Chris Dillow's Blog, page 20

Profits before jobs

We live in a capitalist economy. It's this trivial fact that must determine how we view the Chancellor's so-called plan for jobs.

The point is that much of what he's doing is a lot like corporate welfare. For example:

 - The Job Retention Bonus - ��1000 to an employer for every employee who remains continuously employed to January - will hand out cash to firms that would have retained staff anyway. At the margin, it will encourage firms to retain employees insofar as it reduces the cost of doing so. But the margin might not be very extensive.

 - The Kickstart scheme pays bosses the cost of hiring onto a minimum wage job a young worker who is currently on Universal Credit. This risks encouraging firms to hire such workers, at the expense of those who are not on UC - such as those leaving school or college. And again, it give money to firms who would have done this anyway. Again, it's a handout.

 - Paying employers to take on apprenticeships and trainees encourages them to do so at the margin, but again also pays some for doing what they would have done anyway.

 - Some people are objecting that the VAT cut for the hospitality trade will not be passed onto customers. But this is the point: it will raise profit margins instead.

 - The Eat Out to Help Out scheme will boost demand for restaurants. Yes, insofar as it does so it will encourage diners and staff to take risks with their health. But as Marx wrote, "Capital is reckless of the health or length of life of the labourer."

The point here is that capitalists only hire or retain workers if it is profitable to do so. Wage subsidies increase those profits. In this sense, the fact that so much of today's plan is corporate welfare is a feature, not a bug.

From this perspective, complaining about the deadweight cost of the plan - that it will pay firms to do what they'd have done anyway - misses the point. For one thing, there's a knowledge problem here: the government cannot distinguish between firms that need incentivizing to retain or workers and those who don't. Given that fine targeting is impossible, some deadweight cost is inevitable.

And, in fact, desirable. Whereas those of us who have kept our jobs have seen our finances improve - the Bank of England reports a ��41bn rise in households bank deposits in the last two months - the lockdown has been terrible for many firms' cashflow.

Sure, in normal times it would be reasonable to complain that such costs distort allocative efficiency. Right now, though, a big Okun gap is more important than a lot of Harberger triangles. These are not normal times, and Sunak woudn't be introducing such measures if they were.

As it is, Sunak at least has the wit to see that in a capitalist economy it is imperative to maintain profits. This outweighs any consideration of allocative efficiency.

This also helps explain why support for freelancers - and indeed the arts until very recently - has been so patchy and late. A loss of freelancers is not an existential threat to capitalism but a slump in profitability is.

In theory, there is an alternative here. A Job Guarantee would protect and create jobs without corporate welfare. And it could, in theory, do so by providing jobs that are socially useful but not highly valued by capital, such as care work or improving local environments. This, though,was not an option for Sunak. We lack the policy infrastructure to identify good jobs; this task can only be done locally, and yet local government has been almost destroyed.

In the real world of capitalism, then, corporate welfare and cronyism are the only options - for now.

Limits of evidence-based policy

There is something paradoxical about Michael Gove's recent speech calling for government to be "rigorous and fearless in its evaluation of policy and projects." It's that his praise for evidence-based policy has come in a year when we've seen that policy should sometimes not be based on rigorous evidence.

The best time to have imposed the lockdown was as soon as possible after a few cases had been discovered. But this would have been a hard sell. Not just the grifter media but the public would have asked: why are we losing our freedoms to forestall so small a threat? But of course, by the time there was strong evidence that a lockdown was necessary, it was too late.

Tens of thousands of us face the problem of having to act on insufficient evidence. The equity investor who waits for strong evidence that a share is under-priced will buy when it no longer is. Loads of hedge funds exemplify Gove's ideal: they employ lots of data scientists working with strong incentives and clear metrics. But their results are generally mediocre. Similarly, the entrepreneur who waits for proof that there's a market for a product will find that his rivals have captured it. The factory manager who waits for good evidence that a machine needs replacing will see it blow up. And so on.

The same applies to macroeconomic policy. The Bank of England did not cut Bank rate to 05% and introduce Qe until March 2009 - 12 months after the recession had begun. Waiting for strong evidence of a recession before loosening policy means loosening too late. This is why I favour strong automatic stabilizers.

In these cases, the demand for rigorous evidence is an example of what Jon Elster has called hyper-rationality:

Sometimes people ignore the costs of decision-making. They search for the solution that would have been best if found instantaneously and costlessly, ignoring the fact that the search itself has costs that may detract from optimality. (Solomonic Judgements, p260)

There are other problems. It's sometimes hard to extrapolate the results of the RCTs lauded by Gove. They "prove", for example, that parachutes don't save lives. As Cartwright and Deaton say:

Demonstrating that a treatment works in one situation is exceedingly weak evidence that it will work in the same way elsewhere; this is the ���transportation��� problem.

And where they do yield results, these can be hard to interpret. The average treatment effect hides important heterogeneity of effects on individuals, for example.

There's also the problem that past evidence is no guide to the future. We have evidence from the 50s and 60s that very high top tax rates are entirely consistent with strong GDP growth. But is this evidence useful? Mr Gove and his friends would probably say not. And perhaps for a good reason: high taxes are sustainable if those paying them regard them as a price worth paying to live in a civilized society, but resist them if they regard them as infringements of their rights. Policies effects depend upon beliefs. And these change.

Indeed, they sometimes change because of policy. One effect of the expansion of universities in the 90s has been to create a large cohort of metropolitan liberals. How do we factor this into cost-benefit analyses?

There are two very important categories of cases where past evidence doesn't help us predict the future.

One is the problem of radical uncertainty: we can never be 100% confident that past statistical relationships will continue to hold. The other is that of reflexivity. Beliefs can change the world. For example, McLean and Pontiff and Cotter & McGeever have shown that when strong evidence emerges of stock market anomalies, these get competed away. In economic policy, the counterpart to this is Goodhart's law: "any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes." You can't solve these problems with big data: the datasets used to find stock market anomalies are huge, but their findings less so .

All of which leads us to three paradoxes.

Paradox one is that, as Abby Innes points out, there is a precedent for Gove's belief that data science will deliver better government. The old Soviet Union had a "fantasy of ���optimal government'" in which "cyberneticians would depict the governmental system as an object of technical control, with inputs, outputs, and feedback loops: the language of machines." This is evoked in Francis Spufford's wonderful Red Plenty. In this sense, Gove's role model is not so much FDR as Leonid Kantorovich. This project, however, failed in part for the reason Hayek pointed out - that governments just cannot know enough about complex systems.

Paradox two, as Phil points out, is that Gove's vision is unconservative. It is one in which:

the centrality of government is overweening and checks on the executive's remit - other state institutions, watchdog quangos, parliamentary scrutiny and media accountability - are brushed aside by authoritarian, action-oriented government.

Which leads to paradox three. One the question: is data-driven effective government likely, it is the conservative Gove here who is taking the side of the old USSR and this Marxist who is one the side of Hayek. 

What football teaches us

I was a little perplexed by Tom Chivers' nice defence of his love of football. For me, any defence can only be a rationalization: my love of the game long preceded the acquisition of whatever feeble reason I possess.

Nevertheless, there is a lot that Tom has left out. Albert Camus famously said that "what I know most surely about morality and the duty of man I owe to sport and learned it in the Racing Universitaire Algerios." He might have added, though, that it teaches us so much about society too.

One thing it teaches us is the importance of emergence and complexity. Danny Murphy exaggerates when he says that Man City's guard of honour for Liverpool will leave Kevin De Bruyne "clapping for some players who can���t even lace his boots." But there's a point there. A great team does not necessarily comprise the best players, but rather ones that function best as a collective. The Leicester City team of 2016 had few stars, but it won the title. And the legendary Arsenal back four comprised players who (Adams apart) were somewhat limited.

Conversely, great players don't make great teams. A few years ago, England fielded a "golden generation" - Lampard, Scholes, Rooney, Cole, Gerrard etc - but to no great success.

You can't read the properties of a collective simply from its components. The same applies to societies. Marx wrote that the unhappy condition of workers ���does not, indeed, depend on the good or ill will of the individual capitalist��� but was rather the product of impersonal forces. The same is true of gender and racial inequalities. Injustice is not only a matter of bad people doing bad things.

One feature of complex systems is that history matters: they are as they are because of what happened in the past. The same is true of football. There is a type of player that England does not produce: the player such as Xavi, Pirlo or Modric who can control the pace of the game by retaining possession. The nearest we've had in recent decades is Paul Scholes, but putting him into an England team was like giving a computer to a monkey.

The problem here is history. Working class Englishmen have for decades been expected to work hard, know their place and do as they were told. That's an environment which crushes the intelligence that a type of footballer needs. (We might add that there are countless great foreign players which have no equivalent in England: Cantona, Bergkamp, Zola, Ozil and so on.)

Another implication of emergence is that matches matter. Success isn't a matter of finding the best people, but the right people. Olivier Giroud is widely criticized, but he made Arsenal a better team than they are now, and helped France win a world cup. He's not the best striker, but for two different teams he was the right one. And football is full of managers who did well at one club but failed at another - because they were sometimes a good match for the club, sometimes not. The same is true in business: whether a manager succeeds or fails depends not just on his individual ability but upon how good a match (pdf) he is for the job.

Which helps explain something else. Football exemplifies William Goldman's saying: nobody knows anything. Claudio Ranieri's appointment as Leicester manager was greeted with derision, and Arsene Wenger's at Arsenal with "Arsene who?". Both were great successes. Conversely, much-lauded signings often fail - such as many expensive Chelsea strikers.

Complexity produces unpredictability. Which is why football pundits are like the men who told Elvis to go back to truck-driving or the Beatles that they had no future in showbiz: "you win nothing with kids."

It's not just complexity that so often causes pundits and fans to go wrong. Something else does - cognitive biases. Radio 5 Live's 6-0-6 is the strongest corroboration of Daniel Kahneman you'll ever hear. There are gazillions of these: the hot-hand fallacy (pdf) ("he's on form"): the consistency illusion ("I always knew he was rubbish"): over-reaction ("sack the manager"):hindsight bias ("he should have passed it instead"); misperceiving randomness (across ten cupties in which a team has a 10% chance of winning, the chance of giant-killing in one will be 2-1 on): the outcome bias (if a team wins, however flukily, we infer that it played OK); and so on.

These might seem harmless mistakes when confined to talking about football. But they have analogues in expensive mistakes. The hot-hand fallacy leads investors to pile into unit trusts with good recent performance (pdf) - which costs them money as the performance proves unsustainable. Over-reaction leads them to buy stocks at the top of the market and sell at the bottom. Failing to see that low probabilities compound to give us a high one helps explain why so many projects run over time and budget. And so on.

In all these ways, football really is more than just a game. It teaches us how societies and businesses operate, and how to think clearly about them. You can learn much more from the back pages of a newspaper than you'll learn from the front pages.

The economic base of realignment

One finding of Labour's review of its election defeat is that politics is "organised more around cultural values than an economic 'left-right' divide."

This is the theme of Stephen Davies new book, The Economics and Politics of Brexit, in which he argues that we've seen a realignment of politics: "the main division in society has switched from being primarily about economics to being about culture and identity" - between cosmopolitans and nationalists. The Tories won December's general election, he says, because they were quicker than Labour to see this division, and succeeded in uniting the nationalists whilst the cosmopolitans were divided. We can read Sir Keir's "friends of the forces" plan as an attempt to appeal to the nationalists*.

Which in turn echoes a point made by Matthew Goodwin and colleagues:

2019 is not a critical election but a continuation of longer���term trends of dealignment and realignment in British politics...Class realignment and Brexit realignment...go hand in hand and appear to have implanted a new, potent cultural divide at the heart of British politics.

All this poses a big question, however: why now?

There's nothing new about a mix of social conservatism and anti-EU feeling, as anybody who remembers trash newspapers in the 80s will recall. The Sun's headline "Up Yours Delors" appeared in 1990. But in the 1997, 2001 and 2005 elections voters decisively rejected the party obsessed with Europe in favour of a socially liberalish cosmopolitan technocrat party, and it was only after the they stopped "banging on about Europe" that the Tories returned to power.

So what changed? The question here isn't merely about what people believe. It's about why social conservatism and anti-EU feelings have become more salient and mobilized.

It could be that less has changed than we might imagine. Lewis Baston argues that many "red wall" seats (a phrase unheard before 2019) are "in fact nothing more than traditional marginal seats."

But there's something else - the years of economic stagnation caused by the financial crisis and austerity. As Stephen says, political divisions "reflect and derive from real conflicts of interest and material circumstance and everyday lived experience". We have abundant evidence - such as from Thiemo Fetzmer and Nick Crafts - that austerity led to Brexit. The Resolution Foundation has shown that "Blue Wall" seats have suffered even worse economic conditions than the rest of the country since 2010.

There are at least two mechanisms here. One is simply that hard economic times create a sense of decline and hence a nostalgia for better times: the Churchill myth, and celebrations of VE day are probably stronger now than in the 90s. The other is that - as Ben Friedman has demonstrated - they generate intolerance and fear of outsiders.

On top of this, there is the fact that the right (and centre) have no answer to capitalist stagnation. In the 80s, Thatcherites could plausibly tell a large client base "vote for us and you'll get rich". Today's Tories can't say that. As Dave Cohen says, "culture wars are all they���ve got." It's a cliche to complain that the BBC gave Farage the oxygen of publicity, but less often remarked that he was filling a vacuum. Marx predicted that falling profits would lead to "credit frauds and stock swindles". It's also led to analogues of these in politics - the rise of cranks and grifters promoting culture wars.

All this gives me a beef on two fronts. On the one hand, I'm unhappy that too many polscis are committing an error that neoclassical economists also make: they take preferences as data without inquiring of their origin. But on the other hand, it refutes the optimism of some earlier Marxists who thought that class consciousness would grow endogenously. It doesn't. It needs cultivating. And we can't do this merely by calling for more anger.

It also gives me two worries. One is that this new alignment is hostile for both socialists and free marketers, as it gives us big government without the changes we need in economic institutions. Worse still, having profited so much from the new political alignment, the Tories will open up new fronts in the culture wars. And too many leftists will play into their hands.

* He's not trying to appeal to actual servicemen (who'd like better pay, no stupid wars and a leader who doesn't support the IRA) but those who fantasise that they were in the forces. 

Ideology vs the triple lock

Centrists want to scrap the pensions triple lock. Matthew Parris says it is now "impossible to defend" and that the old should pay the costs of the lockdown. Also in the Times, Oliver Kamm writes:

People of working age in their 30s, 40s and even 50s are disadvantaged by the way our economy favours pensioners. The cause of intergenerational equity demands some redress for this imbalance.

And Polly Toynbee says it is "rational and inevitable" that the triple lock should go.

I disagree. As I've said before, the triple lock is a thoroughly good idea.

For one thing, its main beneficiaries are NOT today's pensioners but today's young people. An 80-something will get only a few years of real-terms pension increases. But younger people can look forward to decades of such rises. Because your wealth is the present value of future incomes, this benefits them now. Scrapping the triple lock will therefore impoverish young people more than old ones.

If we do this, young people will have to make more provision for their own retirement. But this is both difficult and expensive. Difficult, because we face radical uncertainty about future investment returns, and so we don't know how much to save - and as Janan Ganesh wisely points out, it is as dangerous to save too much as too little. And expensive, because fund managers charge a fortune for the privilege of mismanaging our money. It's more efficient for the state to provide pensions. Not only are the administration costs smaller, but - more importantly - the state is better at bearing risk than the individual.

All this should be obvious. Why, then, do so many people not get it?

I'll concede that there is an issue here: if, as the OBR predicts, average earnings will rise 18% next year as hours return to normal, a rigid adherence to the triple lock would require a huge increase in pensions. But this only tells us that blindly following simple rules can sometimes be silly. It doesn't undermine the principle of the triple lock.

Instead, hostility to it is, I suspect, founded upon some ideological biases: when intelligent people are obviously wrong, I look to ideology*.

One bias here is what I've called the cost bias - the tendency to describe as costs what are in fact only transfers. Oliver says the triple lock "will add ��15bn a year to the cost of the state pension by 2060-61". But it's not just a cost, but a benefit. And who'll be getting it? People who are today only around 30 years old.

In some quarters, this bias is magnified by a childish error - the tendency to regard the government's finances as akin to a household's. We don't, however, need MMT to see this is nonsense in this case.

For one thing, the size of this transfer will not be especially large. The OBR estimates that by then state pensions will be equivalent to just under 8% of GDP. That's less than many European countries devote to pensions now.

And for another, people will have to get pensions somehow. Any pension, state or private, must be paid for by working people - if not by taxes to pay the state pension, then by dividends to pay private pensions**. If future workers cannot afford to pay taxes, they'll be unable to pay dividends either. If you're worried by the burden future pensions will impose upon future workers. the solution is to raise productivity, not to scrap the triple lock.

Secondly, there's a tendency to overlook the inefficiencies of the private sector, to fail to see that it does some jobs more expensively than the public sector. Yes Polly Toynbee is well aware of the inequalities generated by the private sector, but I fear she under-appreciates its brute inefficiency.

Thirdly, there's hostility to the principle of universal benefits. Polly says the triple lock is "an extravagant way to steer more towards the better off." But if pensioners' total incomes are too high, the solution is income tax rather than use means-testing with its large deadweight costs.

I fear, though, there there might be another error at work - then tendency to see people merely as members of demographic groups rather than as individuals. Thinking in terms of "young" and "old" pits one generation against another. But this is silly. Young people are individuals with hopes and expectations. The state pension is one of these hopes. In raising it in real terms over time, it thus benefits the young. And because people under-estimate the power of compounding in so many contexts, they under-estimate the benefit to the young of real-terms pension increases - just as they under-estimate just how expensive pension fund charges compound to become. 

So who, then, would benefit from scrapping the triple lock? The answer is pension fund managers. who'll get higher fees as young people have to make more private provision for their old age. What we have here, then, is an example of how centrists - maybe inadvertently at least in this case - help to sustain extractive capitalism.

Equally inadvertently, in doing so they are in fact punishing young people. In this sense, Larkin was right: "They fuck you up, your mum and dad. They may not mean to, but they do."

* I'm not attributing all these biases to all of Kamm, Toynbee and Parris - merely noting that they are common ones.

** There is a caveat here. Private pension providers can invest overseas, and so extract dividends from foreign workers. In principle, though, the state can do this too with a sovereign wealth fund.

Lockdown threats to capital

Many economists agree that a premature lifting of the lockdown will not necessarily boost the economy greatly. As both Simon and Jo say, if people fear catching the virus they'll avoid shops and restaurants even if they are open.

Which poses the question. Why, then, are so many on the right so keen to lift the lockdown? In part, the answer might lie in a useful concept of Michal Kalecki's (pdf) - their "class instinct." This tells them that a prolonged lockdown - especially combined with inadequate protection for workers and businesses - threatens the longer-term health of capital. The sooner it is lifted the smaller these threats are.

I'm thinking here of several mechanisms, each of which might well be stronger the longer the lockdown goes on.

First, the experience of huge economic change as a result of the lockdown reduces some of the barriers to other types of change:the status quo bias ain't what it used to be. Prince Charles thus has a point when he says the pandemic gives us an opportunity to reset the economy onto a greener path.

It's a point some capitalists have heeded. BP recently cut its long-term forecasts for oil prices because "the aftermath of the pandemic will accelerate the pace of transition to a lower carbon economy."

Such a transition isn't just a problem for BP, however. Companies embody what Peter Rousseau and Boyan Jovanovic have called vintages of organizational capital. Which mean it is often hard to teach old dogs new tricks. Instead, new economies are often founded upon new firms, The green revolution, therefore, might well see new firms supplant existing ones just as the IT revolution did. This might be good for "the economy" but it's not for many of today's capitalists.

Worse still, from their point of view, is that such a transformation might also restrict the role of capital. Michael Roberts says it requires more spending on public health and education - which means a less commodified economy.

There's another way in which the lockdown might accelerate decommodification. Many of us have learned that we can be as happy sitting outside with friends as we are shopping or going to restaurants. If we retain these habits, there'll be fewer ways for capital to make a profit.

And then there's the fact that insofar as the lockdown represents a huge increase in state intervention, it shifts the Overton window in favour of further interventions. Of course, many such interventions work to the benefit of capital. But not all. As Martin Wolf says:

My guess is that Facebook, Google, Amazon and the like will be brought under political control: states do not like such concentrations of private power.

There's a further legacy of the lockdown for capitalism. To see it, remember a basic national accounts identity. GDP is equal to the sum of consumer spending (C), investment (I), government spending (G) and net exports (NX). It is also equal to the sum of wages (W), profits (P), taxes on production (T) and other incomes such as those of the self-employed and rent (O). Rearranging these gives us an identity for profits:

P = (C-W) + (I-O) + (G-T) + NX.

This equation tells us that we could see profits surge (from a low base) in the next few months as high government borrowing coexists with high C - W as pent-up demand is released by shops reopening; those queues outside Primark and Selfridges were good news for capital.

But what about the longer-term? Here there are huge dangers for capital. One is that governments might want to cut G - T, perhaps by raising taxes rather than cutting spending: the deficit myth dies hard. A second is that investment might stay low because the lockdown has not just created spare capacity but also had a scarring effect upon animal spirits.

And then there's C - W. Those workers who are now borrowing to see themselves through a loss of jobs and hours will eventually have to pay down that debt. That will reduce C relative to W. If others of us have gotten into the habit of spending less, the hit to profits will be even greater.

Now, there is a big caveat here. A prolonged lockdown - especially when combined with the government's inadequate protections for jobs and businesses - could cause a wave of capital scrapping which would boost aggregate profit rates over the longer time not only by reducing the denominator but by increasing the monopoly and monopsony power of the surviving firms.

Many capitalists, though. don't want to bet on being among the survivors. Hence their hostility to a lockdown.

Of course, this tension between the lockdown and the loner-term health of capitalism could be mitigated by sensible policy, such as greater support for jobs and business (which would mitigate the scarring effects and private debt overhang) and a rejection of post-lockdown austerity.

But we live in the real world of bad policy. Capitalists have therefore understandable reasons for wanting the lockdown lifted soon. Yes, this risks public health. But as the man said, "capital is reckless of the health or length of life of the labourer, unless under compulsion from society."

Why so little anger?

Richard Murphy asks why there is not more anger at the government's mishandling of the pandemic and predicts increased anger as unemployment rises.

I agree that people should be angry: the UK's excess deaths per million exceed those of comparable countries and the government has not done enough to protect workers. But as recent history teaches us, the fact that something should happen doesn't mean it will. There are reasons for the lack of anger.

One, I suspect, is that in crises people tend to want to pull together and not to rock the boat.

There are two other things that come from my day job that might be relevant here, however.

The first is suggested by research by Christoph Merkle. He found that UK shareholders just after the 2008 financial crisis were much less upset by their losses than they expected to be. One reason for this was that they realized they were all in the same boat - and a troubled shared is a trouble halved. Another, though, is that we quickly become accustomed to bad times. We adapt. That lessens anger.

Secondly, a common failing of retail investors is to hold onto losing stocks too long in the hope they'll come good: this is called the disposition effect.This is part of a wider habit, known as choice-supportive bias or post-purchase rationalization. We hate admitting that we were wrong. To avoid this, we invent reasons why the dud stock we bought will come good, or why the car we bought is in fact a great one.

Likewise, voters don't like admitting, even to themselves that they were wrong. And if we don't want to believe something, we easily find reasons not to. As Leon Festinger showed, people can stick to their beliefs even after they have been falsified.

In a sense, though, Tory voters have not been proved wrong. Nobody ever seriously pretended Johnson was competent or diligent. Voters didn't want a technocrat, and they haven't got one. People voted for him merely because he'd Get Brexit Done and was not an anti-semite. And he's fulfilled expectations. He's the Ronseal Prime Minister, doing exactly what it said on the tin.

We typically feel anger not so much as mere incompetence but at injustice or treachery: there's a reason why the hatemonger Farage wants to depict any slight concession to reality as "betrayal". From the point of view of his supporters, however, Johnson has not betrayed anyone. So there's less reason for anger.

And then there's simple tribalism. I might moan endlessly about the Arsenal. But when confronted with a Sp*d abusing them, I leap to their defence. Similarly, Tories faced with "woke" lefties attacking Johnson will support him. In this context, Starmer might well be wise to soft-pedal his criticisms of Johnson. Doing so provides space for the Tories and media to peel off from him. It deters them from circling the wagons.

There are, then, good reasons why much of the public has been passive in the face of the government's incompetence.

Whether this will continue, however, is impossible to say. The recent surge in protests by the Black Lives Matter movement shows us that anger can simmer beneath the surface largely unnoticed by the media and politicians until a trigger causes it to explode. Threshold models of the sort described (pdf) by Mark Granovetter might be relevant here. Some things can be explained but not predicted.

How the world really is, and how we react to it, are two very different matters.

Origins of a disaster

The FT reports that Johnson " is now convinced that the economy is facing a cliff-edge unless it starts to reopen." But as Simon says:

[This] is a tragic error, not just because it will lead to yet more deaths but also because it will delay any economic recovery...The idea that there is a trade-off between protecting the economy and protecting people���s health is not only wrong, it is also dangerous.

But why do so many ministers and their supporters believe otherwise? I suspect it's because of several errors.

One is the failure to sufficiently protect jobs and incomes. Yes, the furlough scheme is good. But it doesn't go far enough. As Eric says, the government could have returned last year's tax payments to companies and households - which would have done a lot to support the self-employed many of whom are suffering a lot. It could also have suspended loan repayments and rents.

Sure, the government could not prevent unemployment rising, if only because the lockdown is inhibiting job creation and hence preventing new entrants to the labour market from finding work. But it could have done much more to support incomes and hence given people greater security.

Of course, the lockdown means output must fall and hence incomes must fall. But in principle, all of this hit should have fallen upon the public finances rather than people. Or, to put it another way, the income hit should be smoothed out over decades and spread over all of us and future generations rather than be suffered by millions today.

In this sense, there has been a policy failure. Yes, the media would have us believe that Rishi Sunak is having a good crisis. But this is because it focuses far too much upon presentation and not enough upon policy. The standards for Tory politicians have fallen so low that being able to read a speech fluently suffices to make one a future PM.

But why was the policy response inadequate? Partly, it's because, as Eric says, "the failure of contingency-planning for a recession is unacceptable." This, I suspect, is a symptom of a widespread error - the neglect of tail risk, and failure to prepare for it.

It also reflects a continued fetishization of the public finances and aversion to borrowing. Of course, you don't need to be a modern monetary theorist to believe this is silly. With demand for gilts strong even at negative real yields, the government can borrow a lot and lock in low borrowing costs by borrowing long-term. What Keynes said in 1933 still holds true: "Look after the unemployment, and the Budget will look after itself."

I fear there's something else going on - the protestant work ethic. Protecting the economy from the lockdown means paying people not to work. Many people - not just Tories - are instinctively averse to this. Which is why unemployment benefits have been so mean for years.

Granted, there's an issue of horizontal equity here: is it fair to pay some people not to work whilst NHS workers are working flat out and risking their lives for low pay? But this can be solved later - for example by paying the latter a bonus.If your house is on fire, you put it out quickly and worry about tidying up the mess later.

But there's another mistake. The idea that lifting the lockdown will cause a strong rebound in economic activity assumes that we'll all return to pubs, shops and restaurants as normal once we are told to do so. But this is deeply doubtful. If the virus is still widespread people will stay at home out of fear. As Simon says, "nearly all academic economists understand that you cannot restart the economy without getting the virus under control."

The government's belief to the contrary arises from an error identified by Adam Smith in 1759:

The man of system... seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. (Theory of Moral Sentiments part six, section II ch 2)

It was this error that led New Labour to exaggerate the efficacy of targets because it under-estimated the extent to which these would be gamed. And it led Brexiters to think that leaving the EU would be easy - that as Michael Gove said, "the day after we vote to leave, we hold all the cards and we can choose the path we want." They under-estimated the extent to which the EU and Remainers in the Tory party, had principles of motion of their own and were not mere chess-pieces.

It is, of course, true that the government has mishandled this crisis from the start and is still mishandling it. Such mistakes, however, are not mere accidental, contingent quirks. Instead, they arise from a systematic ideology - and in some respects, one not confined only to Tories.

Tail risk in policing

One of the key things you learn in finance - often the hard way - is that averages and majorities are not sufficient statistics. What also matters - and matters a lot - is the distribution and in particular the extreme of the distribution. Making a profit in 99 days out of 100 is little use if the hundredth day wipes you out.

This tail risk comes in many forms: bonds can default; liquid assets can suddenly become illiquid; uncorrelated assets can fall together; and the rare event such as a crash that you've sold insurance against can materialize. And we've known since October 19 1987 that the risk is higher than a normal distribution predicts.

Intelligent risk managers and retail investor should know all this and guard against it - although many do not. 

Which is why I was disappointed in this dispute between Tom Chivers and others. Tom is absolutely right that we over-estimate the prevalence of things that are salient: there's a phrase for this - the availability heuristic. But I'm not sure he's relevant. Risk is probability multiplied by impact. Even if there are very few murderous policemen, the damage they do is huge - not just the deaths they case, but the loss of trust in the police and the millions of pounds of damage done by the riots they provoke. One bad copper can do more harm than dozens of good ones do good. There's tail risk in policing as in finance.

In this sense, Chris Rock is dead right. Policemen are like airline pilots: being relaxed about about a few "bad apples" is horribly complacent. It's committing a basic error - the neglect of tail risk.

Here, Mr Rock's analogy with pilots is illuminating. The thing is that - as Matthew Syed points out - the airline industry goes to great lengths to minimize tail risk:

When there is a crash, [black] boxes are recovered and analysed so that enlightened changes can be enacted. This means that the same mistake never happens again. It is this constant willingness to learn from failure that means aviation has become one of the world���s safest forms of transportation.

Why doesn't a similar thing happen in policing? Why do we shrug off acts of brutality as the acts of bad apples?

It isn't just because the costs of such brutality are smaller and - being borne by blacks and working class people - more tolerable.

Another reason, I suspect, is the tendency to see more variation on our side than on the other: "we are all different; they are all the same." If you're on the side of the police a bad copper is atypical and tolerable: as Dar Williams sang, "when our people torture you that's a few random cases." If you're not on the side of the police, on the other hand, then ACAB. Both errors are the flipside of each other: the ingroup heterogeneity bias is the counterpart of outgroup homogeneity.

There's more. David Correia and Tyler Wall say:

Encroachment on private property is a threat to capitalist order, and it is police who manage this threat...The elite fear the destruction of their property, yes, but even more they fear the destruction of the social relations that make private property possible. And so they fear a world without police.

They are also loath to rock the boat by rooting out bad coppers: you don't bite the hand that feeds you.The role of the police is not merely to uphold the law, but to uphold law and order. This earns them the gratitude of the ruling class, and hence its tolerance.

We see a counterpart to this in finance. Experiments by Elise Payzan-LeNestour and James Doran have shown that people become addicted to small gains even when these are accompanied by large downside risk. As Charles Prince, then-CEO of Citi, famously said in 2007: ���as long as the music is playing, you���ve got to get up and dance���. Whilst a strategy works for you, you overlook its downside.

You might find it odd that I'm drawing analogies between finance and attitudes to policing. You shouldn't. There's a common theme here - cognitive biases.These have given us the field of behavioural finance, but also a deeper understanding of how capitalism reproduces itself by generating ideas that sustain the existing order. The link between my day job and my Marxism is tighter than some of you like to think.

Racism as emergence

Instinctively, I have solidarity with those taking a knee to protest at racism. But I have a problem here. We cannot eliminate racism merely by being nice to each other, any more than we can prevent recessions by wanting to be richer.

I say this because racial disparities aren't just the product of racist attitudes - important though these are. They can also arise from human action but not human design: they are also an emergent process.

Such a possibility shouldn't surprise anybody. When Adam Smith said that "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest" he expressed an important point. Aggregate outcomes are not merely individual intentions writ large. Sometimes, selfish people do nice things. Conversely, good people can do bad ones, as Marx saw:

Capital is reckless of the health or length of life of the labourer, unless under compulsion from society���But looking at things as a whole, all this does not, indeed, depend on the good or ill will of the individual capitalist. Free competition brings out the inherent laws of capitalist production, in the shape of external coercive laws having power over every individual capitalist.

Smith and Marx both saw the importance of emergent processes. Some racial inequalities are just these. I'm not thinking here so much of blacks being killed by the police as economic inequalities. In the UK, as in the US, blacks earn less than whites even where they have the same qualifications; are more likely to live in poverty; and much less likely to be in top jobs.

One way in which these emerge without much overt racism was pointed out by Thomas Schelling back in 1971. He showed (pdf) how blacks and whites could come to live in entirely separate areas even even if people were no more racist than wanting to avoid being in a minority.

When they are segregated in housing, however, other inequalities follow. Black people will suffer worse job opportunities if only to the extent that they'll not benefit so much from hearing of vacancies from the word-of-mouth of neighbours. Their children will go to worse schools and so have worse qualifications and hence be more likely to become unemployed. And that - via the incentives beloved of Econ101 - will tip some into crime. That in turn will give younger people worse role models and peer pressures, and expose "black areas" to harsher policing. In this way, racial inequalities will reinforce and amplify each other, as Barbara Reskin says:

Even if discrimination's only direct effect were on where people lived, it would indirectly contribute to black-white disparities in schooling, health care, the cost of insurance, the opportunity to accrue wealth, etc. In sum, direct discrimination within subsystems exacerbates disparities in other subsystems in part by creating emergent (��ber) discrimination.

There's more. Historic racism has lasting effects. One mechanism here is simply that we are all creatures of history. As Avidit Acharya, Matthew Blackwell and Maya Sen have shown:

Whites who currently live in Southern counties that had high shares of slaves in 1860 are more likely to identify as a Republican, oppose affirmative action, and express racial resentment and colder feelings toward blacks.

What's more, if an inequality has persisted for a long time, we become accustomed to it: as Kris=Stella Trump has shown our ideas of what inequalities are fair are strongly influenced by existing inequalities. Similarly, if it's normal for white people to be in better jobs, hirers will be predisposed to continue to employ them, on the principle that nobody got fired for buying IBM: Gary Becker had a point when he said that competition could eliminate racism but the problem is, in practice, it doesn't grind so finely as to do so.

And because we've become accustomed to police brutality, we tolerate it as being the work of a few bad apples - oblivious to Chris Rock's point that in other professions such as airline pilots we have zero tolerance for bad apples.

This habituation effect explains why people who have been silent for years about racial inequality are now taking a knee, and why universities who have tolerated racism for years now side with Black Lives Matter. They've taken such inequalities for granted, but a grotesque murders shocks them.

None of this is to deny a self-evident fact, that outright racism exists.My point is that this is only part of the story. Racial inequality isn't merely the product of overt racism. Some of it is instead an emergent product of mild or even no bias (the same is true for sexism, but that's another story).

This fits with a Big Fact - that racial inequalities have persisted for decades despite legal changes, a decline in overt racial hostility and rise of "wokeness". Emergent systems can be resilient - which is why we need radical action and not just gestures to change them.