Chris Dillow's Blog, page 68

Irrationality in the boardroom

Here���s the finding of a new study of German firms:

Managerial overconfidence is positively related to the probability of failure of planned investment projects.

This corroborates a decent amount of research summed up (pdf) by Ulrike Malmendier:

A large and growing body of evidence suggests that a substantial share of top corporate executives exhibit symptoms of overconfidence in their decisions���Even when managers intend to maximize claimholder value, they can fail to do so because they hold overconfident beliefs.

For example, she shows (pdf) that where bosses are overconfident, firms��� capital spending is unduly sensitive to corporate cash flow: they invest when the firm is flush but not when it isn���t. And Charles Lee and Salman Arif have shown that increases in investment tend to lead to more earnings disappointments and lower growth ��� which suggests that investment decisions are motivated by sentiment rather than a realistic assessment of potential projects.

You might say that this merely vindicates Keynes��� point that investment is driven by animal spirits. Only partly. His point was that the future was unknowable and so firms had to rely upon animal spirits. This research, however, shows that such spirits are systematically mistaken ��� which goes beyond Keynes��� point.

This is by no means the only evidence we have. There���s also groupthink in boardrooms, which has contributed to corporate scandals. Bosses can be narcissists and psychopaths, with adverse effects on corporate performance. Richard Roll famously pointed out 31 years ago that takeovers were often motivated by hubris (pdf): RBS���s takeover of ABN Amro, which was one of the most expensive mistakes in British economic history, fits this pattern. And banks took excessive risks in the mid-00s, which led to the financial crisis.  

What we have here, therefore, is abundant evidence that bosses are irrational, and this irrationality is costly for shareholders and the wider economy.

Jeremy Corbyn���s call for a maximum income does not address this. The problem is not just that bosses have too much money, but that they have too much power, which they misuse.

This fact, however, is almost completely effaced from political discourse. The nudge agenda focuses far more upon low-level individual irrationalities than upon boardroom ones; bosses are routinely portrayed in the media as disinterested experts and even heroes rather than biased rent-seekers; and debate about Brexit has stolen almost all the cognitive bandwidth that should be devoted to other matters.

In these ways, politics and the media serve the function of sustaining unjust and inefficient inequalities.

Brexit as identity politics

Are we Remainers making a simple mistake about Brexit?

What I mean is that we think of Brexit in consequentialist terms ��� its effects upon trade, productivity and growth. But many Brexiters instead regard Brexit as an intrinsic good, something desirable in itself in which consequences are of secondary importance.

Thinking of Brexit in this way explains a lot of otherwise strange behaviour:

 - Why the Tories have a big poll lead even though voters think they���re doing a lousy job of managing the Brexit process. If you think Brexit is worth having for its own sake, then you���ll be pleased the Tories are getting on with it, because a second-best Brexit is better than none.

 - Why most Brexiters had no plan for the process. They just weren���t thinking in consequentialist terms.

 - Why Theresa May says ���Brexit means Brexit���. To consequentialists, this is pure gibberish. From the perspective of those who want Brexit as a matter of principle, it���s not: it���s an assurance they���ll get what they want.

 - Why preparations for Brexit are so chaotic. If you regard Brexit as an intrinsic good, then it���s not so important how we achieve it. Of course, there are good and less good types of Brexit. But if you prefer to satisfice than optimize, this isn���t necessarily decisive.

  = Why the government is offering ad hoc support to businesses likely to be hit by Brexit, be it handouts to Nissan or assurances to farmers that they���ll still be able to hire cheap foreign labour. There isn���t a systematic plan here or conception of what Brexit should look like, just one-by-one attempts to buy off specific discontents.

 - Why technocrats and Brexiters have a mutual incomprehension and loathing. Technocrats haven���t grasped that because Brexit is a good in itself, the process of achieving it is a secondary detail. And Brexiters have had enough of experts because they are irrelevant as consequences (up to a point) don���t much matter.

Of course, Brexiters might well be under-estimating those consequences. But if so, they are not the first people whose wishful thinking causes them to under-estimate the force of Isaiah Berlin���s point (pdf) that ���some among the great goods cannot live together���.

All this poses the question: what is the nature of this intrinsic good? I suspect it���s to do with self-image. Brexiters want to think of themselves as independent people free of the yoke of Brussels, an image that trumps technocratic consequentialist considerations ��� or at least is incommensurable with them. The fact that many cannot say what exactly they���ll be free to do after Brexit isn���t important: freedom can be desired for its own sake.

In this sense, Brexit is another form of identity politics. Remainers who complain about its adverse effects might be making a point that satisfies themselves, but not one that has much influence upon many of their opponents.  As with so much identity politics, we���re left with a rather futile dialogue of the deaf.

Economists in an alienated society

���The social power, ie the multiplied productive force���, wrote Marx, appears to people ���not as their own united power but as an alien force existing outside them, of the origin and end of which they are ignorant, which they thus cannot control.���

I was reminded of this by a fine passage in The Econocracy in which the authors show that ���the economy��� in the sense we now know it is a relatively recent invention and that economists claim to be experts capable of understanding this alien force:

As increasing areas of political and social life are colonized by economic language and logic, the vast majority of citizens face the struggle of making informed democratic choices in a language they have never been taught. (p19)

This leads to the sort of alienation which Marx described. This is summed up by respondents to a You Gov survey (pdf) cited by Earle, Moran and Ward-Perkins, who said; ���Economics is out of my hands so there is no point discussing it.���

In one important sense such an attitude is absurd. Every time you decide what to buy, or how much to save, or what job to do or how long to work, economics is in your hands and you are making an economic decision.

This suggests to me two different conceptions of what economics is. In one conception ��� that of Earle, Moran and Ward-Perkins ��� economists claim to be a priestly elite who understand ���the economy���. As Alasdair MacIntyre said, such a claim functions as a demand for power and wealth:

Civil servants and managers alike [he might have added economists-CD] justify themselves and their claims to authority, power and money by invoking their own competence as scientific managers (After Virtue, p 86).

There is, though, a second conception of what economists should do. Rather than exploit alienation for their own advantage, we should help people mitigate it. This consists of three different tasks:

 - We should help people make better decisions for themselves. This needn���t consist of ���nudging���. We might do it by increasing their information. Or we might do it by warning people to avoid the most common errors of judgment. This is what I do in the day job. By this standard, Martin Lewis is one of country���s leading economists.

 - We shouldn���t engage in futurology. That���s the job of soothsayers, necromancers and charlatans*. Instead we should help build resilience to shocks. At the individual level, this consists in helping people to make choices, such as in building well-balanced portfolios. And at the social level it means helping to build institutions which allow people to bear risk: this can be private insurance markets as well as a welfare state.

 - We can undermine the justifications for inequalities of wealth and power by pointing out that bosses and bankers' claims to them are often plain wrong.

The difference between these two conceptions has been highlighted, inadvertently, by Jeremy Warner. He says economists have had a ���terrible year��� because their warnings of a Brexit shock were wrong. Maybe, maybe not. But this allegation only applies to economists as priests. In our second conception, economists have had a good year. For example, most actively managed UK equity unit have under-performed trackers, which supports our longstanding advice in favour of passive management.

I should stress here that the distinction between economists as priests and economists as dentists is separate from the heterodox-orthodox distinction. Orthodox economics, when properly used, can both serve a radical function and help inform everyday decisions.

You might object here that my distinction is an idiosyncratic one. Certainly, economists as dentists earn less than economists as priests: I know as I���ve done both. But there are reasons for that, which have little to do with economists��� social utility.

* OK, I do it sometimes ��� but only to keep my editor happy.

Immigration & class struggle

James Bloodworth makes an important point here which I fear that some of his interlocutors don���t fully appreciate. He writes:

There does exist a discernible bien pensant willingness to pretend that immigration has no impact whatsoever on worker-employer relations���it is precisely the unwillingness on the part of liberals to acknowledge the challenges for the working class that migration brings���that is rendering the political climate gradually more inhospitable to those who want to find solutions that do not involve sealing off Britain's borders.

The error of which James accuses liberals here is in fact an old one. Liberals of both left and right have for decades been blind to the importance of class struggle. Marx spoke of the ���hidden abode of production��� precisely because liberals did not want to leave ���the realm of freedom, equality, property and Bentham��� to see what the labour process was really like. Both Keynes and the neoclassicals effaced classical economists��� concern with the distribution of incomes between wages and profits. Classical liberals have long underplayed the importance and ubiquity of workplace coercion. And one of New Labour���s biggest failings was its managerialism and acquiescence in the growing wealth and power of the 1%.

From this perspective, liberals who are reluctant to acknowledge immigration���s impact upon worker-employer relations are making the same mistake they always have.

Which poses the question. Given that James is right to say that spreadsheets and pious lectures haven���t assuaged workers��� concerns about the impact of immigration upon the balance of class power, how might we better address the problem?

First, we should note that immigration and globalization (pdf) are ��� at most ��� only one of many factors which are hurting lower-paid workers. Other forces include: austerity; power-biased technical change; the decline of trades unions; the productivity slowdown; financialization (pdf); and a meaner welfare state.

The answer to this set of problems is to increase workers��� bargaining power ��� which requires, among other things, policies such as stronger aggregate demand and greater redistribution.

Should immigration controls be part of this package? Perhaps not. Even if we grant that immigration is a problem for the low-paid, it doesn���t follow that closing borders will be a great help. The idea that remedies must resemble causes is a fallacy, of the sort that quack doctors in medieval times committed.

In fact, such controls would bring with them other problems:

 - They���d require us to leave the single market which might well depress exports and hence incomes.

 - In practice, tough immigration controls would bear upon soft targets such as students and innocent people which wouldn���t help workers.

 - If we impose immigration controls, so will other European countries on British people. This will worsen our job prospects.

 - Border controls carry a deadweight cost. Who���s going to pay the taxes to pay for border guards?

Quite simply, immigration controls cost money. Given that most people aren���t willing to pay to reduce immigration, it should therefore be possible to persuade some of them of the case for relatively open borders.

James is, I fear, right to say that the immigration debate has not been handled well by the left. But it need not be so.

A new year's message

For those of you entering 2017 with dread at the prospect of Brexit and a Trump presidency, here���s some comfort: things rarely turn out as bad as they seem. This is not just a sentimental clich��. It���s supported by social science.

Back in 2008, Christoph Merkle asked stock market investors how they���d feel if they lost money. After the crisis he asked them how they felt about the losses they had actually suffered. He found that their actual pain was significantly less than they���d feared. ���Investors are able to cope with their losses much better than they expected��� he concluded. Experienced utility was higher than anticipated utility.

This is consistent with a finding by Andrew Clark and Yannis Georgellis ��� that people adapt to most adverse events such as divorce or bereavement. We are psychologically more resilient than we think.

I suspect the same is true in politics. This is partly because the language of politics is hyperbole: each side overstates the extent to which victory for the other would be a catastrophe. Also, developed economies tend to be resilient to shocks; neither good policies nor bad have dramatic effects. There is, as Adam Smith said, ���a great deal of ruin in a nation.���

Modest adverse effects, allied to our tendencies to over-estimate the harm of losses and under-estimate our ability to adapt to them, suggest a cheerful possibility: that Brexit and a Trump presidency might not be as bad as feared.

In truth, though, I suspect a lot of the pain we felt about last year���s political developments was not so much a fear about their likely effects as disappointment about what they symbolized. Victory for Trump and Brexit represented a victory for liars, racists and the closed-minded.

But perhaps there���s a solution to this, which we���ve known since the Stoics ��� to simply pay less attention to the corrupt and fallen world, to cultivate our own garden. Or as the greatest of those who left us in 2016 put it: ���Forget your mind and you'll be free.���

Again, social science vindicates this. Participation in politics ��� unusually amongst voluntary (pdf) work ��� tends to make people less happy.

Of course, there are massive objections to this advice. One is that it���s horribly complacent. It���s easy for us older, richer white people to ignore politics because we won���t bear its costs. The victims of Trump and Brexit will be the poor and ethnic minorities, not people like me. And in retreating from politics, we are in effect tolerating lies, injustice and economic inefficiency. If the best people become idiots in the original sense of the word politics will be dominated by the worst.   

But this would be no change at all. Politics today is largely feudal: it is what rich people do to the poor. The challenge for we leftists is how to resist this without falling into despair. This is, psychologically, a tricky balancing act. But not an impossible one.

Happy new year.

The Econocracy: a review

The debate about the state of economics has long been in danger of falling into a mutual accusation of fallacy-mongering. Critics of the mainstream are accused of attacking straw men, whilst defenders sometimes stray dangerously towards the ���no true Scotsman��� fallacy: ���ah yes, but that���s not proper economics." The Econocracy by Joe Earle, Cahal Moran and Zach Ward-Perkins should elevate this debate.

They argue that ���economics has become dominated by a particular, narrow way of thinking about the economy��� and that ���Economics education involves memorizing and regurgitating neoclassical economic theory uncritically.���

They back up their claim by a survey of economics courses at some leading universities which I find truly depressing. The emphasis that courses place upon fact-free theory suggests that teaching hasn���t caught up with the ���credibility revolution��� (pdf) which places more weight upon facts. And the ���problem sets���  Earle, Moran and Ward-Perkins reproduce have me agreeing with Martin Wolf, that I wouldn���t become an economist today: they look more like teaching dogs to jump through hoops than a proper education.

Their call for a true liberal education which prizes critical thinking over rote-learning is laudable.

This poses the question: why did economics education change so much from the 70s and 80s, when pluralism was prized? The answer lies not just with economics but with the university system. Earle, Moran and Ward-Perkins describe how increased pressure to publish caused university departments to value orthodox neoclassical economists who better appeal to journal editors: for all its virtues, peer review can also promote groupthink. And they show that increasing student numbers and a desire to cut costs squeezes out critical thinking in favour of abominations such as multiple choice tests.

All this is good. For me, though, the book raises some questions.

One is: how radical must be the changes in economics education? Earle, Moran and Ward-Perkins call for teaching to ���start with empirical evidence and real world issues and then introduce theory afterwards.��� This sounds admirable. But it���s difficult to implement.

For example, some important basic facts in macroeconomics are that: there���s no such thing as a ���representative firm��� (see this great paper (pdf) by Nick Bloom and colleagues); that GDP growth in developed nations is often stable but interrupted by occasional crises; and that recessions are unpredictable. The sort of theory that can account for these facts is very tricky. A shift away from equilibrium theories towards complexity, evolutionary models and agent-based modelling would require massive changes for which students and perhaps academics are ill-prepared.

A second question is: do the authors let off the media too lightly? They say:

In an econocracy political decisions are redefined as technical questions to be answered by experts and thus removed from the public arena���The vast majority of citizens face the struggle of making informed democratic choices in a language they have never been taught.

This overstates things: the EU plebiscite was a big and regrettable counter-example. But insofar as it is true, whose fault is it? Even if economists were truly knowledgeable humble experts, their voices would not prevail against a media which is largely hostile or indifferent to the truth.

Much as I sympathize with the authors��� critique of economics (at least as it is taught) I fear that it is not just economists that are the problem. Some of our fundamental institutions ��� universities and the media ��� are perhaps failing to sustain an open society. And this even more dangerous than the flaws in economics.

Against busyness

A nice post at the HBR blog by Silvia Bellezza, Neeru Paharia and Anat Keinan describes how being busy is now celebrated as a symbol of high status.

This is not natural. Marshall Sahlins has shown that in hunter-gather societies (which were the human condition for nine-tenths of our existence) people typically worked for only around 20 hours a week (pdf). In pre-industrial societies, work was task-oriented; people did as much as necessary and then stopped. Max Weber wrote:

Man does not ���by nature��� wish to earn more and more money, but simply to live as he is accustomed to live and to earn as much as is necessary for that purpose. Wherever modern capitalism has begun its work of increasing the productivity of human labour by increasing its intensity, it has encountered the immensely stubborn resistance of this leading trait of pre-capitalistic labour. (The Protestant Ethic and the Spirit of Capitalism (pdf), p24)

The backward-bending supply curve of labour was normal.

E.P. Thompson has described (pdf) how pre-industrial working hours were irregular, with Mondays usually taken as holidays. He, and writers such as Sidney Pollard (pdf) and Stephen Marglin, have shown how the working day as we know it was imposed by ruthless discipline, reinforced by Christian moralists. (There���s a clue in the title of Weber���s book).  Marglin quotes Andrew Ure, author of The Philosophy of Manufacturers in 1835:

The main difficulty [faced by Richard Arkwright] did not, to my apprehension, lie so much in the invention of a proper mechanism for drawing out and twisting cotton into a continuous thread, as in���training human beings to renounce their desultory habits of work and to identify themselves with the unvarying regularity of the complex automation. To devise and administer a successful code of factory discipline, suited to the necessities of factory diligence, was the Herculean enterprise, the noble achievement of Arkwright���It required, in fact, a man of a Napoleon nerve and ambition to subdue the refractory tempers of workpeople accustomed to irregular paroxysms of diligence.

Today, though, such external discipline is no longer so necessary because many of us ��� more so in the UK and US than elsewhere ��� have internalized the capitalist imperative that we work long hours, as Bellezza, Paharia and Keinan show*. Which just vindicates a point made by Bertrand Russell back in 1932:

The conception of duty, speaking historically, has been a means used by the holders of power to induce others to live for the interests of their masters rather than for their own.

In some cases, though, such long hours are inefficient even by capitalistic standards. In fund management, for example, laziness can pay off**. Shann Turnbull���s idea of the cybernetic company suggests that a well-run firm should in many respects run itself without the need for busy management. And I suspect that in many creative occupations, we get our best ideas in the bath or just chilling.

Russell said that ���a great deal of harm is being done in the modern world by belief in the virtuousness of work.��� I suspect the harm isn���t just cultural ��� important as that is ��� but also economic. In fact, most economists agree we'd be happier of there were more public holidays.

All of this is, of course, a fancy way of saying that I���m going on holiday.

Happy Christmas everyone.

* Personally, I believe the opposite. If a man still needs to work hard after an Oxbridge education and thirty years of house price inflation, there's something wrong with him.

** One reason for this is that fund managers have only a handful of good ideas and time spent looking beyond these encounters diminishing returns. In fact, the returns might be negative, if research causes the manager to chase noise rather than buy genuinely under-priced assets.

An appeal for ground truth

There���s much talk of ���post-truth politics��� as if it were the sole creation of social media and fake news websites. This is misleading, because the mainstream media ��� and in particular the prominence given to Westminster correspondents ��� is itself partly to blame.

I���m prompted to say this by Tom Crewe���s superb account of the Tories destruction of local government. Austerity is not merely an abstract policy, but causes real damage in the form of closures of libraries and Sure Start centres, cuts to bus routes and increased homelessness. And to this we could add worse flood defences, less care for the elderly and disabled and increased likelihood of prison riots.

It���s in this context that Westminster political reporting is positively dangerous. In presenting politics as a ���he says, she says��� knockabout, the ground truth of real damage to real people is overlooked, and instead it becomes merely a matter of abstract debate.

George Osborne managed to present himself as being on the side of devolution because he talked so much about the ���Northern powerhouse���. But the reality of big cuts to local government meant he was in fact a centralizer. Post-truth Westminster correspondents who listened to words rather than looked at ground truth let him get away with this.

This trend, of course, contains a vicious class bias. ���He says, she says��� reporting tends to be deferential towards those in power. This isn���t just because they have better-resourced PR departments but also because, as Adam Smith said, there���s a ���disposition to admire, and almost to worship, the rich and the powerful.��� Such reporting also favours those with superficial charm and over-confidence ��� traits more likely to be possessed by men from rich backgrounds such as Cameron and Farage. And of course in giving a voice to Westminster politicians, the voices of people on the ground are not heard.

All of this is to support Paul Mason who says:

One of the most pitiful things about the political class...is their distance from the actual experience of work.

A media which paid more attention to the ground truth of workplace coercion, wage stagnation and casualization would give us a better understanding of strikes than ���he says, she says��� debates between partisans. But this is absent in post-truth reporting.

What I���m appealing for here is for journalists (and economists) to get their shoes dirty, to look for facts on the ground rather than quotes from ���senior sources��� who are themselves often ignorant or careless of ground truth; in fairness, many do so ��� though I suspect these tend to the less well-paid reporters*. It���s people like Kate Belgrave and projects like Migrant Voice or Unpaid Britain we should listen to more than empty suits and gobshite columnists. Remember the original and correct meaning of Raymond Wolfinger���s words: the plural of anecdote IS data.��� All of this, however, is a long way from a lot of the journalism we get.

* I know, I risk the charge of ���physician, heal thyself��� here. But I like to think that in my day job I don���t confuse getting a quote from a fund manager with pursuing the truth.

The decline of public service

Have we under-estimated the importance of self-restraint in politics, and over-estimated that of formal explicit constitutional rules? I ask because of two things I���ve seen recently.

One is David Remnick���s complaint about Trump's appointments:

Having no experience in a given field seems to be, in the Trumpian universe, the greatest of virtues. The contempt for experience (as a marker of �����litism���) is parallel to the contempt for science, for fact, for restraint, for consideration, for decency, for a sense of the past.

The other is Jonathan Freedland���s account of the rise of lying in politics:

In the political realm have we somehow drifted into a world in which no one can be trusted, not on questions of judgment, nor even on questions of fact. But we cannot live in such a world. Evidence, facts and reason are the building blocks of civilisation. Without them we plunge into darkness.

These two pieces pose the question: why have things come to this? Here���s a theory: politicians��� self-restraint has diminished. They used to have self-imposed rules about not lying egregiously; or trying to think about policy; or trying not to appoint complete duffers; or not accepting positions for which one was unfit. Today, these restraints are weaker.

I had many complaints about Thatcher. But I wouldn���t list among them the sort of systematic bare-faced lying of the sort we saw from the Leave campaign, or (with the possible exception of the poll tax) the reckless disregard for the basic principles of good decision-making that seems to characterize ���planning��� for Brexit. Thatcher was wrong, but I don���t think she held facts and truth in contempt, as Trump and some Brexiters do*. She was at least trying.

The notion of ���public service��� wasn���t wholly pompous blather: it contained a kernel of truth that is smaller now than it once was.  

In truth, of course, self-restraint and social preferences (pdf) are widespread and necessary. The tragedy of the commons was alleviated in part by stinting. Crime is low not just because of the fear of punishment but because of our self-restraint. And organizations (especially perhaps in the public sector) succeed in large part because of intrinsic motivations and reciprocity: workers who are paid more than is strictly necessary do more than is necessary. This is why ���works to rule��� can be disruptive.

It could be that the same was true in politics. Perhaps liberal democratic politics worked - insofar as it did - not just because of explicit constitutional rules and checks and balances but because of politicians' intrinsic motives.

What we���re seeing now is the demise of such public spirit.

Exactly why this has happened is a big question. I suspect Freedland is right to attribute it to the rise of tribalism, which I suspect is a manifestation of increased narcissism. If you���re totally confident that you���re right (which is of course the vice of overconfidence) you���ll not see the need to engage with reality or to ensure that your appointments are minimally competent.

But here���s the problem. In a healthy polity, the demise of politicians��� self-restraint wouldn���t much matter because conventional checks and balances would protect us. The media would expose mendacity and incompetence, and voters would reject dishonest or inadequate candidates and policies.

Such checks might still exist ��� if, say, Congress vetoes some of Trump���s appointments. But perhaps a lesson of this year is that they are weaker than we���d hoped. Which makes the decline of self-restraint even more worrying.

* Someone famously said: ���Washington couldn't tell a lie, Nixon couldn't tell the truth, and Reagan couldn't tell the difference.��� There is, though, a big difference between indifference towards the truth and actual hostility to it.

More evidence for voter irrationality

Whenever some of us claim that voters are irrational, we���re met with the accusation that we���re elitists who haven���t come to terms with the possibility that crowds are wiser than we are. In this context, therefore, I welcome some new research by Erik Eyster and Ernesto and Pedro Dal Bo who provide experimental evidence (pdf) that voters are irrational.

They got subjects to play a prisoners��� dilemma game in which there were big pay-offs to defecting with the result that subjects did not cooperate even though the aggregate rewards to doing so were high. After a few rounds of that game, subjects were offered a vote on a tax which would have disincentivized defection and so encouraged cooperation and the achievement of those higher rewards. However, the majority of subjects voted against the proposal even though it was in their interests.

This suggests that people look too much at the obvious cost of a policy and under-estimate the extent to which it can have the benefits of changing behaviour. The authors say:

Voters will tend to focus on the direct e���ects of the policy change and underappreciate the indirect e���ects. As a result, voters will favor reforms with positive direct e���ects, even when undone by negative indirect e���ects, and reject reforms with negative direct e���ects, even when more than compensated by positive indirect e���ects.

This is consistent with work by David Leiser and Zeev Kril, who have shown that laymen are terrible at identifying causal connections in economics.

Does this have real-world relevance? What sort of policies fit this sort of pattern?

Plenty.

The authors give the example of pollution taxes: maybe voters overweight their direct cost and underweight their indirect effect in curbing pollution. They also suggest that price or rent controls fit this pattern. Voters see their direct benefit, but under-rate their adverse impact upon supply.

Some of you might add minimum wage laws to this category: voters might overweight their direct benefit of raising wages but underweight the indirect effect of curbing labour demand.

We might add that policies that disincentivize arms races also fall into this category. This might explain hostility to Robert Frank���s call for a progressive consumption tax to deter the excessive spending that results from expenditure cascades.

Perhaps immigration controls fit the pattern too. Voters see the direct benefit: fewer immigrants mean less competition for jobs and hence higher wages. But they don���t see that if their wages rise without any increase in productivity then inflation and interest rates will rise, which means that people will lose their jobs because of weaker demand.

The Brexit vote might also conform to this. Maybe voters over-rated the direct benefit of Brexit (���we���ll save ��350m a week���) and under-rated the indirect cost, that Brexit would weaken the economy and hence the public finances.

Franklin Roosevelt once said that ���democracy cannot succeed unless those who express their choice are prepared to choose wisely.��� And it seems voters don���t choose wisely.

It would, however, be wrong to blame voters alone here. They aren���t expert economists, any more than I���m an expert plumber or electrician.

The fault also lies with politicians ��� with the ���elite��� if you like. They don���t seem to care much about the quality of voters��� decision-making, as they as they support the right side. And the media are also at fault, in taking little effort to improve voters��� wisdom. If Roosevelt was right, such carelessness is positively dangerous.  

Another thing: we must distinguish between being right and being rational. It's possible that Brexit or high minimum wages are the right policies even if voters choose them for irrational reasons. I find it hard to believe, however, that irrational voters will always or even often choose the right policies for the wrong reasons.