Egalitarianism, not inequality, caused the meltdown
Appeasing the mob is a thing politicians may sometimes have to do in order to maintain social stability. In the process, they are liable to use arguments that are biased and incoherent. Senior economists working in the public sector, on the other hand, should avoid using dodgy lines of reasoning to assuage public opinion.
A recent speech by the Bank of England’s Andrew Haldane, apparently delivered in response to the Occupy protest movement, contains some useful points. Haldane asks his audience not to blame the financial crisis on individual greed or negligence (he doesn’t mention individual stupidity) but to focus on systemic failings. More importantly, he points out that the easy credit of the Nineties and Noughties, encouraged by government — partly in pursuit of egalitarian policies — was a contributory cause of the bubble that led to the meltdown. But to begin his speech with the tendentious statement that
at the heart of the global financial crisis were and are problems of deep and rising inequality
seems irresponsible.
If the state responds to a perceived condition (in this case, inequality) by interfering with markets in ways that lead to trouble, it is misleading to suggest that the original condition can be regarded as the ultimate cause of the trouble. It is a particularly questionable thing to do when there is already a popular belief system to this effect.
The Financial Times, a publication that likes to parade its right-on credentials, predictably picked up on the inequality point in Haldane’s speech — in the process transmuting “heart of the crisis” to “root of the crisis” — but ignored his point about cheap credit driven by egalitarian ideology. This point is less readily assimilated into the Occupy world view, but is more important for understanding the 2008-09 crisis, and more important for preventing another one.
Super-easy credit (or the attempt to provide it) is of course not only a cause of, but also the policy response to, the crisis — at least, the one which central bankers around the world have selected as appropriate. Whether fighting fire with fire can be a successful strategy is something which remains to be seen.
● Haldane mentions Raghuram Rajan’s book Fault Lines. As is pointed out there, the subprime bubble was set in motion by the US government’s encouragement of home ownership, via a lowering of retail lending standards (see Fannie Mae and Freddie Mac), although the baton for making dodgy loans was later enthusiastically taken up by the private sector.
As more money from the government-sponsored agencies flooded into financing or supporting low-income housing, the private sector joined the party. After all, they could do the math, and they understood that the political compulsions behind government actions would not disappear quickly. With agency support, subprime mortgages would be liquid, and low-cost housing would increase in price. Low risk and high return — what more could the private sector desire? Unfortunately, the private sector, aided and abetted by agency money, converted the good intentions behind the affordable-housing mandate and the push to an ownership society into a financial disaster. (pp.38-39)
According to a study cited in the book which looked at different zip code areas in the US, the number of mortgages obtained in a given area during the 2002-05 period showed a negative correlation with average household income growth in that area — clear evidence, according to Rajan, of “a government-orchestrated attempt to lend to the less well-off”.
● In fairness to the parties concerned, one should mention that Professor Rajan’s book exhibits even more blatantly the symptoms of Haldane’s speech, i.e. of trying to put a twist on the basic position, to the extent that we end up being presented with an inversion of it. Several of the chapters are devoted to a lucid analysis of how an egalitarian policy eventually led to a general mania for making dodgy loans, but the usefulness of this is undermined by earlier chapters which make the case for why redistributive policies are justified and necessary — in effect excusing the intervention that led to the disaster, and adding to pressure for a repeat, if not perhaps exactly in the same form.
Every other paragraph of these interpretative chapters seems to contain some dubious claim, reminiscent of the pronouncements of New Labour apparatchiks — there is not enough education, human capital is not reaching its full potential, we need more graduates, there is increasing demand for skilled labour etc.
Among the more nebulous assertions we have the following.
To the extent that [inequality] is caused by a significant part of the population’s not being able to improve themselves because of lack of access to quality education, it signifies tremendous inefficiency. A mind is a terrible thing to waste, and the United States is wasting too many of them. (p.27)
The concept of underutilised talent may have relevance in biology or psychology, but in economics it is surely out of place, unless one can point to a specific market failure. It could be that 90% of the mental capacity of every person on the planet is unused, but that does not mean that liberating these capacities to allow a massive expansion in supply of landscape paintings and mediocre novels would produce a Pareto-superior outcome.
More plausible, though unmentioned by Rajan, is the idea that the inflation of substandard textual output, as a result of expanding the ‘university’ system, has crowded out scope for the few individuals genuinely capable of making intellectual progress to use their unutilised abilities.
● An effect of the current cheap-credit policy may well be to increase inequality via inflation of asset prices. If the present round of hyper-easing leads to a second financial crisis, I hope post-crisis analysts will refrain from seeing a spurious explanatory link between that crisis and inequality. Correlation is not causation, a fact which many contemporary economists seem to forget.
Inversion, in psychology, is a concept that goes back to Freud, though Celia Green developed it further in Advice to Clever Children. The basic idea is that an attitude or drive which is considered unacceptable (socially and/or internally) is masked by being expressed as its opposite. For example, hatred of a family member or spouse is transmuted into professed ‘love’ for that person, the underlying motive of course remaining operative. Inversion works better, psychodynamically, than simple suppression, and has the added advantage that the target of the negative feelings may be sufficiently deluded by what is presented to allow the agent covert scope to express his/her real desires.
You may like to experiment with applying the concept as an observational aid. Try imagining what someone — say, a politician, social worker, or doctor — may really be wanting when they express an interest in enhancing someone’s ‘welfare’ or expanding their ‘opportunities’. Analogous phenomena are observable in the office and the home.
Here are a few pointers to get you started. (Astute readers will notice that some of these are not strictly inversions but mere deceptions.)
“Being able to deal with others is very important.”
— I enjoy stabbing people in the back.
“Communication is an essential basis for success.”
— I love listening to people who share my prejudices.
“One cannot overestimate the importance of hard work.”
— Daddy got me my first job!
“I am modest and self-effacing.”
— My smugness is so ripe it could oil locomotive wheels.
“I believe everyone should be treated without bias.”
— The categories of people I secretly hate make a list as long as my arm.
“I find it distasteful when individuals ask for money.”
— Bermuda or Capri this year?
“Being connected to family is very important.”
— I left my second wife and kids for my secretary, but I regularly visit my mum at the old folks’ home.
“My new book? Oh it’s nothing, it’s probably all nonsense.”
— I’m going to make damn sure that publicity assistant gets the sack, after the fiasco at Waterstones.
“Markets are frightfully imperfect, and need more regulation.”
— Fortunately, I’ve already got rich from flogging my dodgy wares to gullible customers.
“I’m an ordinary, down-to-earth bloke.”
— Did I mention, I used to own the Ritz?
Something has gone wrong with the advancement of knowledge. This has been creeping up on us over a period of decades. Two main factors — (a) collective capitulation in the face of conceptual difficulties, and responding by fudging the issues, in many cases by use of excess technicality, (b) the belief that all must have opportunities — have resulted in a ‘sausage-factory’ model for universities in which research has been inverted: its primary purpose is now to conceal and suppress meaning, and to block real advances.
The issue is masked by the fact that we continue to have apparent technological progress. New treatments, new substances, new techniques. Whether the university system is the best place to generate those things, given the amount of money spent relative to useful output, is not clear. What is clear is that no major theoretical advance has been made in any of the key disciplines — physics, psychology, biology, economics — for at least fifty years. ‘Soft’ subjects such as philosophy or anthropology have become hopelessly bogged down in ideology, and nothing genuinely progressive is now likely to come out of the university versions of those.Over-institutionalisation is sufficient to explain lack of intellectual innovation, without having to invoke political developments. However, the political context is certainly compatible with the way academia has changed, and clearly some of the specific tinkering has made things worse. Much of what is labelled as ‘democratisation’ may be phoney, but to the extent society is genuinely run by majority viewpoint we cannot expect much support for the concept of culture for its own sake. The average person has no interest in devoting their own resources to it, given it has little bearing on their life.
The culture of the past, on which the culture of the present is largely parasitic, arose non-democratically. Cultural producers either had sufficient capital of their own, or benefited from patronage — patrons being motivated either by an impersonal interest, or by the wish to signal dominance (“I can afford to indulge in non-profitable activities”). In either case, progress depended on the existence of inequality.
Intellectual activity financed by a fully democratic state may continue to generate minor technological improvements, but it is unlikely to produce major advances in knowledge, and in fact has not done so. We need patronage of individual innovators if we are to escape the research-by-committee effect, but there appear to be two main reasons why it no longer happens on a meaningful scale, in spite of a supposedly high degree of inequality.
1) State-financed research has crowded out privately-financed research. The state now dominates research, largely determining what gets done. Private capital owners do not feel they have a role to play or, to the extent they still do, take their lead from what the state does and no longer view their own opinions as meaningful in this area. As in medicine and education, the state’s dominance in research, in terms of volume, means the standards it applies become the standards outside the state sector as well.
The views of a group of university professors, however closed to new ideas, are usually going to be taken as outweighing the views of a lower-status individual, although the fact that the professors have been elected by one another to posts need reflect nothing more than a mediocre competence and a willingness to defend the dominant paradigms.
2) As inheritance tax has taken its toll on estates, and markets have become more ‘massified’, the character of the average millionaire has changed. Political commentators may applaud the fact that an individual is now more likely to get wealthy from selling something that a lot of people want than from inheritance, but the kind of discrimination and interest needed to support innovative culture is likely to be easier for someone who has not had to work for their money. The high point of patronage by the Medicis, for example, came with Lorenzo, who supported artists Michelangelo and Leonardo, but it was his grandfather Cosimo and particularly his great-grandfather Giovanni di Bicci who built up the family fortune.
● Local communities electing their own Police and Crime Commissioners, as an expression of decentralised democracy? What a waste of time and paper. When a non-market service has its bourgeois standards replaced by pseudo-egalitarian ones, one cannot expect to remedy the resulting dysfunctionality by forcing would-be beneficiaries of the service to take a nominal role in running it, any more than one can expect to improve state medicine by artificially importing pseudo-market mechanisms.
I was disappointed, however, that Lord Prescott did not win the Humberside post. Might he not have knocked a few heads together?
On the topic of Prescott, I have never understood why an MP should not have two Jaguars, even if he or she is Transport Minister. It seems more fitting an expression of respect for our institutions than eating maggots for TV. A country’s acceptance of a reduced role in world affairs does not have to mean degradation for its politicians. And God preserve us from bicycling monarchs.
● I understand that a disgruntled former employee of Potato-Chips-R-Us has alleged that the culture at the company is “poisonous” and that managers habitually refer to customers as “Teletubbies”, implying they are dumb, fat, and permanently glued to TV screens. However, the company’s own ethics compliance department has now carried out a rigorous review of over 30,000 internal emails, and discovered only 188 occurrences of the words “Teletubby” or “Teletubbies”, all of them innocent references to the popular BBC show.Clearly the former employee must have been lying. Indeed, a spokeswoman for Potato-Chips-R-Us revealed that someone had told her that the former employee had been overheard complaining about his salary, only two weeks before giving notice.
We trust that no other ex-employees will be tempted to make critical allegations about their former employers. It is not seemly, and you know what to expect if you dare to risk a slugfest with a company as large and well-connected as Potato-Chips-R-Us.
in other news:
● Nobel Peace Prize awarded to the planet Jupiter for “hundreds of millennia of exerting a benign, calming influence”
● Pacific Ocean nominated for Chemistry Prize
Lack of funding means I am limited to making brief comments on complex issues. Those with access to state finance, who could provide more detailed expositions from a similar perspective, do not.
Private capital is necessary for scientific and cultural progress. Modern institutionalised academia is not well suited to generating paradigm shifts. Those with surplus funds should regard it as a responsibility to support individual innovators, including those with unfashionable viewpoints – irrespective of whether they agree with them.
Oxford Forum is seeking patrons to provide financial backing. Donations support the work of Dr Celia Green, one of the few female geniuses there have ever been, and at present scandalously ignored by the intellectual establishment.