says, “I suspect, and hope, that Miliband doesn’t really believe this.”

Which brings me to Graeme and Xin. As you know, they pretended to get married in order to get Xin a visa, but ended up falling in love.

The message here is that people can – and do – end up becoming the roles they play; this is why arranged marriages often become loving ones, and why economists are more selfish than others.

I fear that this problem might also affect leftist politicians. Yes, they might start out by merely pretending to bash the poor. But as with Graeme and Xin, the pretence ends up becoming reality. Similarly, they might start out by trying merely to play a role by climbing up a hierarchy, but they end up supporting that hierarchy. As I’ve said, office determines character more than character determines office. The result is that leftist politicians so often disappoint their more radical supporters.

It’s in this sense that we should worry about Miliband’s attack upon benefit claimants. Such attacks might start out as mere noble lies intended to pacify the mob – but they don‘t end there.

All of which leads me to endorse a point made by Phil:

The Labour party is and always has been a party within the capitalist system and…trying to change it – rather than bypassing it in an attempt to change society – [is] a waste of effort.

He says “we have to tackle the new inequality in this country between the top and everyone else.” And he complains that “over the last twelve years Chief Executive pay in Britain’s top companies has quadrupled while share prices have remained flat.”

So far, so good. But why has inequality increased? Here, Miliband fails atrociously.

Although the word “responsibility” appears 27 times in his speech, there’s one word he never uses – power.

Rising top pay is attributed not to bosses’ power to extract rent from shareholders and workers, but instead to a lack of “values of responsibility“. Windy moralizing thus displaces any recognition of a key fact about capitalism – that it generates inequalities of power.

Given this, it is no wonder that Miliband’s policy proposals are feeble. He says that “we also need to recognise – as many great companies do—that firms are accountable to their workers as well as their shareholders”.

But the nearest he gets to a concrete measure to achieve this is to propose that an employee sits on remuneration committees. Otherwise, his main idea is for firms to publish the ratios of top to average pay – as if a day of bad headlines will be sufficient to curb bosses’ excesses.

In the same spirit, his complaint about New Labour is about messages and morality: “we did not do enough to change the ethic we inherited from the 1980s” and “we sent out the wrong message to those at the top of society”.

There’s no acknowledgement that New Labour failed to challenge the power of bosses – and, indeed, helped to entrench and legitimate that power insofar as it bought into the ideological fiction of the magic of leadership.

The fact is, though, that bosses pay themselves a fortune not because they are especially bad people, but because they can. Miliband’s failure to see this represents a blindness about the nature of power in capitalist society.

Some new research provides laboratory evidence for this.

Armin Falk and colleagues conducted a simple experiment. They split people into pairs. One person had to do a tedious job, of counting the number of zeros on sheets of numbers, with the pair being paid according to the number of correct answers.

The other was given the role of boss, who did nothing except decide how to allocate the revenue thus generated between himself and the worker.
They found that “workers” who felt they were unfairly paid had significantly lower heart rate variability than those with less sense of unfairness.

This matters, because it’s thought that low HRV can predict heart failure.

Falk and colleagues corroborate this by showing that survey evidence links perceptions of being unfairly paid with subjective assessments of personal health.
What we have here, then, is clean micro-level evidence for a link between a sense of unfairness and physiological symptoms.

This is significant. Wilkinson and Pickett’s evidence – which is based mainly upon cross-country correlations between inequality and life expectancy – has been strongly criticized for relying upon a selective sample of data.

This evidence, though, seems more robust – it's less vulnerable to the omitted variables bias if nothing else; it‘s reasonable to suppose that if something as trivial as a lab experiment can provoke changes in HRV, then the real world of longer-lasting senses of grievance might also do so, and probably to a greater extent.

There is, though, a slight caveat here. Falk and colleagues are measuring subjective senses of fairness. This means that a man who gets a £1m bonus but who thinks he deserves a £2m one will – ceteris paribus – have lower HRV than a minimum wage worker who feels fairly treated. I‘m not sure, though, that this undermines the basic point, which is that inequality really is bad for health.

It reports how corporate giant Glencore's profits arise, in part from "exposing thousands of Zambians to dangerous levels of sulphur dioxide emissions.

The firms is also accused of profiting from inside information obtained from an EU bureaucrat and using stolen land in Colombia. 

These are all examples of how income and wealth inequality – Glemcore CEO Ivan Glasenberg is a multi-billionaire* – arises in part from inequalities of power: Zambian and Bolivian villagers have no power to insist that the costs of pollution are internalized; Colombian peasants had no power to protect their property rights, and so on.

These, of course, are not isolated examples. As Rick says, "All pay is, ultimately, a function of power."

Some of this power is innocuous: Wayne Rooney earns a fortune because his rare skills give him the power to demand a high wage. But other forms of power are more questionable.

For example:

- top bankers are rich because they have the power to privatise gains but socialise losses.

- technical change has weakened the power of unskilled workers whilst raising that of bosses.

- profits and profit-related incomes have risen at the expense of wages because capitalists have power conferred on them by mass unemployment and declining militancy.

- workers have low pay because they lack bargaining power whilst capitalists can extract favours from government because they do have such power, as they can threaten to relocate.

And herein lies one of the blindspots of the free market right. It seems unable to see that in actually-existing markets, there is power and unfreedom; some of the more tedious passages of Hayek's Constitution of Liberty are where he tries to redefine coercion as something that hardly happens in a market economy.

If the Left is sometimes guilty of caricaturing the rich as evil exploiters, the right has its own caricature of them as heroic Howard Roark types. They are not.

However, it's not just the right that is at fault here. So is the non-Marxist left. It sometimes gives the impression that more progressive taxes are a sufficient response to inequality. They are not.

Such taxes fall as heavily upon the minority of the rich who are genuine public benefactors – entrepreneurs and talented sportsmen and artists – as it does upon exploiters and rent-seekers.They do not address inequalities of power.

Worse still, it's not clear that the soft left even has much idea here. It's not obvious whether the state is part of the solution or part of the problem. Those allegations against Glencore, for example, could all be seen as examples not (just) of corporate malfeasance but of state failure.

By this I mean not monetarism but rather the idea that if the power of the working class could be broken, then corporate profitability would be restored.

Alan Budd, a Treasury official in the early 80s, has described this as the “nightmare” interpretation.

It’s not. It’s the generous one. I say so for two reasons. One is that if Thatcherism equals monetarism then it must be judged a failure. The thinking behind monetarism was that the announcement of monetary targets would lead to a costless disinflation as inflation expectations fell. But in fact, inflation only fell in 1982 because of mass unemployment.

And monetary growth overshot its targets.

Secondly, the restoration of corporate profitability was not (just) an end in itself. The thinking was that higher profits would lead to higher investment and thus faster growth and higher employment, either by providing the funds for capital spending or by improving confidence.

And for a while, this worked. In the late 80s higher profits were associated with an investment – and indeed employment – boom. Thatcher’s class war was, then, a success.

But only for a short while. My chart shows that over the last 15 years or so, investment has fallen as a share of GDP even though profit rates have increased.
Thatcherism – understood as the idea that a quiescent working class and high profit rates would lead to good investment and high economic growth – is therefore dead.

Viewed in this context, calls from Duncan Weldon and Brendan Barber for wage-led growth make some sense. After all, if bashing the working class hasn’t raised capital spending and economic growth, maybe enriching it will.

The logic here dates back at least to E.F.Schmacher’s 1944 paper, “Public finance – its relation to full employment”. He argued that redistribution towards workers would raise aggregate demand – because workers have a higher propensity to consume than capitalists.

Although capitalists would suffer low profit margins, high aggregate demand would ensure a high output-capital ratio and thus high profit rates.

Such a strategy is, under some circumstances, feasible.

But is it feasible here and now? I’m not sure, for three reasons:
1. What policy levers – other than bog-standard fiscal expansion – are there that could transfer incomes to the low-paid?

2. Even if such policies are implemented, would aggregate demand rise? If workers use their higher incomes to save more or pay off debt, aggregate demand will not rise.

3. It’s possible that the squeeze on profit margins will reduce capitalists’ confidence and willingness to invest. The experience of the last few years tells us that high profit margins are not  sufficient for high investment – but they might be necessary for it.

Roughly speaking, one can think of justice in terms of either a process or an outcome. From the perspective of process, justice has not been done; bin Laden did not get a fair trial*. But from the perspective of outcome, it might well have been; if anyone deserves to die for their crimes, it is bin Laden**.

But here’s the thing. In the economic sphere, the contrast between justice as outcome and justice as process is correlated with the left-right split. Many – not all – on the left think that inequality is too high, regardless of how it came about.

This is an outcome-based view. But many on the right take a process-based view. This is summed up by Nozick’s famous dictum “whatever arises by just means is itself just.”  And it was also expressed by Hayek:

The manner in which the benefits and burdens are apportioned by the market mechanism would in many instances have to be regarded as very unjust if it were the result of a deliberate allocation to particular people. But this is not the case. Those shares are the outcome of a process the effect of which on particular people was neither intended nor foreseen by anyone. (Law, Legislation and Liberty vol II p64)

Given this left-right split between process and outcome conceptions of justice, one would expect it to the right that is expressing misgivings about bin Laden’s killing, whilst the left would be more relaxed. Bin Laden has been denied due process, but has gotten outcome-based justice.

But this doesn’t seem to be the case. It seems to be some on the right who are rejoicing - though not all – whilst some (though not all) on the left have qualms.

So, why is there this unexpected pattern? One possibility is that although we use the same word “justice” when speaking of economic and criminal matters, it in fact has different meanings in the two contexts (But why?) Another possibility is that our intuitions about justice are just confused.

Or perhaps justice isn’t the issue at all. 

—
* I’m ignoring the question – which some think relevant - of whether bin Laden was assassinated or killed in ordinary military action.

** You can, quite consistently, say that some people deserve to die for their crimes whilst at the same time oppose the death penalty on the grounds, for example, that the process is unfair.