Chris Dillow's Blog, page 99

Surviving self-deluded leaders

Andrew Hill in the FT has a nice piece on the self-delusion of chief executives such as Sepp Blatter, Li Hejun and Dick Fuld. He could easily have broadened the point into politics. For example, Dan Hodges has said of Ed Miliband:

He created his own world and lived in it. This explains his preternatural calm and his astonishing self-belief ��� but it also explains why he drove his party over a cliff.

The point here is that there are forces which increase the chances of a leader being self-deluded, for example:

 - As Andrew says, self-belief is a valuable trait: the candidate who says "yes, we can" is more likely to get the leadership job than the one who says "I'm not sure about this." But there's a very thin line between self-belief and overconfidence.

 - Overconfidence pays. The man who is overconfidence gives more "competence cues" than the more rational one - and hirers mistake such cues for actual competence with the result that the overconfidence candidate gets the job.

 - Leaders don't just have limited knowledge - this is true of us all - but biased knowledge. This might be because bosses often hire underlings in their own image. Or it might be because underlings don't want to tell their boss bad news. As Steve Richards wrote of Miliband:

Nearly all those who work for Miliband are dependent on his patronage. He chose them and they are pleased to be close to him. They do not want to say things that he does not want to hear...I am told that sometimes his staff applaud him when he returns from making a mediocre speech.

These mechanisms give rise to the problem famously identified by Kenneth Boulding in 1966:

There is a great deal of evidence that almost all organizational structures tend to produce false images in the decision-maker, and that the larger and more authoritarian the organization the better the chance that its top decision-makers will be operating in purely imaginary worlds.

All this, though, poses the question: if leaders are so often self-deluded, how come so many organizations succeed, or at least don't collapse?

One answer is that not all leaders are narcissists or psychopaths. And some, by accident or design, do manage to preserve cognitive diversity. For example, Churchill and Sir Alan Brooke "could hardly stand one another", but together they suceeded in part because they avoided groupthink.

A second answer - stressed by Oliver Williamson - is that there are benefits of hierarchy. Sometimes, it's better to have decisions taken quickly by one idiot than slowly by committees of idiots or even more slowly by expensive lawyers nit-picking over contracts.   

But there's a third answer. Figures from the ONS show that only one per cent of the UK's 2.23 million businesses have more than 100 employees. This fact tells us two different things. One is that diseconomies of scale - of which deluded bosses are just one - are a big constraint; they don't just cause high-profile disasters but, much more often, simply stop firms expanding in the first place.   

It also tells us something else - that a company that gets big is doing a heck of a lot right. It could well be that all those right things give the firm enough room - enough monopoly power - to accommodate some dysfunctionality, as long that it falls short of catastrophically bad decisions such as taking over ABN Amro. Adam Smith famously said that "there is a great deal of ruin in a nation." So too is there in an organization.

The left, & social change

Why are many lefties so thick? Three recent events pose this question: the mob that harassed Douglas Carswell; Len McCluskey's threat to sue Nick Cohen for libel; and the vandalism of a war memorial by anti-Tory protestors.

There's a common theme here. These episodes reinforce the worst image of the left - that it (we) are self-righteous bullies who care nothing for the liberties or sensibilities of others. I fear, therefore, that they actually detract from the left's cause.

For this reason, they reinforce Nick's criticism - that the left has lost "any notion of how to change a society."

Of course, social change is vastly complex and poorly understood. But I'd suggest that narcissistic posturing is perhaps not the best way to achieve it. Feudalism did not give way to capitalism because villeins protested their moral superiority to their lords, so perhaps capitalism won't convert to socialism this way either.

So, what can lefties do instead?

We could start by heeding Rebecca Winson's advice, and find a way to preach to the unconverted. For some of us, this means blogging about how inequality imposes social and economic costs; how austerity is based upon economic illiteracy; how Tory policies have real human costs; or how tolerance of injustice is based in part upon cognitive illusion. Sure, our audience is small. But if millions of people have a few, rational discussions with millions of others, it adds up.

In this context, language matters. I'm not sure that "fuck Tory scum" is a way for the left to win friends. Nor do I like the phrase "ordinary working people": who wants to think themselves ordinary?

Another thing is to find stepping stone changes: apparently small changes that can lead to others. My call for Brailsfordism might fit this bill: in inviting workers to suggest improvements, it is intended to build class consciousness - to embolden workers to recognize that they, and not bosses, have the potential to organize institutions themselves.

Here, there might be a case for those much-derided "safe spaces": fora in which marginalized groups can speak without being dominated by white men might give some people the confidence to become more politically active*.

Yet another thing we can do is to encourage socio-technical change. There's widespread agreement that Marx was right that "the mode of production of material life conditions the general process of social, political and intellectual life" - that "the hand-mill gives you society with the feudal lord; the steam-mill society with the industrial capitalist." The work of Jeremy Greenwood and Ian Morris vindicates this view.

Perhaps another technology-induced social change is occuring. For example, the collapse in the cost of storing and transmitting information makes dencentralization - worker control - feasible where previously there was hierarchy. And lower capital requirements might be undermining the monopoly power of big capitalism in favour of smaller companies. We can encourage this for example by spending our money at indepedent coffee shops, craft breweries, worker coops or through P2P lending rather than at capitalist firms.  

What I'm saying here is that the transition to a better society might occur not (just) by protesting or waiting for a big bang revolution, but as a result of countless small individual actions, which might have echoes throughout society.  Obviously, I don't know what all these actions should be - but if the left can apply millions of brains to the question, it might find some answers.

* Jason Brennan counters than safe spaces can be infantilizing. It's possible that both views are right, depending upon the precise institutional context from place to place.

The Brailsfordian road to socialism

One problem with the Labour party is that it has too many Brownites and Blairites and not enough Brailsfordites.

I mean, of course, Sir Dave Brailsford. He has explained how he made British cyclists into world-beaters by aggregating marginal gains:

If you broke down everything you could think of that goes into riding a bike, and then improved it by 1%, you will get a significant increase when you put them all together.

This is echoed by Esther Duflo and  Abhijit Banerjee in Poor Economics:

It is possible to make significant progress against the biggest problem in the world through the accumulation of a set of small steps.

Labour should apply this philosophy to the public services. And it should do so in combination with Hayek's insight that knowledge of where these gains are to found lies not in any contral body but rather is fragmentary and dispersed across all individuals.

What Labour should do, then, is ask everyone connected to the public services as client or worker: what concrete steps can we take to improve this Job Centre, this hospital, this school? Many of the suggestions will - I'd hope - be utterly mundane and apparently trivial: they'll consist in slight tweaks to how wards are cleaned, minor changes to procurement or teaching. And they'll vary from place to place. But as Sir Dave said, if you add together thousands of tiny improvements, you get a big improvement.

Liz Kendall, among others, has spoken - rightly - of the need for decentralization. But this should not merely be the end of the policy process, but the beginning.

What I'm calling for is for Labour to "connect" to people and to "listen" not in any abstract focus group sense, nor as a kowtowing to prejudice, but rather to use genuine but local and specific knowledge of how to improve the public sector.  

As for what institutional form this listening should take, it varies. It might be as simple as using Labour's website as a suggestion box, or getting local parties to ask local workers for concrete ideas about how they can work better. Or, as Paul says, local trades councils or their successors could propose locally agreed action plans for school improvement instead of Ofsted-type special measures. Just as the improvements shouldn't be centrally-directed, so the institutional forms through which they are articulated should be diverse.  

All this might sound like low-level cheeseparing - not that there's anything wrong with that. But it might not be. It's what I've called a building-block policy - an apparently small initiative that leads onto others. Smallish forms of civic engagement can lead to others - in effect, we're putting learned helplessness into reverse. Giving people a little bit of power will encourage them to demand more. They might ask: if we're coming up with all these ideas for improving public services, why is some guy getting a six-figure salary for sitting in an office? Eventually, this might lead to a transformation in politics - to forms of sociocracy rather than hierarchy. Politics will no longer about what men in Westminster do for (or more often to) us, but what we do for ourselves. As Tocqueville wrote:

Democracy does not provide people with the most skilful of governments, but it does that which the most skilful government often cannot do; it spreads throughout the body social a restless activity, a superabundant force, and energy never found elsewhere, which, however little favoured by circumstance, can do wonders.

"Small changes can have big effects" wrote Duflo and Banerjee. The transition to socialism will not happen by protesting, emoting or even perhaps by voting. It'll come instead by small and individually innocuous steps.

Second-best behaviour

All economists know the theory of the second-best. This is the idea that a government action that would be sub-optimal in an ideal world can in fact improve welfare in a less than perfect one; for example, if there is monopoly, price controls which would be inefficient otherwise could make consumers better off.

Listening to Malcolm Bruce's shocking claim that lying in public life is widespread, however, raises the question: does this theory apply more widely?

Of course, in a perfect world politicians would tell the truth. But we don't live in that world, but instead in one in which the public are ill-informed and the media is biased. In such a world, a political lie might be justified on second-best grounds. Just as an otherwise undesirable price control can offset the sub-optimality of monopoly and so improve well-being, so an otherwise undesirable lie might offset untruth elsewhere and so move us closer to optimality.

This might not be true in the trivial context in which Sir Malcolm was speaking, but it could be so in economic policy. As Simon says, it "seems a hopeless task" that a political party could tell the truth and win elections.

If I were a politician, I would lie through my teeth about being tough on immigration and "scroungers", on the grounds that such dishonesty is necessary to get elected and implement better policy. Arguments to the contrary, it seems to me, are ones of fact rather than morality: is dishonesty really necessary or feasible? Isn't there a danger the lie will become the truth.

This, though, might not be the only example of the second-best in politics. Take our electoral system. This is biased against smaller parties, which seems undesirable. But one might argue that this bias offsets biases in favour of smaller parties - such as the excessive media exposure given to Farage or the egocentric bias which causes people to overweight their private beliefs. (I'm not sure I support this argument myself, but given the existence of the FPTP it must have some defence like it).

There is, though, a massive problem with such second-best thinking - it can justify pretty much anything. A general fighting a war in a good cause can use it to defend war crimes; the bombing of Dresden is still morally controversial today. This is especially so because the self-serving bias means we can always find a strong defence for our own behaviour. As Dan says, the defence that "in the system as it exists, we are forced to take measures to offset its weaknesses��� is not a strong one.

In fact, the question I'm raising here is millennia-old: is it possible to remain virtuous whilst engaging with a morally comprised world? This isn't just a question for those considering a career in politics. It arises for pretty much any profession: law, journalism, banking or even - as Dan shows - academia.  

There's a long tradition which answers this question in the negative: this was a big part of monasticism, an echo of which is found in Alasdair MacIntyre's claim that we should construct "local forms of community within which civility and the intellectual and moral life can be sustained." This might help explain why there is so much discontent among even well-paid professionals. Perhaps the old question deserves more explicit attention.

Legitimating bosses

A front page headline in today's print edition of the FT reads: "Malone close to victory in Charter's $55bn battle for Time Warner Cable."

Why use military terms to describe an everyday commercial transaction? When I bought a pint of milk this morning, I didn't consider it a victory. Why, then, should a takeover be any different - especially as many of them fail badly?

The answer lies in a paper by Olivier Fournot. He shows that one of the tricks bosses use to glamourize and legitimate themselves is to present themselves as Hollywood-type heroes: charismatic, often unorthodox, leaders. The FT's language of "victory" and "battle" fits this template more than would the more quotidian language of accountancy.

A big part of this image-making is to present bosses as risk-takers - even though, objectively-speaking, it is often workers and small contractors who actually bear the biggest risks.

Bosses' legitimation methods don't stop here though. The media commonly pretend that bosses have objective expertise on economics - although they often don't - whereas trades union leaders are merely vested interests: compare, for example, the BBC's treatment of, say, Martin Sorrell and Len McCluskey.

It's not just words that help legitimate and glamourize bosses. So too do silences. The media rarely pose the knowledge problem: what can bosses know? And yet the answer might be: less than you think. And they rarely ask: could it be that bosses' success is due in part at least to luck? This is despite the fact that Alex Coad's work, showing that corporate growth is largely random, is consistent with this possibility.

For these reasons, what looks like neutral business reporting is in fact heavy with ideological bias. This is often inadvertent: I doubt FT subs last night thought "how can we help to glamourize bosses?" Media bias is not merely a matter of deliberate partisanship; it is often unconscious.

But it matters. The steady drip, drip process of legitimating top-down conscious control serves to take competing ideas of the agenda. Such ideas include market-based-management; the value of trial and error; the idea that economic processes are complex and emergent; and, of course, worker democracy. In these ways, boss ideology has contributed to what David Marquand rightly calls a "comatose intellectual conservatism."   

Blair vs the Blairites

One effect of growing old is that you get to see history being rewritten. So, I fear, it is with the description of Liz Kendall as being a Blairite because she rejects the idea that England has moved leftwards and supports Toryish policies such as free schools and spending 2% of GDP on defence.

This is to do Blair a disservice. Blair's latter-day sucking up to billionaires and tyrants has caused some people to forget that he did not win elections merely because he copied Tory policies and moved to some nebulous "centre ground." His talent was greater than that. He succeeded in fitting left-wing policies into rightist sentiments; that's what triangulation, at its best, meant.

His famous slogan "Tough on crime, tough on the causes of crime", for example, was both leftist and rightist. So too was his "make work pay" policy. This took the idea popular on the right that work is better than idleness and used it as a case for redistributing income via tax credits to the low-paid. And "education, education, education" both appealed to self-help and aspiration whilst also promoting the life-chances of the worst off.

And here's my problem. I don't see much evidence that latter-day Blairites are doing this; abandoning some of the party's sacred cows is not sufficient. Ms Kendall's talk of public sector reform could mean anything from giving fat privatization contracts to crony capitalists to the more admirable decentralization of the sector advocated by Paul Cotterill*.

But what would latter-day triangulation look like? Here are some suggestions:

 - It would champion smaller businesses - and worker democracy - against bigger ones as part of a pro-growth policy. This is leftist in the sense that it challenges the very wealthy but rightist in that it embraces aspiration.

 - It would ask: why do employers prefer Romanians with a rudimentary grasp of English to people who have experienced eleven years of English education? This is rightist in that it speaks to immigration, but leftist in that it seeks to improve the life-chances of the worst off.

 - Policies to make work pay should include jobs guarantees and higher aggregate demand but also supply-side policies to raise productivity. We can combine redistribution and increased efficiency, given that we're starting from a low base for the latter.

I fear, though, that Labour isn't sufficiently exploring these possibilities. Paradoxically, some so-called Blairites don't seem to appreciate sufficiently the man's achievements.

* In fairness, Kendall has made encouraging noises here.

Pro-growth, anti-business

David Clark writes:

To abandon the search for a more equitable, productive and democratic economy out of a desire to appear ���pro-business��� would be a serious error.

This hints at an under-appreciated possibility - that some pro-growth policies are not pro-business. What might these be?

One obvious candidate would be some combination of less austerity, a serious jobs guarantee, a citizens basic income and stronger trades union rights all of which would strengthen workers' bargaining power. These would be "anti-business" in the sense Kalecki noted: they would undermine "the social position of the boss", in part by making employment less dependent upon business confidence.

They might, however, be pro-growth not only in the sense that they increase aggregate demand but because they might encourage productivity growth. If bosses can no longer make profits by employing cheap labour, they would need to increase efficiency and deepen the capital stock. Is it really a coincidence that the strongest sustained rise in productivity we've seen in the UK occurred during the full employment of the 50s and 60s?

This, though, is by no means all. Here are five other possibilities:

 - Tougher competition policy, planning reform and less restrictive laws on intellectual property. All these would have the same effect. They'd be anti-business in the sense of weakening the power of incumbent firms, but pro-growth because they would encourage new entrants. Insofar as productivity growth comes from such external restructuring (pdf), they would also raise productivity.

 - Encourage alternative sources of finance, such as P2P lending, crowdfunding or even a state investment bank. All these are anti-business in that they are anti-banker but pro-growth because they encourage new companies.

 - Tax reform. Lower rates of corporate taxes but with fewer exemptions are against the interests of some businesses but might well be pro-growth. And I suspect that a cut in corporate tax financed by higher top rates of personal tax might highlight the distinction between the interests of business and the interests of those who run them; the two are not the same.

 - A maximum wage for quoted companies and organizations in receipt of public funds.As Michael Skapinker says, "even fervent defenders of free markets think top pay is out of control". Such a maximum could unleash a wave of entrepreneurship; it says to managers and bankers: if you want to make big money, you've got to stop being fraudsters and bureaucrats and instead set up your own business.

 - Greater worker ownership and control. This would obviously be anti-business, in the sense that it would undermine the power and self-regard of bosses. But we've good (pdf) evidence that it might well increase productivity (pdf) - perhaps for the Hayekian reason that it makes better use of fragmentary, dispersed knowledge than bosses can. We know that centrally planned economies are a bad idea - so why assume that centrally planned companies are?  

My point here is a simple one which, like pretty much any economically literate idea, is utterly disregarded by our idiot media - that there's a big difference between being pro-business and pro-markets. Remember that it was business (or a chunk thereof) that caused the financial crisis by mismanaging the banks and by failing to invest in real capital, thus encouraging money to flow into malinvestments such as dodgy mortgage derivatives. Should we really wholly entrust it with the recovery without even thinking about the alternatives?

"Consistent with"

In discussing Paul Romer's wonderful concept of mathiness*, Peter Dorman criticizes economists' habit of declaring a theory successful merely because it is "consistent with" the evidence. His point deserves emphasis.

If a man has no money, this is "consistent with" the theory that he has given it away. But if in fact he has been robbed, that theory is grievously wrong. Mere consistency with the facts is not sufficient.

This is a point which some defenders of inequality miss. Of course, you can devise theories which are "consistent with" inequality arising from reasonable differences in choices and marginal products. Such theories, though, beg the question: is that how inequality really emerged?** And the answer, to put it mildly, is: only partially. It also arose from luck, inefficient selection, rigged markets, rent-seeking and outright theft.

However, it's not just defenders of inequality who make the "consistent with" error.

Rational choice theorists have sometimes been too keen to explain apparently odd behaviour as "consistent with" rational maximizing: the notion of rational addiction might be the most egregious example of this.

Equally, though, behaviouralists might sometimes be too quick to see behaviour as "consistent with" people suffering from cognitive biases and too slow to see instead that it might be due to rational behaviour subject to particular information sets or incentives: I'm pretty sure I've been guilty of this.

Quite often, the facts are consistent with either theory. For example, the well-attested momentum anomaly - the tendency for assets that have risen in price recently to continue rising - is "consistent with" both a cognitive bias (under-reaction) and with rational behaviour; fund managers' desire to avoid benchmark risk.

My point here should be well-known. The Duhem-Quine thesis warns us that facts under-determine theory: they are "consistent with" multiple theories. This is perhaps especially true when those facts are snapshots. For example, a Gini coefficient - being a mere snapshot of inequality - tells us nothing about how the inequality emerged.

So, how can we guard against the "consistent with" error? One thing we need is history: this helps tell us how things actually happened. And - horrific as it might seem to some economists - we also need sociology: we need to know how people actually behave and not merely that their behaviour is "consistent with" some theory. Economics, then, cannot be a stand-alone discipline but part of the social sciences and humanities - a point which is lost in the discipline's mathiness.

* I soooo wish this idea was around in the 80s: it would have explained a lot of my frustrations when I was a student.    

** Scott Sumner is not guilty of this error, but I fear that other "libertarians" are less scrupulous.

Voting against one's interests

Many lefties have long believed that false consciousness causes some workers to vote against their own interests: I have some sympathy for this view. However, reading Dan Davies makes me suspect that it's not just workers who do this.

He points out that the benefit cap could clobber the buy-to-let market and says:

If anyone could be seen as a core Tory/UKIP voter, I would have thought that a small landlord in a southern coastal town would be. It���s not often that you see a government attacking its core supporters in this way.

But it's not just BTL landlords who voted Tory even though this could hurt them. One big group of losers from austerity has been older savers. This is because - for a given inflation target - a tight fiscal policy means lower interest rates.

Of course, a looser monetary policy helps savers by raising asset prices. But given that equity and bond prices (and house prices too to some extent!) are set largely by global forces, it's not at all clear that Tory austerity has, net, been good for older, richer savers. And yet these have overwhelmingly voted Tory. Why?

I'm not sure it's because some of Labour's policies would have hurt them. The party's proposed rent controls were pretty watery and the people I'm thinking of would barely have been touched by the mansion tax or 50% tax rate. Net, it's quite possible that lower interest rates and the benefit cap timebomb are more damaging than Labour's proposals.

Instead, one possibility is that such people believe a Tory government would be good for the country if not for themselves. But there are two other explanations.

One is that people don't see even the most rudimentary policy mechanisms. They just don't get that the incidence of benefits does not fall solely upon "claimants", or that a tighter fiscal policy must mean a looser monetary policy.

The other, though, is that, in voting, brand matters. The Tories have spent decades building a reputation as being the party of savers and of the wealthy. This reputation wins it support from people who are hurt by its actual policies: as the saying goes, give a man a reputation as an early riser and he can sleep til noon. In this sense, older richer people vote Tory for the same reasons that ethnic minorities don't - because their votes are shaped not by current policy but by a (folk) memory of what happened years or even decades ago.

This might be wrapped up with uncertainty aversion. Many older affluent people simply feel less uncomfortable with a Tory than Labour government, regardless of precise policies.

And herein lies a warning for Labour. Some of its leadership candidates want the party to woo southern middle-class voters by being pro-business and pro-aspiration. But if a party's image can't be built in a few months, and doesn't depend merely upon its actual current policies, then it might not be able to do this.

Labour's managerialist election

Many of us believe that if Labour is to have a future, it must embrace decentralization and attack  managerialism. The very way in which the leadership election is beling conducted, however, suggests that managerialism remains entrenched.

What I mean is that the election is bundling together two questions: what narrative/vision/message should the party have? And: who is best at winning the party votes?

But these are separate questions. It's perfectly possible that the leader most capable of "connecting" with voters is not the one best able to formulate policy and vision. In fact, it might be that no  particular individual is better at the latter than the wisdom of the Labour membership crowd.

I suspect it would be better for the party to spend a few months thinking about its message and identity - at least in outline - and only then ask: who is best able to win support for this message?

Instead, in conflating the two issues, Labour is doing what I have accused the left of- the Bonnie Tyler syndrome: it is holding out for a hero, a single charismatic figure who can solve its problems.

But what if there's no such person? Labour is not conspicuously overstocked with political geniuses. And looking at its last two leaders suggests that the membership is not necessarily equipped to select the best candidate*.

Labour, then, must put less faith in leaders. Granted, a great leader - if one comes along - might transform the party. But it's perhaps more likely that a leader who has false ideas buttressed by the groupthink of a coterie of lackies can do real damage.

You might object that I'm demanding that the leader be a mere frontperson, advocating for a programme which s/he doesn't believe. I'm not sure this objection is decisive. For one thing, politics should not be an ego-trip for power maniacs: the party could reasonably expect the leader to subordinate his own ideas to the collective good. And for another, any big dissonance between the party's vision and the beliefs of a candidate would count against him/her in a leadership election.

Herein, though, lies a paradox. I've claimed that Labour's obsession with leadership is a symptom of managerialism. And yet well-run businesses avoid the error which the party is making. One of the key functions of a good CEO is to identify what the organization is best at doing - its core competences - and to ask how best to deliver them. Labour is not doing this, but instead engaging in what I've called cargo cult management. There's a world of difference between managerialism and good management - and Labour shows no sign of learning this.  

* Yes, the way of selecting leaders has changed, but I'm not sure this solves the problem.