Author Archives: Guy Lipman

Natural Justice

I finished a book a couple of weeks ago that I suspect is going to be very significant in my thinking over the coming years: Binmore’s Natural Justice.  Kenneth Binmore is my kind of thinker (Keynes is another) – a mathematician turned economist, equally at home with philosophy and the real world (Binmore’s team designed the UK’s 3G spectrum auctions which raised £22bn).  

Natural Justice uses technical game theory to explore the way in which our need to coordinate within groups leads (through biological and cultural evolution) to our tendency towards justice and morality.  (Please don’t interpret this as suggesting that morality isn’t real or important in its own right.)  

At the heart of any coordination problem is the Nash equilibrium.  John Nash (portrayed by Russell Crowe in A Beautiful Mind) proposed this idea of any situation where no agent had any incentive to unilaterally change their behaviour.

The most famous example of a Nash equilibrium is the prisoner’s dilemma, but a more practical example is driving: if all drivers drive on the left of the road, it generally makes sense to drive on the left.

This example points to the insight that there may be multiple Nash equilibria, and not all equally good or stable.  Everyone driving on the right is also a stable equilibrium.  Everyone choosing randomly is also an equilibrium, although a clearly inferior one and unstable (any bias will tend to reinforce itself, leading to a new equilibrium).  Another insight from is that societies can be guided towards equilibria, for example, with traffic laws.

Binmore will appeal to many conservatives/economists when he claims that societies should not aim for coordination utopias that are not Nash equilibriums – these are unstable and unlikely to persist.  However, in a challenge to many conservatives/economists, he reminds readers that there is no good reason to assume that we are in nash equilibrium at any time, or that the equilibrium we are closest to is the only or best one.  Far from suggesting we should be laissez-faire, he endorses a big role for thinkers to help us discern the best Nash equilibria, and ways to achieve them.

This compromise appealed resonated with how I think.  While I recognise that a huge amount of good in the world is done out of altruism, I never want my society to be reliant on it, or to be able to be gamed.  And I’m far more interested in helping people see what is in their interest, than by trying to convince them to act against their interest.  

Many treatments of game theory ignore questions of enforcement; Natural Justice argues availability of enforcement is pivotal to which situations are equilibria.  For example, me working for payment on completion only makes sense if I believe the outcome can be enforced.  Trust or social norms may be a replacement for enforcement in the short term, but they are likely to be insufficient in the long run.  

The book ties this distinction into the argument between utilitarianism (that things should arranged to maximise overall utility) vs egalitarianism (that things should be arranged to improve the position of the person with least utility).  Binmore suggests that with the ability to enforce contracts, we will end up with utilitarianism, but without it we will end up with egalitarianism.

Another significant contribution of the book is its consideration of what economists call Interpersonal Comparison of Utility.  I clearly value outcomes for myself, though I don’t ignore the value of outcomes to others.  Some economists argue that we cannot objectively compare other people’s utility to our own.  The book argues, more pragmatically, not only that we do take others’ utility into account, but that this is a useful evolved mechanism.  I’m sure my understanding of this idea would benefit from a second reading of the book.

I’ve got a couple of other books on social contract and game theory to get through, so I am certain that my thinking will evolve, but I felt this introduction was a good start.

Some Thoughts on the Election

I am convinced that the path we’re currently on isn’t socially or environmentally sustainable.  My primary objective in taking an interest in politics, is the hope that my vote and my interest can help get us onto a more sustainable path, one that maximises people’s chances to flourish, both now and in future generations.  

Many of you will be thinking that this wish directly implies that I should vote for Labour or the Greens.  I’m much less convinced.  Though many Green and Labour policies naturally appeal to me, I believe that all parties are capable of recognising the benefits of making the system more sustainable.  Indeed, I wouldn’t be surprised if many of the changes I’d like to see are ultimately made by the Conservatives.

In this respect, I was pleased that both the Labour and Conservative manifestos went further towards recognising the social sustainability challenges that we face than they had before.  The Conservatives didn’t go far enough, and quite a few policies in both manifestos could have done with some more thought and discussion. Both had some proposals that I disagree with.  The environment was largely ignored.  But I do praise them for trying, and I do believe that these views are genuine.

My hopes were raised, and then came the response from their opponents and the media – highlighting the ‘losers’ from any change, ignoring any benefits.  Yes, I get that this is politics, and I get that is what gets readers engaged.  But when I’m looking at who I want to be governing, and who I want to be representing me in Parliament, particularly with such big challenges ahead, I want it to be a party that shows a willingness to listen and to talk honestly to the whole country.  And no party is filling me with overwhelming confidence.

I get why Theresa May is promoting ‘strong and stable’ leadership – I don’t like chaos any more than anyone else.  But in a complex world, it is often difficult to tell the difference between ‘strong’ and ‘brittle’.  I have moments when I’m convinced that May could be a good strong leader if she gets a decent majority, and other moments when it fills me with dread.  But I am similarly unsure how strong or good a leader Corbyn would be.

The Conservatives, Lib Dems and SNP wanted to make this election all about Brexit, but Labour seem to have ensured attention was on everything except Brexit.  I wish that by voting a certain way I could undo last year’s referendum, but can’t.  The only way I can see of avoiding Brexit is the government negotiate a truly dreadful deal, and I’m not prepared to hope for that. Intriguingly, the financial markets (ie the pound) seem to have decided that the best bet for the closest relationship with Europe is a comfortable Conservative majority (eg https://www.theguardian.com/business/2017/may/26/ftse-reaches-record-high-as-uk-opinion-poll-spooks-sterling ).

Probably the one area where I do have strongly partisan views is on austerity and social spending.  I am not alone in thinking that the austerity of the past 7 years has been a failure.  I believe the bulk of the cuts will have far bigger long term costs than they’ve saved us.  in the Health portfolio, I realise that there are difficult decisions to be made, but I don’t recall ever seeing such mismanagement as we’ve seen over the past 2 years.  My take on it is that it is ideological – a desire to cut costs without considering evidence or consequences, and without recognising that the system cannot work without the goodwill of doctors and nurses.  I’m not totally convinced that Labour would have run things wonderfully or efficiently, but I can’t believe they could have done a worse job than the current government.  

Obviously it is much easier to argue for more spending than to say where it should come from.  We need to make our government sustainable over the longer term.  But at the moment most people (including those at the top) feel the tax system is unfair.  We’re going to need to do more talking about how tax and redistribution should work.  Blindly raising taxes on those that already feel things are unfair will just create resentment and them to feel justified in restructuring their affairs.  We need to ensure we’re doing it in a way that the majority of people feel that their contributions are necessary to ensure a country that they want to live in.  

In these uncertain times, I’ve come to appreciate the importance of having good people in parliament, and I think it is even more important than which party they’re in.  Assuming that all members of a party are as bad as each other doesn’t make sense, and over the past year some of the most effective opposition to the government’s worst policies has come from Conservative MPs.  So if you’ve got a good candidate, I’d encourage you to consider supporting them irrespective of their party.

Finally, I’d like to make a comment on how we talk about our politicians.  After the tragic shooting of MP Jo Cox last year, there was a bit of a move towards treating politicians with a bit more respect and understanding (eg http://www.telegraph.co.uk/news/2016/06/17/jo-cox-was-brave-so-are-most-mps-lets-show-them-more-respect/) .  Unfortunately, it doesn’t seem to have lasted.  I shouldn’t have to point out that politicians are people, not perfect or altruistic, but mostly hard-working people who want the best for their constituents, and indeed for the whole country.  I wish we could stop demonising and abusing them (in particular, sexist or racist abuse towards politicians is still unacceptable), and be more thoughtful in our criticisms – otherwise we shouldn’t be surprised if we get the politicians we deserve.

Doughnut Economics

I came across Kate Raworth’s Doughnut Economics – 7 ways to think like a 21st century economist (UK) (US) in a Guardian review last month, and have now finished it.

I’d recommend it to just about anyone as a very readable overview of the economic challenges facing the world, why economics has struggled and will increasingly struggle with these challenges, and how our thinking can adapt to tackle these challenges.

The book’s central idea is that economic activity should neither be minimised or maximised – there is a sweet territory (the doughnut) below which society will not sustain and above which the planet will not sustain.  At present we suffer risks on both sides.

2360

(Source: Kate Raworth and Christian Guthier/The Lancet Planetary Health via the Guardian)

The seven changes in thinking that the book proposes are:

  1. Change the goal – from GDP to the Doughnut (genuine sustainability)
  2. See the big picture – from a stand-alone market to an embedded economy
  3. Nurture human nature – from rational economic man to socially adaptable humans
  4. Get savvy with systems – from mechanical equilibrium to dynamic complexity
  5. Design to distribute – from ‘growth will even it up again’ to distributive by design
  6. Create to regenerate – from ‘growth will clean it up again’ to regenerative by design
  7. Be agnostic about growth – from growth addicted to the right level and kind of growth

Obviously none of these are crazy, and most people would fundamentally agree with them, but Raworth does a great job of talking through the implications of these assumptions.

The book was full of interesting history of how economics came to be the way it is, how many of the standard assumptions have been acknowledged as questionable even by their original authors, and why they’ve continued to be held – this is helpful to understand if we want to change our thinking.

Overall I really enjoyed the book, and found it very reasonable, acknowledging the many uncertainties and willing to criticise views on the left as well as the right.  I can see it appealing to many of my friends with more conservative as well as those with more progressive views, so highly recommended.

Doughnut Economics – 7 ways to think like a 21st century economist can be found on Amazon (UK) (US) and no doubt many other bookshops.

Brexit – deal or no deal

One of my major frustrations when it comes to politics are the ambiguous statements – where both sides are arguing over different interpretations.  It feels so unnecessary – I wish we could make an effort to be a bit more specific, so that we can focus on where we actually disagree.  

For example:

No Brexit deal is better than a bad Brexit deal

Everyone seems convinced they know what it means – but they don’t agree.  Here are a few interpretations that I’ve heard people make:

    • Leaving the EU without an alternative to the default WTO terms is better than the technically worst possible deal – true, in my opinion, though they’d have to be almost inconceivably bad (maybe one where we agree to become slaves?)
    • Leaving the EU without an alternative to the default WTO terms is better than the likely deal the EU would offer us (ie us not getting our way in negotiations) – questionable
    • Leaving the EU without any trading / movement rights is better than the technically worst possible deal  – again, technically true, but both are highly unlikely in my opinion
    • Leaving the EU without any trading / movement rights is better than the likely deal the EU would offer us (ie us not getting our way in negotiations)  – I believe untrue
    • In order to get a reasonable Brexit deal we have to be able to ensure we could survive no Brexit deal  – I’m really not sure, sometimes negotiating from a position of strength helps and sometimes it hurts
    • It doesn’t really matter if we get a deal or not –  clearly untrue
    • We shouldn’t make much effort to get a deal – clearly untrue
    • We shouldn’t (literally) kill ourselves trying to get a deal – clearly true (I haven’t actually heard anyone arguing this meaning, but thought I’d include it for completeness).

So next time you’re going to argue over whether no Brexit deal is better than a bad Brexit deal, please make clear which one you mean.  And if you’re going to disagree with someone, it might be worth checking that they actually mean something you disagree with.

Hypocrisy

I have started attending some of the talks organised by The Forum for European Philosophy, and last Tuesday attended a panel on “Hypocrisy”.  If I’m honest, hypocrisy isn’t a topic I had given too much thought to, but it does seem to be a criticism that is increasingly made of those in leadership, so it is worth thinking about.

Talking to a handful of my friends shows that very few people have a working definition of hypocrisy, which in itself is interesting.  Dictionaries tend to define it along the lines of: “The practice of claiming to have higher standards or more noble beliefs than is the case”, but it is worth noting that in practice people tend to use it more broadly – for example not needing the individual to actually claim or even promote the higher standards.  

Based of the dictionary definitions, hypocrisy has two components:

  • the claim to have higher moral standards, or at least the promotion of particular standards
  • and the act which betrays those standards.  

Some people, tend to focus on the two separate components: criticising the moral arrogance, and the bad actions.  If I’m honest, this is my natural inclination – and the charge of hypocrisy itself is downplayed.  In particular, if someone claimed a standard that I didn’t agree with, and then didn’t follow it, I wouldn’t want them to change their behaviour to be in line with their ‘bad’ standard.

But enough others emphasise the combination that makes up hypocrisy, that it is important to try and understand this.  

I can think of a number of fundamental reasons to dislike hypocrisy (beyond our dislike of the separate components):

  • When practiced by leaders, hypocrisy often indicates the individual can’t be trusted and is undeserving of their position.
  • More generally, hypocrisy is a form of deception and cheating.  These undermine a functioning moral order.  By tolerating it, we ourselves weaken that system (and conversely, by condemning, it we are promoting that system).

I suspect that these reasons to condemn hypocrisy are deeply ingrained, and have arisen through evolution, along with our aversion to cheating (see for example Haidt’s book The Righteous Mind).  [One of my favourite experiments shows that in games, people will not only incur a cost to punish cheaters, but they will incur a cost to punish those that don’t themselves punish cheaters!]

I suspect there are some more pragmatic reasons that people care about hypocrisy (some a result of people’s innate aversion to it):

  • We may not like someone’s actions, but may feel unable to insist on them acting by our standards.  It does feel fairer to criticise them if they themselves have argued against for these standards.
  • Similarly, if someone is arguing for standards that we consider inappropriate, we can undermine them by highlighting that they don’t follow them.
  • Given the impossibility of anyone being entirely consistent, and the public’s deeply ingrained dislike of hypocrisy, it makes an easy accusation for leaders we dislike

While I do value a generally functioning moral system that allows us to cooperate within our society, and feel it is appropriate to condemn forms of cheating (including hypocrisy), this can be taken too far, particularly in today’s divisive political climate.  When criticising a leader we already dislike for some inconsistency, I do feel we would be wise to consider whether we’d feel so critical if a leader we liked acted similarly (or indeed do we share similar faults).  

And where possible, I believe we would be better to focus our attention on the inappropriate standard or the action.  And if neither of these are that bad, there is probably a better place to direct our anger.

Rethinking the economics of housing

You can’t exist long in London without being drawn into debates on house prices, and in the hope of having something coherent to say, I recently read “Rethinking the Economics of Land and Housing” by Ryan-Collins, Lloyd and MacFarlane (disclaimer: two of the authors work at the New Economics Foundation which I support).

The book is aimed at readers with an interest in economics, particularly those willing to question some of the prescriptions of the neoclassical framework.  That it discusses implications of competing theories on an example as practical as the housing market makes it particularly engaging (I enjoy highly abstract philosophical discussions – though I appreciate that most people don’t!).

The fundamental point the book makes is that neoclassical economics tends to treat land as just another capital input, ignoring its distinctive characteristics: that changes in value are seldom attributable to its owner (but rather to societal improvements, particularly the availability of jobs) and that supply of land does not increase in response to rises in price.  This should call into question the standard assumptions that the free market produce good outcomes and that landowners ‘deserve’ the majority of their gains.  

Instead, however, the past 50 years has seen a reduction in regulation.  Banks have been encouraged to increase mortgage lending, governments have scaled back on supply side interventions (eg building of social and affordable housing), and there has been a massive increase in wealth inequality as a result of transfer of wealth to home owners (mostly as a result of land value increases).  

The book provides a good theoretical justification for rethinking the underpinnings of this market, and our collective assessment of how a fair, and indeed economically rational property market might work.  The book makes some good practical suggestions, but is far more concerned about starting a dialogue than prescribing a political solution.

Then last week I attended a conference held by the Labour party on Fairer Housing within Westminster.  The key point raised was how badly Westminster Council and Local Housing Associations are addressing the housing needs of lower income residents: that the wrong people are profiting from the situation, that bad contracts are being entered into (including nowhere near enough social and genuinely affordable housing), and that the council is forcing residents to move out of London, destroying social ties.

Unfortunately, despite reading the book and attending the conference, I’m still not too sure I’ve got anything to coherent to conclude.  As a citizen of this great city, I do want a diverse and vibrant community, which requires genuinely affordable housing.  I do recognise that the free market doesn’t lead to collectively optimal outcomes, and rational economics dictates that we need policies to correct for this.  I do believe we need more community empowerment, but without it giving a substantial voice to those most reliant on social housing, we’re going to get decisions that prioritise existing home owners.  

I recognise that these kinds of policies are going to be a tough sell politically, particularly to those who have come to consider their gains from property entirely entirely appropriate.  But books like this one definitely help, along with the wider discussion that I hope they’ll spark.

The best books I’ve read – fiction

I am always a bit reluctant to recommend fiction- when a novel resonates with me, it is always personal. So please consider this list as a celebration of some of the books that enriched my life – and if you do feel tempted to read any of these, I hope you enjoy them.

 

The Hunchback of Notre Dame, by Victor Hugo

I read this when I was 19 and staying in Paris – I remember being swept away with the beautiful descriptions of Paris, and its portrayal of flawed personalities.  In a similar vein, I also loved the Count of Monte Cristo, by Dumas, beautiful language (even in translation) and a fast moving plot..

The Lacuna, by Barbara Kingsolver

I loved this story of the childhood and adult life of fictional writer, Harrison Shepherd, set between Mexico (living with artists Rivera and Kahlo and exiled Bolshevik Trotsky) and in America (under the shadow of McCarthyism).

East of Eden, by John Steinbeck

I have read several of Steinbeck’s novels, but this was my favorite – a storyline that forced me to keep reading, and some incredible character development.

Shantaram, by Gregory Roberts

This is part true story, part fiction, about an Australian who escapes prison and flees to India, living in a Bombay and working in a Bombay slum.  The first two thirds of the book is some of the best writing I’ve read (it started to drag on a bit in the final section set in Afghanistan), but overall it was a wonderful book.

Trinity, by Leon Uris

I devoured Leon Uris’s historical novels, set in the midst of conflict, in my final year of school and first year of university.  Exodus and The Haj (set in Israel/Palestine) and Armageddon (set in Germany) were great, but my favorite was Trinity (and its sequel Redemption), set in Ireland.  History brought to life, and engaging characters.

Matthew Flinders’ Cat, by Bryce Courtenay

An Australian novel by storyteller Bryce Courtenay, Matthew Flinders’ Cat is a beautiful story of the friendship that develops between a homeless man and a young boy in Sydney.  I also loved Courtenay’s Four Fires, about a poor Irish family struggling in the countryside North of Melbourne.

The True History of the Kelly Gang, by Peter Carey

I generally struggle with literature, but this unique book captured me in the first page with its fresh language (written from the perspective of an uneducated bushranger) and depiction of the Australian countryside that I know well.

The Glass Palace, by Amitav Ghosh

A historical novel, telling the story of a poor boy in a Mandalay market stall, who follows the Burmese Royal Family into exile in India in the 1870s.  Beautiful characters and language, about a fascinating part of the world.

Wonder, by R.J.Palacio

The story of 10 year old Auggie, who suffers from a severe facial deformity, told from a number of perspectives (all children).  An incredibly moving book, both tragic and inspiring.

Harry Potter, by J.K.Rowling

No description needed.

The best books I’ve read – Non Fiction

I’m often asked to recommend good non-fiction books, and these are the ones I’ve loved and been most influenced by.  Obviously some people will struggle to see the appeal of some of these topics, but hopefully you’ll find something in this list that you want to read.

 

Saving Capitalism, by Robert Reich

Former US Labor Secretary Robert Reich’s account of how politics and capitalism has become unsustainable, and how it can be fixed.

The Darwin Economy: Liberty, Competition and the Common Good, by Robert Frank

I spend a lot of time thinking about how society should operate and how resources can best be allocated.  This book has massively impacted my thinking, helping me to see

Other People’s Money, by John Kay

A balanced and in-depth look at financial markets and institutions, at what factors make them effective and what factors makes them destabilising.

When Genius Failed, by Roger Lowenstein

The story of Long Term Capital Management, the hedge fund founded in 1994 that imploded in 1998, which included such financial stars as Robert Merton and Myron Scholes.  A fascinating and readable insight into what hedge funds do, and how things can go wrong.

Traders, Guns and Money, by Satyajit Das

Fast paced yet thought provoking adventures in the world of financial derivatives.  A lot more fun than it sounds (though that could just be me!).

The Partnership: The Making of Goldman Sachs, by Charles Ellis

A very readable history of what I consider to be the greatest bank in history, filled with illuminating anecdotes of the people and events that have shaped Goldman Sachs.

Final Accounting, by Barbara Toffler

Subtitled ‘Pride, ambition, greed and the fall of Arthur Anderson’, this was a fascinating insight into the culture at the accounting firm brought down by events at Enron.

From Edison to Enron, by Richard Munson

Probably only of interest to those working in energy, but I really enjoyed and learned a lot from this history of the US electricity industry.

Against the Gods: The Remarkable Story of Risk, by Peter Bernstein

A wonderful account that brings to life the people and events responsible for statistics, probability and risk management, from ancient times to the present.  

The Theory that would not die, by Sharon Mcgrayne

One for statistics nerds, the incredible (no exaggeration!) story of Bayesian statistics.

Philosophical Theories of Probability, by Donald Gillies

I have been intrigued by probability and what it actually means since my undergraduate days, and this book does an excellent job of summarising the different theories and perspectives.

Surely you’re joking, Mr Feynman, by Richard Feynman

I read this in my final year of high school, and it made me fall in love with physics.  

Chaos, by James Gleick

I discovered chaos theory in my first year of university and loved its multidisciplinary nature, and the fact that it was such a new field of science.  I particularly credit this book, which does a wonderful job of telling the history of this field.

Uncle Tungsten, by Oliver Sacks

A beautifully written book – part childhood memoir, part history of chemistry.  It is possibly the book that I’ve recommended the most times.

Being Mortal, by Atul Gawande

An essential and thought provoking book by a surgeon, reflecting on the nature and objectives of end of life care.  

Give and Take, by Adam Grant

Of all the books I’ve read on personal effectiveness, this resonated the most – it explains and promotes thoughtful and sustainable generosity in our lives.

How to have a Beautiful Mind, by Edward de Bono

I have friends that are an absolute pleasure to spend time with, and I know people that I just don’t enjoy being around – the biggest quality distinguishing people in the former category is (in my opinion) their beautiful mind.  I read this 12 years ago, and loved it (and really should read it again).  

Blink, by Malcolm Gladwell

This was the first book I read by Gladwell and still my favorite – I love his way of thinking about the quirkiness of human nature, and I frequently find myself retelling his anecdotes.

The One World School House: Education Reimagined, by Salman Khan

Khan is the founder of online education resource Khan Academy, and this book outlines its origins and presents his thoughts about the future of education.  I find it inspiring and thought provoking.

The Audacity of Hope, by Barack Obama

I read this at the start of 2008, when I knew nothing of Obama, and haven’t read a political vision that more closely aligned with my own.  No less inspirational a dream for his inability to realise it in the political landscape of the last decade.

The Righteous Mind: Why good people are divided by politics and religion, by Jonathan Haidt

This book is essential reading for anyone that wants to make sense of our polarised societies, and to learn to see the good in differing opinions.

Mother Tongue, by Bill Bryson

A insightful and enjoyable survey of the English language, how it has evolved and how it is used and abused.  I have since read a number of other books on the subject, but this is still my favorite.

Down Under, by Bill Bryson

It is always good to know something about your own country, and I learned more about Australia’s history and geography from this book than I ever picked up at school.  Entertaining and insightful.

Red China Blues, by Jan Wong

Jan Wong moved from Canada to Beijing in 1972, a devoted follower of Mao.  This book tells of her time as a student during the Cultural Revolution, and then later returned to China as a journalist in the 1980s.  A unique personal insight into a fascinating period of history.

What’s so Amazing about Grace, by Philip Yancey

I have a complicated relationship with Christianity, ranging from scepticism, frustration, profound respect, and genuine desire for it to be a part of my life.  This book did more than any other to see Christianity’s positive side.

 

Four proposals to make democracy work in the 21st century

Over the past couple of years, I’ve read quite a bit about the challenges of democracy and capitalism in the 21st century, and I accept that the status quo is unsustainable.  I do believe we will be able to make things better, not just because I’m an optimist, but because after all, it is ultimately in all of our interests (dystopia is not fun for anyone!).  

I’m encouraged that so many thinkers and activists are getting engaged, promoting ideas.  The solution is inevitably going to be involve community discussion and experimentation, and ultimately lots of different solutions that will all build on each other,.  

In this post I wanted to raise four ideas that I believe would go a long way to making democracy fit for the 21st century.  

Government by Lottocracy

My first proposal is to replace elected representatives with randomly selected representatives, similarly to how we do it with jurors and how it was done in ancient Athens.

Firstly and most importantly, I don’t think most people believe we are well represented.  The electoral system and party system make it difficult to be elected, and arguably the skills to get selected and elected don’t correlate with the ability to represent the wider public (this is especially the case in the US where the cost to get elected significantly changes the dynamics of power).  In particular, the lack of diversity (particularly with respect to economic background) makes it harder to counter the argument that they fail to understand the perspectives and values of the wider population.

Secondly, I believe that if we knew that people were going to be selected at random to make political decisions, we would all have a vested interest to make the system fairer to everyone.   I’m not suggesting that that company executives are sitting in board rooms plotting how to take advantage of the public, safe in the knowledge that they can lobby the government and help them get elected, but I do believe that giving greater power to the wider public would change their interests.  And I believe we would improve education to everyone if we knew that anyone could be governing us.

This proposal could be introduced incrementally.  For example, we could set up a citizen’s forum, with real power over certain aspects of government, and then gradually extend and improve it.  This would also allow us to explore questions of implementation: how many representatives there should be, their ability to be refuse to serve, how long they would represent for, how they would interact with the executive and public service.  

 

Public Commissioning

My next proposal is for public commissioning, of research, development, production and creative output.  

Since the 1980s, there has been a marked reluctance for governments to plan and supply goods and services, with a preference for the market to perform these functions.  In many cases this is a good thing, increasing innovation and individual freedom.  Unfortunately, there are some things the market struggles to provide, particularly goods and services with a small marginal cost relative to their fixed cost.  Examples of this include research, journalism, works of culture, and environmental assets.  

I don’t believe we want to go back to a world of relying on philanthropists to provide these, nor of an all-powerful government deciding everything in our lives, but I do think there is space for communities to pool resources and collectively decide to allocate them for collective benefit.

 

Wealth Tax

My third proposal is to make more use of a wealth tax, and reduce reliance on income and consumption taxes.

Your wealth determines your political power and your control of resources.  It also has a destabilizing effect, increasing the cost of maintaining a rule of law and reducing democratic legitimacy.  That said, I wouldn’t want us to prevent or disincentivise saving and investment totally.  It seems that we should be able to come up with a balance –  allowing those who invest successfully to benefit, while forcing them to pay some of the wider costs of the inequality this creates and reducing the ability to benefit indefinitely from initial wealth.

I believe that our current income and consumption tax laws attempt to achieve this, but do a poor job of it.  For example, the nature of income has become more complex – different sources have different rules, and require an entire tax industry to keep on top of and to optimise (either for the taxpayer or the government).

We are now at a point where it would actually be simpler to determine your wealth than your income, and it would be fairer.  For example, I think replacing existing taxes with a flat 5% annual tax on any net wealth over £80k would get a better balance and avoid many of the distortions that occur today.

There is still a question about how to measure wealth – but that is already a challenge, for example when calculating capital gains.  My favorite idea for this is through self-reporting, with the government having the option to buy any asset for a 10% premium over your reported value.

Another concern relates to people being forced the challenges of illiquid assets – for example, if you own outright a million pound property, you might not have the cash to pay your annual wealth tax.  Again, this is already an issue – for example with inheritance tax – where you are required to pay 30%, or where the pensioners are trying to live off their property value.  But there is already a reasonably effective financial market that allows people to borrow on the value of their property, and I foresee that we’d create markets that allow people to sell a part of their house, but continue to live there.  

Other challenges relate to how we should tax foreign citizens and wealth held overseas.  I am confident that we can come up with a fair way of doing this that treats them fairly, but avoids putting them at an advantage over domestic citizens.

Basic Income

My final proposal is the one that has received the most widespread attention, and is one that I’ve blogged about previously:  a Universal Basic Income, paid to all citizens.  

We live in a world where growing numbers struggle to gain a living wage in the jobs market.  It is inhumane and ultimately unproductive to stigmatise those that fail – we are far better to keep them supported and validated, encouraged to contribute in whatever ways they can: for example through caring for others, community work, education or otherwise enriching society.  

A basic income has the advantage over benefits that it doesn’t create a disincentive to work (it doesn’t disappear as you start earning), prevents the sense that the working poor are worse off than the unemployed, and has considerably cheaper to administer than a traditional welfare system (no monitoring people applying for an arbitrary number of jobs each week).

There are objections to a basic income.  Some worry that it will increase the size of the state – on the contrary, I consider that handing money to citizens to spend as they see fit is an example of shrinking the state.  Others worry that people won’t work without the threat of starvation or stigma – in fact studies show this not to be the case (I believe a sense of hopelessness is actually more likely to reduce desire to work).  

Some worry that the unpleasant jobs don’t get done without desperate people to do them – yes, some we will decide we don’t need that much, but for the things we really need done, pay will have to go up to attract people, and technological innovation will develop ways to significantly reduce the amount of labour required.  Finally, there is a concern about whether we can afford everyone to have a basic income –  I’d argue that unless we’re planning on killing off the unemployed or forcing them into workhouses, a basic income will prove no more expensive than unemployment benefits.

The Econocracy

This week I finished The Econocracy – the perils of leaving Economics to the Experts, by recent economics graduates Joe Earle, Cahal Moran and Zach Ward-Perkins, which considers a number of flaws with our current approach to economics:  

  • A reluctance to consider any ways of analysing economics other than neoclassical economics (which focuses on equilibria resulting from individual agents optimising their utility).
  • An inability to acknowledge that economic decision making fundamentally reflects political values, insisting that neoclassical economic policy conclusions are objectively the only rational ones.
  • The effective exclusion of the vast majority of the population from economic decision making, threatening the democratic legitimacy of its decisions.
  • Universities being too focussed in their teaching and research on applying neoclassical tools to abstract problems, with insufficient attention being given to how to understand the real (complex) world or to understand when these tools might be inappropriate.

I realise that this isn’t the kind of book that all my friends will enjoy, but for those that are inclined, I found the book excellent – readable, thought provoking, calm (never angry or unfairly blaming) and open-minded.  I enjoyed the many good examples and quotes, for example, the this one from John Maynard Keynes (one of my heros) in 1924:

“The master-economist must possess a rare combination of gifts … He must be mathematician, historian, statesman, philosopher – in some degree.  He must understand symbols and speak in words … He must study the present in the light of the past for the purposes of the future.  No part of man’s nature or his institutions must be entirely outside his regards.”

which contrasts with this more recent quote by Gary Becker:  “The combined assumptions of maximizing behaviour, stable preferences, and market equilibrium, form the heart of the economic approach as I see it.”

If you’re after more information on the book, there’s a longer review of the book on the Guardian and a more critical one on the Financial Times, however I thought I’d instead use the rest of this blog post to reflect a bit more on neoclassical economics.

Some wider thoughts on Neoclassical Economics

The neoclassical economics framework is a broad class of models, which consider the behaviour of (mostly) rational agents mechanically seeking to optimise outcomes.

It is incredibly flexible, capable of incorporating almost any feature you like.  This makes it difficult to challenge, as its fans can just respond “whatever feature you think is missing, you can add, so why are you complaining”.  But, like one of those expanding suitcases, it is only useful when you don’t put too much in it, and I do think it is as much a fault of the framework as its users that they tend to leave out a lot that the wider population would rightly consider important (like the environment, social well-being, inequality).

As well as being flexible, many neoclassical models are well-suited to quantitative treatment, mathematically and computationally solvable.  This should be an obviously good thing – except that it leads to a particular tendency to prioritise some factors (which are more easily quantifiable – like money) and ignore others (like feelings).  It also gives an impression of scientific objectivity, when in fact its conclusions can be drastically altered based on arbitrary choices of assumptions.     

I am undecided whether our best hope is improving our use of neoclassical economics, or of building other frameworks to use instead or alongside neoclassical economics.  Clearly neoclassical economic models can be improved, and this is definitely the path of least resistance in the economic community.  But I also respect the views of those who think this is ‘collaboration’ is dangerous, and after all, an agent based optimisation model is unable to recognise the fact that we are more than optimising agents.

What I am sure of is that neoclassical models are likely to be around for some time, and it is crucial that those using them are aware of both their fundamental limitations and the weaknesses in how they tend to be used.  I believe that broader economics training in our universities, along the lines argued in The Econocracy, would help create more useful economists.  But most crucially, I believe we desperately need greater public engagement and scrutiny of economic decision making: most importantly to ensure it takes into account a wider range of interests, but also to legitimise its decisions.