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Articles by chris

Hoist by his own petard

7 days ago

There is genuine anger at the behaviour of Dominic Cummings not just among the usual suspects but among some Tory MPs such as Roger Gale and Douglas Ross. It’s worth exploring why this should be the case.
It’s because of cultural evolution. Early humans worked out (or stumbled upon) an important fact, that we often thrive best when we cooperate. As Axelrod and Hamilton showed in a classic paper (pdf):

Cooperation based on reciprocity can get started in a predominantly noncooperative world, can thrive in a variegated environment, and can defend itself once fully established.

Or as Ken Binmore put it in Natural Justice:

We don’t need to pretend that we are all Dr Jekylls in order to explain how we manage to get on with each other fairly well most of the time. Even a society of Mr

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Austerity, power & BBC bias

10 days ago

George Osborne gave a revealing interview (1’52" in) to Radio 4 yesterday – revealing, not untypically for the BBC, for what it did not say.
Osborne said that sometime in the "next two or three years":

Markets, and indeed the country, will look to governments to set out plans for how they are going to eventually bring balance back to the public finances.

The first thing that was not said here – and certainly not by his fawning interviewer – is that the more educated parts of the country will be looking for no such thing. Intelligent economists (as well as me) agree that fiscal austerity will be counterproductive. With demand for gilts strong – even at negative yields – government borrowing is sustainable for now. And the best way to get it down is simply to ensure a strong economy.

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What we don’t see

14 days ago

Daniel Hannan recently tweeted:

Around 80% of us say we support the lockdown. But, looking around me, I’d say that no more than 20% are still observing it rigorously. Is this a case of what economists call “revealed preference” – or do people want everyone else to apply stricter rules than they do themselves?

It might well be neither. Instead, it’s an example of the sampling bias. The people we see are, by definition, those who are outdoors and thus who are disproportionately likely to be breaching the lockdown. What Mr Hannan isn’t seeing are the countless thousands of us staying indoors and observing the lockdown. He’s failing to appreciate that what he sees is a biased sample of what there is.
In fairness to him, this is a common error, as experiments by Benjamin Enke have

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How to be wrong

19 days ago

“The tradition of all dead generations weighs like a nightmare on the brains of the living.” I was reminded of these words of Marx by the Telegraph’s report that some Treasury officials are pushing for tax rises and spending cuts in part because there is a “plausible” risk of a sovereign debt crisis.
Of course, Simon is right: there is no such risk as the Bank of England can, in extremis, buy up gilts. Certainly, financial markets aren’t worried; the latest gilt auction saw record demand. And it would be foolish to begin austerity before the recovery is well-established.
Which only poses the question: why do intelligent people believe such silly things?
Part of the answer lies in selection effects. The interests of capital constrain policy options, and the rise of financial/rentier

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Technocrats & class

27 days ago

Are centrists even more utopian than socialists? I’m prompted to ask by a passage at the end of Anne Case and Angus Deaton’s Deaths of Despair. They write:

We believe that capitalism is an immensely powerful force for progress and for good, but it needs to serve people and not have people serve it. Capitalism needs to be better monitored and regulated, not to be replaced by some fantastical socialist utopia.

This comes after 260 pages in which they document how American capitalism has recently been a force not for progress and for good, but for mass social murder. They describe how the collapse of demand for unskilled labour has caused “the loss of meaning, of dignity, of pride, and of self-respect” and so led to tens of thousands of needless deaths of despair among the white

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Avoidable unemployment

April 29, 2020

We Marxists are often accused of being ideologues. This is silly. Everybody has an ideology, in the sense of a set of preconceptions about how the world works. The difference between we Marxists and others is that we are sufficiently self-aware to know this. By contrast, some of the most dangerous ideologies are those which their believers take for granted despite being wrong. This, I suspect, helps explain what is otherwise a paradox.
The paradox is that most voters approve of the government’s handling of the coronavirus crisis despite the fact that Universal Credit claims show that unemployment is soaring, especially perhaps among freelancers: the ONS expects (pdf) it to rise by two million, to over 10 per cent of the workforce.
This rise, though, is largely preventable. In

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Risk in capitalism

April 24, 2020

One thing this crisis is demonstrating is that in modern capitalism it is workers and small businesses that bear risk to a greater extent that does larger capital.
As Paul Evans points out, some of the biggest losers are freelance workers who are ineligible for furlough schemes. And Charles Gascon at the St Louis Fed adds that it is low-paid workers who are most at risk of losing their jobs:

The occupations at the highest risk of unemployment also tend to be lower-paid occupations. The average annual earnings of the low-risk occupations is $64,600, about 75% higher than earnings in the high-risk occupations, at $36,600. This indicates the economic burden from this health crisis will most directly affect those workers who are likely in the most vulnerable financial situation.

The UK

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When rules don’t apply

April 16, 2020

It’s a cliché that this is a crisis. But what exactly is a crisis? I like Richard Bookstaber’s idea – that it is a time when normal economic rules don’t apply.
For example, in normal times investors can reasonably think about valuations and corporate earnings. But in crises what matters instead is risk and liquidity. In normal times, negative feedback loops dominate: cheap assets will rise in price. But in crises, there’s a heightened danger of positive feedback whereby selling begets more selling.
In the 2008 crisis, for example, some opposed bank bailouts fearing a moral hazard problem. But they were applying normal times thinking. What mattered much more was keeping the financial system alive.
We’re seeing the same thing now. This crisis means that some normal ideas don’t apply.

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What centre?

April 12, 2020

The election of Keir Starmer as Labour leader has caused some leftists to fear that the party will move to the centre. Such fears, though, miss the point – that there is no centre.
By this I don’t just mean that there are no votes there, as the LibDems and CUK (or whatever they called themselves) discovered in December. I also mean that there are no ideas there either. One feature of CUK was its utter lack of economic thinking and obliviousness to the fact that the economy has changed a lot since the 90s and so requires new policies. Almost the only substantive thought in its launch document was the notion that government has a “responsibility to ensure the sound stewardship of taxpayer’s money” – an idea that has aged as well as Rachel Reeves desire to be tough on the unemployed.

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“We’ve established that, madam”

April 7, 2020

George Bernard Shaw, it is said, once met an actress and asked her: “would you sleep with me for a million pounds?” “I would think about it” she replied. “Would you sleep with me for a pound?” he then asked. “No” she replied. “What sort of woman do you think I am?” He replied: “We’ve established that, madam. Now we are haggling about the price.”
We should thing about policies the same way. Sometimes, it is worth establishing the principle, and then haggle about magnitudes and timing.
For example, New Labour introduced the minimum wage at a derisorily low rate in 1999. But having established the principle of a minimum it was easy to raise it, and so the UK’s minimum is now comparable to those of many other nations. Similarly, Thatcher’s privatizations began as a small-scale attempt to

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Inequality, morals & Marxism

April 2, 2020

One thing this crisis is demonstrating is that there are plenty of bad employers: the Guardian and Labour List both have lists of them. Another is that, as Sarah O’Connor says, “the people we need the most are often the ones we value the least.” As Paulo dos Santos says, society “grossly undervalues” care work and other jobs essential to fighting the pandemic.
Both these facts show the need for a Marxian perspective.
First, we must ask: why are care workers and others so underpaid? It is certainly not because they lack moral desert. Nor is it because they lack skills: caring demands immense “soft skills” such as patience, discipline and an ability to get on with people as well as physical ones. From a purely technical point of view – that is, one divorced from socio-economic factors –

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The Tories’ dilemma

March 29, 2020

Matthew Parris in the Times raises a challenge for Tories – but not, perhaps, the one he thinks he does.
The government’s willingness to borrow to get through the crisis, he says, undermines the traditional “Conservative case for prudence in public spending.” And if there are not the limits the Tories thought on public spending, then:

The Tories had better brace themselves serious questions about how we can do it for a virus but not to save a shipyard, or the planet from climate change. Or double the future capacity of our hospitals, or legal aid limits, or nurses and carers’ wages.

I think Tories have – and always have had – two answers here. But they contradict each other.
First, let’s dispose of bad reasons for “prudence.”
In part, it is a legacy from different times. In the

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Another wasted crisis?

March 27, 2020

In the immediate aftermath of 9/11 there was much talk that the real heroes were firemen rather than hedge fund managers. That talk soon disappeared, and Americans’ indulgence of plutocrats continued as normal. This warns us about clapping for carers: it might prove to be a brief emotional spasm with no lasting social effect.
Yes, crises can be turning points. But those of the 1970s and 2008 tell us that, for the left, they can also be wasted opportunities.
Here are five uncertainties about how the legacy of this one.
Will the crisis shift politics in a more technocratic direction?
It has taught us that we need more spare capacity in the NHS and that the government has prioritized static “efficiency” too much at the expense of resilience. It’s also taught us that the we need to build a

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Against “aggregate demand”

March 20, 2020

One legacy of the 2008 crisis has been that firms have built up big cash piles. Bank of England data show that non-financial firms now have over £425bn of sterling deposits. That’s equivalent to over two months of GDP and over 12 months of profits. You might think this is a great comfort, as it suggests that companies can respond to their loss of revenues not just by borrowing but by simply running down these cash piles: isn’t that what they are for?
But, but, but. There’s a huge problem here. The firms suffering the biggest drops in cashflow might well not be those with the cash mountains. To the extent that the two groups differ, there will be genuine distress.
Which alerts us to a fact overlooked by basic macroeconomics. The economy does not comprise a “representative agent” firm

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Against one-trick ponies

March 18, 2020

Those of you who believe that bourgeois economics is mere ideology have had two data points of corroboration recently.
First, Stephen Moore, Art Laffer and Steve Forbes said: "don’t expand welfare and other income redistribution benefits like paid leave and unemployment benefits that will inhibit growth and discourage work."
This contain layers of nonsense. For one thing, during the current public health crisis we want to discourage people from working so they don’t infect others. But even in normal times. Their statement would be wrong. In one survey of the evidence Abhijit Banerjee and Esther Duflo conclude that “there is no evidence that cash transfers make people work less.” (Good Economics for Hard Times, p289). One reason for this is suggested by the fact that the unemployed are

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Winning the argument?

March 12, 2020

The reaction of many on the left to the big spending rises in yesterday’s Budget is that they show that Labour has “won the argument” for higher public spending. This is partly true.
On current plans (pdf), total public spending will rise to 40.8% of GDP by 2024-25*. That’s a bigger share than Labour spent between 1997 and 2008. The Tories’ justification for this is correct: low borrowing costs make it sensible to borrow to support economic growth and improve our infrastructure. But this is exactly what most on the left – as well as mainstream macroeconomists – were saying years ago. In this sense, the left has won.
In another sense, though, this is awkward for the left. It tells us that the Tories can increase spending at least as much as Labour can. One reason for this is the old

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On (un)predictability

March 10, 2020

It’s a cliché that stock markets have been in panic mode recently. But why? The answer is not as obvious as you might think. And the issue matters not just for equity investors but for everybody interested in social science.
My chart shows the point. It shows that the All-share index has been largely predictable simply by the dividend yield. Since 1985 the correlation between the yield and subsequent five-year changes in the index has been a humungous 0.8. With the yield now over 5%, history suggests we have the best buying opportunity since 2009.
But, but, but. If investors had believed that the dividend predicts returns, we would never have seen any significant sell-offs of the sort we’ve seen lately. Any incipient rise in the yield would have triggered buying with the result that

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On centrist decline

March 7, 2020

One of the BBC’s most successful comedy shows of recent years is Radio 5’s 6-0-6, wherein actors pretending to be football fans phone in to spout gibberish about the game. A recurring trope is the need for “passion”: managers are expected to be passionate, and teams lose because they “didn’t want it enough.”
I was reminded of this by a tweet from Andrew Adonis, that Labour must “get real about winning” – as if the party would win elections if only they wanted it more.
This is yet another example of one of the great political changes of my lifetime – the utter intellectual collapse of the Labour right.
Think back to the mid-90s. Blairism – lest we forget – was at the time a genuine intellectual project, an attempt to accommodate (mild) social democracy to the economic realities of the

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On capitalist stagnation

March 4, 2020

One of the problems with even the best journalism is that it reports day-to-day events without putting them into context, thereby telling us about the weather but not the climate. So it is with the news that ten-year Treasury yields have hit a record low.
Although the latest move is due to increased risk aversion triggered by the coronavirus this merely continues a long-term trend. Nominal yields have been trending down since the 80s, and real yields probably since it 90s.
Why? Standard explanations talk of the shortage of safe assets and global savings glut. Useful as they are, such explanations miss something important. This is that basic theory (and common sense) tells us that there should be a link between yields on financial assets and those on real ones, so low yields on bonds

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Incentivized stupidity

February 26, 2020

Two good things I’ve read this morning raise an under-appreciated point – that people can be incentivized to behave in ways that seem stupid.
First, there’s Tom Chivers’ review of Mervyn King’s and John Kay’s Radical Uncertainty. He says it is “completely terrifying” that they thought their book needed to be written, because economists and finance types shouldn’t need to be told that “models are not 100% precise representations of reality.”
Of course, he’s right. Models are unreliable and the historic data that goes into them might not be a guide to the future – points well made by Richard Bookstaber in The End of Theory and by Nicola Gennaioli and Andrei Shleifer in A Crisis of Beliefs. But investment bankers have indeed made precisely this error, most famously when Goldman Sachs’

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Immigrants as scapegoats

February 21, 2020

Several observers believe that insofar as the government’s points-based immigration system reduces immigration (which as Jonathan says is “far from certain”), it will do real economic harm. Ian Dunt says it “is a bitterly stupid and small-hearted thing to do.” And Anthony Painter writes:

The scale of the change and its suddenness risk very significant negative impacts. Businesses and public services could struggle to fill vacancies, seasonal businesses could especially suffer, and costs could escalate impacting business and public service viability.

These harms arise because, to the extent that the new policy is based upon economics at all, it rests upon a fallacy – the idea that, as Iain Duncan Smith told The World at One (20’58” in), immigration has a “very negative effect on

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Barriers to cognitive diversity

February 18, 2020

Cognitive diversity is a good thing. We need it if we are to avoid the pitfalls of groupthink, and because – as Hayek said – adequate knowledge of a complex world cannot be known to a single mind. I therefore had sympathy with Dominic Cummings call for “weirdos and misfits” to join Number 10.
And yet one of the first such hires has ended in failure with Andrew Sabisky’s departure following a row about his support for eugenics.
Which poses a question. Why is it so hard to achieve cognitive diversity?
In Cummings’ case one problem is simply the poverty of thought on the right. Intelligent thinking does not come from unaided individuals, but from traditions. And these traditions have withered on the right: free market economics, for example, has pretty much died. Without such moorings,

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When reputation misleads

February 14, 2020

Rebecca Long Bailey inadvertently posed a good question yesterday, when she tweeted:

Rishi Sunak the new Chancellor is a former Goldman Sachs banker who has backed anti trade union regulations; tax cuts for big business; opposing tax avoidance clampdown; cutting tax for wealthiest. The mask is slipping already, this isn’t a different kind of Tory government.

This raises the same question that is being begged by the Labour leadership contest: to what extent does a person’s past behaviour and beliefs predict their future behaviour?
We have countless examples of it not doing so. All of you will have worked with somebody who arrived at your firm with a glittering CV but who turned out to be a dunderhead, and conversely with somebody of no great reputation who turned out to be

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Thatcherism’s death

February 12, 2020

Thatcherism is dead. Boris Johnson’s love of big infrastructure projects conflicts with her preference for markets and caution about spending public money. His pulling out of the single market contrasts with her hailing it as “a fantastic prospect for our industry and commerce.” His increase in bus subsidies conflicts with her antipathy to public transport. (She never actually said that any man on a bus after the age of 30 should consider himself a failure, but the fact that it is so widely believed that she did so reveals something about her). And, of course, whereas Thatcher chose free market ideology over the wishes of northern (now post-) industrial towns, Johnson is making the opposite choice.
John Harris has quoted a senior minister as saying that “some very prominent strands of

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The dangers in balance

February 7, 2020

Would balanced and impartial news and current affairs journalism be dangerous, even if it were done with maximum integrity and competence? I ask because of a recent paper by Benjamin Enke and Thomas Graeber.
We’ve known for a long time that, in the words of Glaeser and Sunstein, balanced news can produced unbalanced views. In a famous experiment (pdf) in 1979, for example, Charles Lord, Lee Ross and Mark Lepper showed people mixed reports on the effects of the death penalty and found that people who supported capital punishment became stronger in their support of it after reading them, whilst opponents of the death penalty also became more dogmatic in their opposition. Balance, then, can lead to polarization.
This mechanism, however, works on partisans – those who fancy themselves

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In praise of trade frictions

February 5, 2020

Are restrictions on free trade a better idea than generally thought? I ask because, despite his lauding of it, it is reported that Johnson will impose customs checks upon goods imported from the EU. This lends credence to the estimate (pdf) by The UK in a Changing Europe that Johnson’s plan might eventually cut UK GDP by over six per cent.
But might this estimate miss an important mechanism and thus over-state the costs of us leaving the single market?
What follows cuts against all my instincts in favour of free trade and EU membership. My gut tells me to agree with Martin Wolf’s claim that Johnson’s proposals mean shooting ourselves in both feet. But we should always question our beliefs. And there is, I suspect, more to be said in favour of trade frictions than we have heard so far.

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On socially influenced preferences

February 2, 2020

Some ideas are both radical and conservative at the same time. This is a thought triggered by reading Robert Frank’s latest book, Under the Influence.
“Context shapes our choices to a far greater extent than many people realize” he writes. “In virtually every domain, evidence suggests that our consumption patterns tend to mirror those of others in our social circle.” He shows that behaviours such as smoking, becoming obese, committing crime (pdf) or even how many children we have are all heavily shaped by what our peers do.
This, he says, means that much of what we do imposes externalities upon others. The biggest externality of smoking, he says, is not so much the passive smoke that smokers impose upon others but the fact that their smoking encourages some others to take up the

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The bias against social science

January 29, 2020

We need the social sciences, but the media does not provide them. I say this because of a recent tweet by Frances Coppola:

If there is one thing we should learn from Auschwitz, it is that atrocities are committed by ordinary, nice people with the full support of other ordinary, nice people.

This contains an unpleasant truth, captured by Hannah Arendt’s phrase “the banality of evil”: at least some of the perpetrators of the greatest crime in history were just very ordinary men.
But this is an extreme manifestation of a general truth, which is the essence of social science – that social events are not the simple product of individual character. History, said Adam Ferguson, “is the result of human action, not of human design.” His contemporary Adam Smith thought that the invisible

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We don’t want economic growth

January 26, 2020

In launching a new 50p coin to mark Brexit, Sajid Javid seems to be interpreting the role of Chancellor in the same spirit that Trigger regarded Del Boy’s request to talk about money: “I saw one of those old £5 notes the other day.” We might have hoped that his energies would be better directed towards improving the UK’s lamentable productivity performance.
In fact, though, we should not snark. Mr Javid has grasped an important point not understood by leftists and economists (two groups which increasingly overlap) – that the public do not want economic growth.
We know this because they have consistently voted against it. The party of austerity won a majority in 2015; the public voted for Brexit in 2016; and they supported Johnson’s hardline Brexit deal last month even though it will

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The interest rate puzzle

January 23, 2020

Simon points to the widespread (but not universal) consensus among economists that house prices are high because (pdf) interest rates are low. For me, this raises a puzzle.
On the one hand, this seems not just true, but trivially true. Housing is an asset. And the price of an asset should be equal to the present value of its future cashflows: rent if you’re a landlord or the rent saved if you’re an owner-occupier. Lower interest rates raise the discounted present value of future cashflows and so raise asset prices. Which is consistent with the fact that house price to income ratios have trended up as real interest rates have trended down.
This is just common sense.
But, but, but. There is one significant asset class that has not benefited from the downtrend in real interest rates –

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