Sunday , April 11 2021
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Articles by chris

The need for institutional brains

18 hours ago

“The trouble with you, son” said Bill Shankly to a young player “is that your brains are all in your head.” I was reminded of this line from the great man by reading Ian Leslie’s Conflicted, on how to have more productive arguments.
His advice is good: define exactly what the disagreement is about; make your interlocutor feel good and secure; acknowledge your own uncertainties; be less tribal; and so on.
In the heat of argument and when the teacups are flying, however, it is easy to forget these principles. We then have what the ancient Greeks called the problem of akrasia, of lack of self-control. Just because we know the right thing to do does not ensure that we’ll actually do it; even self-confessed “moderates” are apt to forget their own advice on how to argue well.
This is what

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Complicated motives

15 days ago

This week Boris Johnson claimed that the roll-out of the vaccine was the result of capitalism and greed; Goldman Sachs workers complained about long hours; and I got my jab. There’s a link here. All three episodes shed light on the role of motivations.
Johnson is of course wrong. The Oxford vaccine was discovered by academics and is being produced by AstraZeneca at cost, and the Biontech vaccine was discovered by people who were already billionaires. It’s nearer the truth to say that the vaccines’ discovers were motivated less by greed and more by intellectual curiosity. And this, of course, is only one of countless motives, which include pride, ego, loyalty to colleagues, force of habit, fear of failure, peer pressure, altruism, and so on.
And these non-financial motives are powerful

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The paradox of financial innovation

24 days ago

Back in 1964 Kenneth Arrow showed that, in theory, competitive markets could produce optimal allocations as long as there were state-contingent securities which allowed people to trade risks and so insure against them. The problem is, he said, that: 

Many of the economic institutions which would be needed to carry out the competitive allocation in the case of uncertainty are in fact lacking.

Almost thirty years later, Robert Shiller showed that this remained the case. “The insurance industry has not devised policies that insure against many…causes of fluctuations in incomes” he wrote in Macro Markets in 1993.
He proposed creating GDP-linked securities which people who were optimistic about economic growth could buy whilst those worried about recession could go short. This would

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On Hans in Luck effects

March 10, 2021

In the Brothers Grimm fairy tale, Hans in Luck, the protagonist starts with a lump of gold but ends up with nothing after a number of trades each of which seems reasonable on its own. This is a metaphor for a lot of behaviour in politics and economics.
The point is that you cannot always judge an outcome by the individual actions that lead to it. Each action Hans takes is understandable in itself but their cumulative effect is to impoverish him*. Which is an example of the Sorites paradox. If you take a grain of wheat you’ve got next to nothing but if you do so often enough you’ll eventually have a silo full of the stuff.
The fund management business operates on this principle. A modest annual management charge looks like a single grain of wheat, not worth noticing. But if you take it

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The left after the Budget

March 5, 2021

Labour’s reaction to this week’s Budget has been widely criticised. James Meadway accuses it of not offering an adequate alternative. He’s right. But there are in fact profound flaws in the Budget which Labour should be pointing out.
One is the failure to address acute poverty. Sunak is planning to cut universal credit payments later this year. That, says (pdf) the Resolution Foundation, will be “disastrous for family incomes” and “bad macroeconomics” as it is taking cash out of the economy at a time when unemployment is likely to be high. This isn’t an isolated error. In delaying the extension to the furlough scheme last autumn Sunak needlessly destroyed jobs. His failure to ensure adequate sick pay has not only impoverished people but jeopardised their health by compelling

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A defence of maths in economics

March 2, 2021

What’s the point of maths in economics? I ask because of this:

Much of the mathematics used in economics is simply performance. Despite the sometimes undue attention given to mathematical methods, the actual mathematics economists use often contradicts their economic conclusions. The mathematics in economics is simply a tool to keep out outsiders: economists themselves do not take it that seriously.

I suspect this is sometimes (often?) true. But I want to give a counter-example. It comes from a source some of you don’t like, John Cochrane. It’s this equation (pdf) for predicting long-run returns on assets relative to returns on cash:

ER = RA x SDa x SDbg x corr (a, bg)

Where RA is a coefficient of risk aversion, SDa is the standard deviation of asset returns, SDbg is the

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Noise, interests & democracy

February 25, 2021

Tim Fenton writes here about Tracy Ann Oberman’s “faux victimhood”. I don’t want to get into this particular case, but the concept of faux victimhood is surely a useful one. And it highlights a problem with actually-existing liberal democracy.
The problem is that what gets heard is not necessarily a guide to what really matters.
People with a sense of faux victimhood make a lot of noise. The old saying is true: “when you’re accustomed to privilege, equality feels like oppression." This is why some white people feel victimized by Black Lives Matter, or why some men feel victimized by feminists. And it’s what gives us complaints about people being “cancelled” when in fact their only fate is to be reduced to writing for the Telegraph. It’s the stone in the show that gets noticed. And gets

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Why Labour should talk about productivity

February 19, 2021

If you buy a goldfish, you shouldn’t be disappointed that it doesn’t catch mice. It is therefore pointless to criticize Starmer’s speech yesterday for being insufficiently critical of capitalism. There is however one curious but important omission from his speech – one which is odd for a technocratic social democrat.
I’m referring to the lack of any discussion of, or remedy for, our productivity problem.
Just before the pandemic, real wages were actually lower than they were in 2007. The average worker has gone 13 years without a pay rise. This is not because capitalists have taken a bigger share of the pie: the share of non-financial profits in GDP was much the same at the start of 2020 as it was in the mid-00s. Instead, it’s because productivity has stagnated: in the 12 years to the

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It’s not the 90s any more

February 17, 2021

Sir Keir Starmer wants to party like it’s 1999. That seems to be his motive for seeking the advice of Peter Mandelson. There is, however, a big problem with this. It’s not the 1990s any more. There have been huge socio-economic changes since then, which require very different policy responses.
One of these is that the economy is now stagnating. In the 20 years to May 1997 labour productivity grew by an average of 2.3 per cent. In the 12 years before the pandemic, however, it grew by only 0.2 per cent per year. Back in the 90s, therefore, it was reasonable to believe that the economy would grow well if governments could only provide the right framework such as stable macroeconomic policy. Today, though, we know that whilst policy stability might be necessary, it is not sufficient.

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Choosing charlatans

February 13, 2021

People choose to listen to charlatans even when it is against their interest to do so. That’s the message of some recent experiments.
Aristotelis Boukouras and colleagues got subjects to take a multiple choice exam during which they could choose to take help from one of two computerized advisors. One of these was an expert, who gave the answers that a panel of economists would. The other gave the answers that had been most popular with other people who had taken the test. They found that most people chose to take advice from the latter – even after they had been told that it was only giving the popular answers and even when they were paid for getting answers right. What’s more, even when people had the option of switching to the expert when they could see that the populist advisor was

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Labour’s patriotism problem

February 6, 2021

Patriotism might be the last refuge of the scoundrel but it is the first refuge for a politician wanting to avoid the reality of the need for radical change. That seem to be the message of the call by some “branding agency” that Labour should appear more patriotic.
Which poses a question. How is it that Labour’s patriotism has come into doubt? For reasonable definitions, it is Labour that is the patriotic party more than the Tories.
Let’s define patriotism as love of one’s country, and let’s define love as wanting what is best for someone whilst valuing them as themselves, and the country as its inhabitants, past present and future.
By these definitions, Labour is patriotic. It wants what’s best for people. Of course voters rejected Labour’s conception of what’s best for them, but

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Hedge fund humbugs

February 3, 2021

At the end of the Wizard of Oz the wizard is revealed not to be somebody of superhuman powers but “just a common man”, “a humbug”. Hedge fund managers are like that. Whereas their enemies, such as some of the posters on Wall Street Bets and indeed many on the left generally, sometimes pretend that they are evil geniuses the truth is much more mundane.
 Data from Hedge Fund Research tell us this. They show that the average hedge fund has made 5.6% a year in the last five years. That might sound OK. But you could have made twice as much by just leaving your money in a fund that tracks MSCI’s world index; over 10 per cent in gold; and 3.8% in US Treasuries. Which means reasonably balanced funds which any investor could create for themselves have done as well as the hedge fund; in recent

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On attitudes to risk

January 31, 2021

There’s a nice juxtaposition between two of the biggest stories of recent days: retail investors piling into Game Stop; and the reluctance of ethnic minorities to take Covid vaccines and the slowness of the European Medicines Agency to approve them.
The thing is that these are all stories about extreme attitudes to risk. Small investors buying a dodgy company looks like risk-loving behaviour, whilst refusing to approve or take the vaccine looks like high risk aversion.
What explains such a big contrast?
Conventional neoclassical economics has no answer. It sees them as mere differences in tastes, which it regards as exogenous.
This won’t do. It’s just shrugging your shoulders. Not that this is the only problem they have. As Thaler and Rabin have shown, the standard approach to

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The death of economic policy

January 29, 2021

One of the great and under-appreciated changes of recent years has been the disappearance of serious economic debate from Westminster politics.
For decades the big political divide was about economics: the causes and cures for the UK’s relative economic decline; the precise mix of state and private sector; what to do about industrial relations; monetarism vs Keynesianism; how to achieve macroeconomic stability; how to redefine social democracy in the 90s; and austerity after 2010.
Today, though, mainline politics is largely innocent of economics. The Tories, Stian Westlake has said, “seem to have stopped talking and thinking about economics.” We see this, for example, in the decline of John Redwood from being a serious Thatcherite to a sub-North Korean driveller about juche. More

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Endogenous policy

January 24, 2021

In a justly criticised piece in the FT, Morgan Stanley’s Ruchir Sharma says:

My team also found a statistically significant link between periods of rising government debt and slow GDP growth. These studies cannot show causation, but the consistent link between growing deficits and weakening growth is unlikely to be coincidence. 

True, it’s unlikely to be coincidence. What is likely, though, is that the causality runs from a weak economy to rising government debt. Slow growth causes rising government debt not just because it depresses tax revenues and raises welfare payments but also because it causes governments to loosen policy.
Sharma’s failure to give due weight to this obvious possibility is an egregious example of a widespread error – an inability to appreciate that policy is

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Character, context and work

January 20, 2021

It is fitting that Donald Trump should leave office in the same week that Phil Spector died, because both remind us that the quality of a man’s character is not the same as the quality of his work.
As a human being, Mr Trump recalls the words of the great Fred Thursday: he’s worth nowt a pound, and shit’s tuppence. As a president, however, his performance wasn’t quite as disastrous as his character. He didn’t start any new wars (though he did continue old ones); broke the confines of fiscal orthodoxy; (marginally) reformed the awful criminal justice system; and showed an awareness that millions of Americans were let down and alienated from conventional politics. Of course, there’s huge downsides too – on immigration policy and climate change not to mention the mishandling of Covid

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Debates, fake and genuine

January 17, 2021

There might not be any general purpose experts, but there are general purposes idiots. That’s one inference from Ipso’s ruling that one of Toby Young’s Covid denialism columns was “significantly misleading.”
In fact, though, this episode tells us something more general about the nature of capitalist power.
The thing is that Young is not an isolated fool. There is a small industry of Covid-deniers, as Neil O’Brien (one of the few Tory MPs brave enough to make a pubic display of intelligence) reminds us. Which poses the question: why do people with no knowledge of medicine or epidemiology feel the need to jump in with silly takes?
It’s because they have an incentive to do so: there’s a demand for gobshites. And it doesn’t come only from trash media such as talkRADIO or the Telegraph. It

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On forecasting

January 13, 2021

What’s the point of forecasting? This is the question posed for me by Michael Story’s account of superforecasters’ predictions for the course of the pandemic.
Take this:

Our central estimate that the death toll will peak at 1,278 with an 80% confidence interval of 892 to 5,750.

So what? It’s not all clear how this affects the debate about how tight the lockdown should be. That depends upon how the virus is transmitted; the trade-off between mental and physical health; how far the economic effects of the lockdown can be mitigated; and so on. Yes, that claim that the daily death toll could be 5750 is alarming, and speaks to the need for a tight lockdown. But you don’t need any precise number to make that case. The mere chance of a high death toll does as well.
Similarly the

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On fantasy politics

January 9, 2021

One of the great political divisions today is between those who acknowledge reality and those whose politics derive solely from the voices in their head.
After Trumpites stormed Congress earlier this week Ian Austin tweeted that “I don’t believe the hard left would have accepted an election defeat” – ignoring the fact that only 13 months ago the left did indeed accept Labour’s defeat peacefully.
And then Matt Goodwin tweeted:

Johnson is socially liberal at heart, Trump is authoritarian. Johnson is instinctive free trader, Trump is protectionist. Johnson is pro-migration at heart, Trump is xenophobe.

Again, this is untethered to reality. As mayor of London, Johnson banned alcohol on the tube and tried to use water cannon on protestors; he was a member of the government that pursued

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On bad government

January 7, 2021

There’s general agreement that the UK government has handled the pandemic badly in many (though not all) respects. Why?
It’s tempting to claim that ten years of Tory austerity has reduced the effectiveness of government and diminished NHS capacity: the UK has fewer doctors, hospital beds and ICU spaces than comparable countries.
Such a claim, however, runs into a problem. By some measures, the UK was actually reasonably well-prepared for the pandemic. In October 2019 the Global Heath Security Index ranked (pdf) the UK second in the world in its preparedness for the pandemic (just behind the US!). And the World Bank’s measure of government effectiveness placed the UK alongside the US and Taiwan – one of whom has handled the pandemic well and the other badly – and far above Vietnam,

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What’s given, what’s not?

January 4, 2021

There is much talk of how Covid is putting pressure on the NHS. Such talk, however, often misses an important fact – that although NHS capacity is more or less fixed in the short-term, it is certainly not in the long-run. And past political choices have limited this capacity. For example, the UK has 2.8 doctors for every 1000 people compared to an average of three in OECD countries generally and more than four in Germany, Italy or Switzerland. We have only 2.46 hospital beds per 1000 people, compared to 8.0 in Germany or 5.9 in France. And we have fewer intensive care spaces than the average developed economy.
The NHS is under pressure because of past political decisions to limit its capacity. Failing to point this out exonerates what should not be exonerated – namely, a decade of

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Alienation & doublethink

December 16, 2020

“The right side lost, but the wrong side won”. I was reminded of John Le Carre’s assessment of the Cold War by a recent exchange in which Allison Pearson claimed that she knew “hardly anyone” who knew somebody who’d had Covid only to immediately say that her whole family had had it.
This seems nonsensical. But it’s not. It reminds me of what happened in the former USSR, where the conflict between the reality of day-to-day life and the imperative to conform to ideology led to an Orwellian doublethink. As Timur Kuran has written:

The individual citizen’s mind was divided into two layers, one “pragmatic” and the other “ideological”. The former layer contained the practical information necessary to get things done, derived mostly from experience…The latter consisted of abstract

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Restraining capital

December 13, 2020

Martin Wolf argues that Milton Friedman was wrong to claim that the only social responsibility of business is to increase profits. I agree with him, but I fear he under-rates two important facts: historical context and class power.
Friedman thought (pdf) that profit maximization promoted the social good only under two conditions.
One, stressed by Luigi Zingales, is that markets must be competitive. Where this is the case, corporations have little power to egregiously exploit consumers or workers. In fact, they must maximize profits or go bust – and going bust is rarely in the public interest.
The second is that profit-seeking is only socially desirable so long as the firm “stays within the rules of the game, which is to say, engages in open and free competition without deception or

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News versus emergence

December 5, 2020

From an economist’s point of view, there are two big facts about the public finances. Fact one is that the government is now being paid to borrow. 20-year gilt yields are minus 2.5% which means that for every £100 the government borrows it must repay only £60 over the next 20 years. Fact two is that record government borrowing is, by definition, the counterpart of the fact that the household savings ratio hit a record high in Q2.
Many political journalists, however, underweight these facts. Laura Kuenssberg talks of the nation’s credit card being maxxed out, whilst Matthew Parris rages at those of us who have the temerity to criticise her.
Which poses the question: why is there just a gulf between political journalists and economists here?
I suggest it’s because political journalists

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Maxxed out?

November 26, 2020

Laura Kuenssberg said yesterday:

“This is the credit card, the national mortgage, everything absolutely maxxed out. Enormous levels of the country basically being in the red.”

This is obviously the most abject drivel. (Hint: how many credit card companies will pay you to borrow when you are at your credit limit?) What interests me, though, is: how can any sentient being utter something so stupid?
Some of you will blame dishonesty and partisanship. But I suspect some more interesting, and insidious, errors are at work.
One is something I’ve complained about before. The BBC is insufficiently aware of emergence – the fact that many social phenomena are the product of human action but not deliberate design.
The public finances are one such phenomenon. It’s true that government

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Full employment, capitalism & regress

November 18, 2020

The Guardian is reinventing the wheel. Its leader yesterday said:

Nobody but the government can take responsibility for maintaining the total level of spending in the economy at a level that keeps the country as close to full employment as possible.

Like all the best ideas, this is not original. In fact, it’s as new as powdered eggs or Woolton pie. It echoes this from William Beveridge in 1944 (pdf):

It must be a function of the State in future to ensure adequate total outlay and by consequence to protect its citizens against mass unemployment. (Full Employment in a Free Society, p29)

Which poses the question: why has Beveridge’s thought been so forgotten that it must now be rediscovered?
The answer is that, by the mid-70s, full employment was causing inflation, industrial

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Our priorities

November 13, 2020

One of the dafter genres of political writing is the offering of unsolicited advice to leaders. Nevertheless, I’d like to suggest what I would do if I were Sir Keir Starmer. You can think of this as advice if you’d like, but I’d rather regard it as a way of contrasting two different types of politics.
What I’d do is to greatly beef up the party’s National Policy Forum, giving it more resources, a much higher profile and emphasising that it is open to all. We need ongoing informal and widespread public inquiries in which experts, the public and interest groups are engaged. These should be exercises in deliberative democracy in which devices such as citizens’ juries are combined with academic research.
Connecting with grassroots is not an alternative to technocracy. The two are

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Farage’s dangerous appeal

November 4, 2020

Nigel Farage’s effort to rebrand the Brexit party as an anti-lockdown faction poses the question: what’s the link between being pro-Brexit and anti-lockdown?
It might seem there’s none. Sure, anti-lockdowners are proclaiming the virtues of freedom. But the anti-migrant sentiment Farage stirred up during the Brexit referendum is the antithesis of libertarianism. If we put it nicely, Reform UK is an unstable coalition between cultural conservatives and libertarians. Less nicely, it’s just another toxic grift.
Perhaps, though, there is a common theme between hostility to migrants and the lockdown. It lies in something Richard Sennett wrote fifty years ago in The Uses of Disorder. Social life, he said, is a process of awkward encounters not just with other people but with a reality that is

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“A great deal of ruin”

October 30, 2020

“There is a great deal of ruin in a nation” wrote Adam Smith in 1777, suggesting (possibly) that countries can cope with poor policies. These are wise words, in many contexts.
Take for example, the NAO’s claim that there is “likely to be considerable amounts of fraud and error” in the government’s furlough scheme and the Resolution Foundation’s estimate that the government has paid around £1.3bn to self-employed workers who in fact suffered no loss of income. No doubt this is sub-optimal, an element of ruin. But this is not in itself a decisive objection to the schemes. It was essential that people hit by the lockdown got quick support. And as the old saying goes: “Good, fast, cheap: choose two.” In choosing “fast”, the government sacrificed a little “cheap”. It incurred some ruin. But

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The economic base of culture wars

October 24, 2020

The long boom of the post-war period gave us trades union militancy, “women’s lib”, the Black Panthers, the gay rights movement and the legalization of abortion and homosexuality. Our recent stagnation has given us Trump and Brexit – and of course the economic crisis of the 1930s yielded much worse.
Which is another way of saying what Ben Friedman wrote in The Moral Consequences of Economic Growth – that economic growth gives us liberalism and demands for equality whilst stagnation and regress give us political reaction.
This, I fear, helps explain something that is otherwise odd – that the Tory party has pretty much renounced economics. As Stian Westlake has said, “the Tories, both in government and more generally, seem to have stopped talking and thinking about economics.” Evidence

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