Three currencies: cash, influence and power

My grandmother’s oranges and Frank Hester’s rants

My grandmother lived through two world wars and difficult times. She kept her politics, other than a general sense of fairness and distaste for injustice, close to herself. I remember it came as a surprise to me when she announced that she made her selection of fresh fruit (oranges if I recall) on the basis that they shouldn’t come from a nation with a pretty toxic regime and social system. Only a few years later, after discovering marketing during my Stanford MBA, I realised that it should not have been a surprise. It is an essential component of the Escondido Framework that our choices are informed by a wide range of considerations and trade-offs, albeit some may swamp others in their importance, and this affects what we buy.

I recently introduced an old friend who is researching impact investing by charity trustees to a former colleague who is chief executive of one of the largest group of family charitable trusts in the UK. The old friend is interested in the use of charity endowment to make mission-aligned investments rather than purely for financial yield. The former colleagues recounted how, as custody of the inherited wealth that the family invests in charitable giving passes from generation to generation, not only does the direction of the charitable giving shift, but also the attitude of the family members towards the non-financial impact of their investment decisions changes. This should be no surprise either, as impact investment strategies are only a short step beyond avoiding investing in industries that conflict with your charitable purposes (for example, as chair of the finance committee of Versus Arthritis, I had no hesitation in making the case that a health charity should avoid investing in industries like tobacco and alcohol whose businesses contributed to ill-health).

TPP’s Frank Hester

So what do I feel about the use by my family doctor (in common with all the GPs in west London and a large part of the NHS community services locally) using SystmOne, one of the most widely deployed electronic patient record systems in the UK? Most of my fellow patients have no idea that TPP (The Phoenix Partnership), which developed and operated SystmOne, was founded and apparently remains owned exclusively by Frank Hester. It was Frank Hester, the largest single donor to the Conservative Party, who has been alleged recently to have declared a few years ago at a company gathering that looking at Diane Abbott makes you “want to hate all black women” and that she “should be shot”. I don’t often have sympathy with Diane[1] who has very different political views to mine and has said some pretty daft and sometimes unpleasant things in the past. Comments of this type are unacceptable for many reasons and it reflects very badly on the company and its people that he felt able to make them.

I imagine that I will be holding my nose metaphorically when I next sit down in my GP’s consulting room as he or she updates my patient record with the details of my visit. If I was still chair at West London NHS Trust, where we were in the process of replacing a legacy electronic patient record system with SystmOne to provide for better interoperability with that used by our primary care partners, I doubt whether the knowledge that SystmOne was provided by a company headed up by someone with such views and that the profits were adding to his wealth would have changed my view of our IT strategy. Notwithstanding Mr Hester’s unpleasant views, the system produced by his company is the only one in town, or at least in my bit of London.

Whether things might have been different many years ago when TPP was starting out is moot. I imagine that Mr Hester was more cautious about what he said, how he said it and in whose hearing he said it, even in as recently as 1997. Certainly, I don’t recall being any less sensitive to boorish, racist and sexist language then, or my NHS colleagues being any less easily offended. But a generation on, and with the money in the bank and the software widely adopted, the customer (and ultimately their patients) has far less choice. Reflecting on this episode in Escondido Framework terms, the shape of the market interfaces have changed. How Frank Hester behaves, which has a bearing on how he does business, has almost certainly changed. Given the strength of his product with its customers and its established position against its competitors, he can (despite the widespread negative reaction his comments received) say unpleasant things without it affecting his business. For those of us who metaphorically are holding our noses, we have fewer degrees of freedom in our decision taking than we might have had many years ago if presented with a prospective supplier who acted in such a way (rather than exercising the restraint that was probably the case when Frank Hester was starting out with TPP in the late nineties).

[1] ……although I am entertained by the memory of serving with her as a fellow member of the Joint Academic Committee in the History Faculty at Cambridge University in 1974, when she (it can have been nobody else) described me in a student newspaper as “rather too obviously a Cambridge politician on the make” – wonderfully ironic given that she became the career politician whereas I made my escape from politics in the 1980s.

Dame Edna Everage and the Future of Soft Power

Dame Edna - soft power at work? — Dame Edna – soft power at work?

I can’t be sure whether Janan Ganesh has lapsed unintentionally into pompous portentousness in the opening paragraph of his column in today’s Financial Times or whether he is reaching out to fans of the late Housewife Global Megastar by writing in her style: “The omni-talented presenter Barry Humphries died over the weekend. On Monday, his native Australia announced a new and enhanced defence posture. One way of engaging with the world as a middle power is fading. Another has just started”.

Either way, the different ways in which a nation engages with the rest of the world are important. Further, from the perspective of the Escondido Framework, the article illustrates the different ways in which power can be exercised, fleshing out the “three currencies” (cash, influence and force). However, his core argument, as captured in the last two of the italicized sentences above, feels overstated. Soft power – an important contributor to influence – hasn’t gone away and remains important. The role and presence of force in the business of nations hasn’t change, but it’s a lot more visible at present and creating a greater challenge and threat.

Ganesh refers to the increasing salience of South Korean culture in the West as an example of soft power. Sharing a home with a “K Drama” addict and having visited the Victoria and Albert Museum “The Korean Wave” last weekend, I am in no doubt about the role of Korean cultural exports in changing my perception of the country and helping me identify with its citizens as “people like us”, much in the way that Ukrainians have evoked sympathy with fellow following Russia’s invasion. It doesn’t mean that Koreans do not reasonably have raised anxieties about Chinese naval exercises or the efforts of their north neighbour to develop nuclear missile capability. It does, however, decrease the proportion of the populations of the West who think of South Korea as “a faraway country of which we know little”.

Far from discounting the value of soft power, the rising tensions that have led governments to consider whether they should increase their levels of military investment (some of this forced on them by the need to replenish stocks having supplied materiel to Ukraine) only increase the need for countries to invest in soft power to underpin potential military alliances and reduce the risk of losing influence in political non-aligned nations.

First lessons from the war in Ukraine

It’s a bold step to claim to draw lessons from a war is that is not yet a month old, where the outcome is very far from clear, and the impact on the world in terms of economic disruption and political destabilisation way beyond the immediate geographic scope of the conflict.

This Russian invasion of Ukraine has so far been consistent with two of the great aphorisms about war. The failure of the Russian army in its assault on Kiev perfectly demonstrates that “no plan survives contact with the enemy”[1]. And the information coming from all sides, some understandable propaganda and disinformation, some amounting to exceptional self-deception, demonstrating the point originally made by Samuel Johnson in 1758[2] but later attributed in more pithy form to US politician Hiram Johnson in 1917 “the first casualty of war is truth”.

This war also demonstrates as well any other that existence of the three sanctions and the complex web of how they apply and interact. This is a war about the application of force and arms. It is also a war about the application of politics and persuasion. It is also a war where economic pressures are at work, where calculations about financial transactions and trade-offs are already having a huge impact.

The question is very reasonably asked how the European customers for Russian gas allow themselves to be propping up a Russian economy that Ukraine’s allies are trying to hobble through a trade embargo. Correspondingly, the world is being thrown into crisis by the impact of a shortage of Russian gas, whether held back by Russia to apply pressure on European countries or from a curtailing of imports driven by an act of policy. The impact on large parts of the world of restrictions of exports of grain from the Ukraine is likely to cause prices to rise in the affluent world and threaten famine in the less affluent.

At this stage, it is far too early even to speculate on the outcome. Will the wave of political sympathy in the West and suspicion of Russia’s motives among the former colonies of both Soviet and Tsarist empires outweigh the economic pressures that may undermine the popular support for the Ukrainians? Will the costs and potential duration of the “special military operation” undermine the political support for Putin’s irridentist claims? How does the Chinese claim on Taiwan play into the political and economic debate and super power balance?

Playing into the corporate world that is the home turf of the Escondido Framework, companies have to take into account the changes to the pressures that they work under. The virtual spaces between market interfaces within which they operate will change. This will reflect changing patterns of supply and demand for resources and for their outputs. It will also reflect changing patterns of government interference in the shape of the restrictions on where they source and where they sell. It will introduce uncertainties where previously there may have seemed a degree of foreseeability. And all this following on the heels of the pandemic and in the context of a climate crisis.

[1] “One cannot be at all sure that any operational plan will survive the contact with the main body of the enemy” Herman von Moltke in “On Strategy”

[2] “Among the calamities of war may be jointly numbered the diminution of the love of truth, by the falsehoods which interest dictates and credulity encourages” Samuel Johnson in “The Idler” 1758

What We Owe Each Other, by Minouche Shafik

Minouche Shafik, Director of the London School of Economics

There is much to celebrate in Minouche Shafik’s argument that we need a new social contract[1], not least a title that uses the language of obligation and duty rather than employing the language of rights. This is even if she falls back, in her closing remarks, on answering her question of what it is that we owe to each, that it is “to muster the courage and sense of unity” that the Beveridge Report said was necessary for the “winning” of “freedom and want”. I was looking for more, and shouldn’t be too critical her effort at a rallying cry to round off the book when she has addressed a variety of policy measures, without being unduly prescriptive about their precise form, that would address “our interdependencies, provide minimum protections to all, share some risks collectively and ask everyone to contribute as much as they can for as long as they can….investing in people and building a new system of risk sharing to increase our overall well-being”.

Shafik’s underlying argument is that we need a new social contract to meet the needs and opportunities facing both individual society and global society in the 21^st century, including those of an environment threatened by global warming and the degradation from human activity, of an ageing population, of an inequity between generations, and of the alienation of communities left as others have prospered that as consequence poses a threat the liberal democracy. She is qualified for this task by her personal history which includes an affluent childhood in Egypt that exposed her to third world poverty around her before her family emigrated to the USA, a career largely “in the trenches of policymaking” spanning international institutions and in the central government and central banking in the UK, and finally her current appointment as Director of the London School of Economics in 2017 where she launched a programme of research, ‘Beveridge 2.00’, to rethink the welfare state.

Having spent many years in healthcare and the application of health economics, I felt initially that her chapter on health was skated over too much. But this was before I reflected that the chapters outside my own area of knowledge were throwing me snippets of valuable information and new insights that left me with respect for the ambition within her 189 very readable pages (Thomas Piketty could learn a thing or two from Minouche Shafik!). Plenty of the examples in this book are familiar, such as the marshmallow test, but others cited, such as the evidence of the value of quite modest investment in early years intervention, such as weekly hour-long visits by Jamaican community health workers for 2 years to encourage mothers to interact and play with their children to develop cognitive and personality skills that 20 years later yielded 42% higher earnings than the control group.

Shafik sensibly avoids too many narrowly defined prescriptions, reflecting on data presented in the book that different countries have successful applied different policy solutions (for example in how they fund and organise healthcare) to achieve broadly similar outcomes (even if the one nation in the case of healthcare that doesn’t do this in a coherent way – the United States – ends up spending far more in aggregate, and in terms of public money, than everywhere else only to realise worse outcomes). However, the general thrust of her argument in each area of policy is clear.

Shafik poses interesting questions around the intergenerational social contract. On one hand, younger generations are blessed with material well-being that the old generations could not have dreamt off. On the other hand, as David Willetts documented in the The Pinch[2], the millennials and generation Z have good reason to be aggrieved as they pay for the higher education and the home ownership enjoyed by their parents appears out of reach. Shafik recognises, in the emphasis that she places on investment in education in new social contract and various mechanisms for achieving this that she suggests. There is also the issue of the price that they and future generations will pay in terms of the environmental degradation resulting from the previous generations’ approach to achieving their wellbeing and economic growth. I am surprised at the complexity that she builds in to potential solutions to this when the solution should lie in regulation, a national income calculus that better reflects the value of the natural world that currently calculated GDP or national income, and environmentally based taxes that capture the externalities of industrial and agricultural activity that damages the environment.

The book also gives rise to a set of interesting questions about what this means for businesses. Where do they sit within this narrative? There are important lessons for the people who sit at the heart of businesses, the “controlling minds” in terms what they can do, both in relation to their own workforces, customers and suppliers, in terms of contribution to a new social contract. For the business to thrive, and sustain itself in the long term, the core lesson is that it should be a player, alongside the individual citizen, in such a new social contract. Otherwise, its profitability and in due course its survival will be undermined by the very same pressures the Shafik describes threatening both individuals and liberal democracy.

I have a fear about one element in the approach Shafik takes to the need for a new social contract. This relates to what goes into the “increase in our overall well-being”. Some of the steam that is driving populism is increasing material inequality and the sense that communities are being “left behind”. Some of this populism is a function of identity politics, which may be whipped up by the perception that communities with other identities (often, but not exclusively, framed by other ethnicities or immigrant groups) are posing an economic threat or gain an advantage. But the perception may nothing to do with actual material wellbeing. Indeed, in the case of some of the 52% of the British population voting for Brexit, or the potential majority in Scotland for independence from the UK, this may be a desire to escape from or avoid the “other” despite the prospect that of material disadvantage. Some may be seduced by arguments that “getting back control” will leave them better off materially, but many others take the view that independence from Europe or the UK is more important than the economic benefit of remaining part of the whole. There is, at least at an abstract level, a link between the communitarian spirit in Shafik’s argument for a social contract “that addresses our interdependencies” and the desire to be part of a union, whether of states sharing a continent or Kingdoms sharing a small archipelago at the continent’s north western edge. Those same people who resist the membership of the country they occupy in a union of countries are also likely to be those most resistant to her arguments for a renewed social contract.

[1] Shafik, Minouche (2021). What We Owe Each Other: A New Social Contract. ISBN 978-1847926272.

[2] Willetts, David (2010). The Pinch: How the Baby Boomers Took Their Children’s Future – And Why They Should Give It Back. ISBN 978-1848872318.

Lockdown reading: Piketty’s Capitalism and Ideology

The Year of Revolution - a clash of ideology Chartists meet on Kennington Common in 1848 — Chartists meet on Kennington Common in 1848 – the year of the Communist Manifesto and “All things bright and beautiful”

I went into the first Covid-19 lockdown in March with three doorstep sized volumes to keep me going.

The 912 pages of Hilary Mantel’s Mirror and the Light were riveting, even if I knew from the outset that Thomas Cromwell’s career would come to an abrupt end at Tower Hill in 1540. The 1088 pages of David Abulafia’s magisterial The Boundless Sea kept me entertained as it opened my eyes, chapter by chapter, to the way that different parts of the world became progressively connected by maritime exploration, communication and trade.

I had started turning the 1041 pages of Thomas Piketty’s Capital and Ideology before restrictions started to be lifted in May but, despite finding some stimulating ideas in his opening account of the different sources of power of different parts of premodern society (which he describes as ternary or trifunctional, and have echoes in the Escondido Framework’s account of the three currencies or sanctions), it was not until the re-imposition of lockdown (the UK government’s Tier 4 restrictions) that I finally completed it.

I admire much of what Piketty has done in Capital and Ideology. His effort to document the movements in the shares of income and wealth between different groups in different societies throughout human history, and particularly the past century or so, is admirable and revealing. It is possible to challenge some of his assumptions and definitions, but the picture he paints of the direction of the trends in material inequality are compelling. I agree with his spin on Rawls’s maximin principle: “To the extent that income and wealth inequalities are the result of different aspirations and distinct life choices or permit improvement in the standards of living and expansion of the opportunities available to the disadvantaged, they may be considered just.” (p.968). His chapters on the increasing support of the “Brahmin” classes educated to degree level for parties of the left and the corresponding “Nativist” alignment of parties of the traditional right and “left-behind” communities are persuasive. But the book is far longer than it needs to be, many of its graphs add little, and he strays from the professorial scholarship of the economist/social scientist-turned-historian into an undergraduate level of prescription.

Piketty’s underlying thesis is that “no human society can live without an ideology can live without an ideology to make sense of its inequalities.” I didn’t need to read 1041 pages to recognise this: growing up in a churchgoing family, I remember singing the third verse of “All Things Bright and Beautiful”

The rich man in his castle,
The poor man at his gate,
God made them, high and lowly,
And ordered their estate.

These days, it is generally omitted!

It may or not be a coincidence that Mrs Cecil F Alexander wrote these words in 1848, the “Year of Revolutions”, in which Marx and Engels also wrote The Communist Manifesto. Piketty chooses to reformulate the opening words of its first chapter “The history of all hitherto existing society is the history of class struggles” as “The history of all hitherto existing society is the history of the struggle of ideologies and the quest for justice.”

There is something in Piketty’s thesis about the relationship between the ideas that prevail at any point in time and the organisation of society and its impact on the distribution of wealth and income. It may be that I started out as a historian whereas has come to history by way of economics, but I find that he oversimplifies to sustain his argument. Ideas ebb and flow and they can influence behaviours, but this is not the same thing as saying that they determine behaviours. He falls into the trap of assuming that the behaviours that are generally ascribed to “capitalism” are the product of the past few centuries.

He frequently quotes Karl Polanyi with approval, who was even more blinkered in this respect, regarding capitalism as an entirely modern phenomenon. Peter Acton has undermined Moses Finlay’s thesis that the ancient economy was shaped by considerations of status and civic ideology rather than rational economic considerations, demonstrating in Poiesis: Manufacturing in Classical Athens demonstrates that the commercial decisions of Athenians “were for the most part…consistent with today’s understanding of good (rational, profit-maximising) business practice[1]. It does not require a 21^st century reading of the biblical parable of the talents to see that the notion of investing for a return was established by the time the Christian gospels were written. And Abulafia’s The Boundless Sea, contains plenty of evidence for the commercial underpinning of the development of maritime trade over many centuries. One of the primary shortcomings in Polanyi’s approach was that set very specific conditions around anything that he would define as a market and, by framing his argument in this way, created a platform for his dismissal of the longstanding heritage of commercial activity. It is as though Polanyi, and to a lesser extent Piketty, seek to dismiss market mechanisms and their place in human societies on the basis that, prior to Adam Smith and his successor, the conditions assumed in classical economics had neither been articulated nor did they prevail.

Essentially, it is not that Piketty is wrong, but his case is overstated and needs reframing. It is not that ideology determines the form of economic organisation, but it helps shape relationship between the parties. In Escondido Framework terms, the prevailing ideological frameworks will influence the attitudes and trade-offs made by parties in their relationships with each other at market interfaces. For example, a religious ordained prohibition on usury does not undermine the human behavioural drivers for gratification today over gratification tomorrow and discounting for risk (although these can be culturally influenced), but historically has resulted in work-arounds (eg Islamic finance) or lending being undertaken by a community less constrained by the prohibition. Certain activities, as in caste based societies, may be undertaken by tightly defined social groups, with implications for the commercial terms on which these activities take place. But this is not the preserve of caste societies: while the boundaries may be less clearly defined and not religiously ordained, even in contemporary society there is an intergenerational stickiness in occupations and values, traditions and attitudes acquired in childhood shape occupational choices and behaviours.

So, two cheers for Picketty for the underlying thesis. And, in due recognition of his own disclaimer in his concluding chapters, he has set out to provoke further debate and provide the foundation for further scholarship rather than provide the definitive answer

However, where I find Capital and Ideology most flawed in when Piketty moves from diagnosis to prescription. In particular, his leap from describing to the increasing inequality in economic outcome for the richest few percent compared to the poorer mass of the population to concluding that all would be solved by appointing worker representatives to corporate boards highlights the danger of straying too far from your own area of expertise.

The inequality that Piketty documents arises from the endowments that we start out with in life (geography, genetics, family wealth, upbringing, education) and our life choices and chances (too many possibilities to enumerate). These will shape whether we end up with investable wealth (the impact of this on equality is thoroughly documented in his earlier work: Capital in the 21^st Century) and whether we end up in positions in which we have market power and are able to extract economic rent, which has arisen most egregiously in recent years for executive directors of large companies as a result of shortcomings in corporate governance. Addressing inequality arising from our endowments needs primarily to be by “levelling up” in terms of investment in education and social support, particularly in early years, and widening opportunities, but in relation to inherited wealth is a proper area for taxation. Addressing inequality arising from investable wealth is also clearly an issue for taxation and also needs international solutions, but is a complex matter not least because of the risk of creating perverse incentives and unintended outcomes. Taxation has its place in addressing inequalities in income, but as with addressing issues surrounding taxation of wealth and wealth transfer, is also fraught with difficulty. Piketty raises these issues quite correctly.

But addressing inequality arising from market power and the ability to extract economic rent is a proper matter for better corporate governance and regulation to address market failure. Piketty fails to recognise the role of market failure and consequently the need to address this, and also the problem of the increasing ability of corporate management (and some of the services that support them), to extract economic rent (ironically, at least in part, at the expense of the owners of investible wealth), and that this is purpose behind the need for reform of corporate governance. His own prescription, worker representation on boards, is not the solution for reasons that I have argued elsewhere. Rather, and this comes back to his underlying thesis around ideology, there is a need to widen the understanding about the proper purpose of the company (the core of the Escondido Framework), and an improved understanding of the role of boards in serving them.

[1] Acton P (2014) Poiesis: Manufacturing in Classical Athens. New York: Oxford University Press

First Reith Lecture 2020: Value does not equal price

I listened this morning to the first of Mark Carney’s Reith Lectures, portentously titled “How we get what we value: from moral to market sentiments”. The promise on the BBC’s web site was that

In this lecture, recorded with a virtual audience, he reflects that whenever he could step back from what felt like daily crisis management, the same deeper issues loomed. What is value? How does the way we assess value both shape our values and constrain our choices? How do the valuations of markets affect the values of our society?

Dr Carney argues that society has come to embody Oscar Wilde’s aphorism: “Knowing the price of everything but the value of nothing.”

It added up to a stimulating hour both from the former Governor General of the Bank of England and from an eminent audience delivering a barrage of pertinent questions but it didn’t really deliver. In many respects, although well referenced and I will come back for later episodes, it was disappointingly superficial and lightweight. However, I’ll wait until I have heard the full series of lectures and have transcripts before making a more considered commentary.

In the meantime, it is sufficient to observe that I was particularly frustrated by a looseness of language and a tendency to equate price with value and speak as if value and values are absolute. Markets generate prices but do not tell you much about the value that an individual places on anything – whether a loaf of bread, a ticket for the opera, their freedom or the impact of climate change on future generations. I place a different value on any of these to somebody else, and I may place a different value on any particular item at different times, even from hour to hour. Prices are the outcome of the differing judgements about the value of whatever is in question at the particular time – the downward slope of the demand curve reflects willingness of different people to make purchase at different prices, reflecting the value to each of them. (By extension, although Carney and his audience were only addressing financially denominated markets at the time, this applies also to marketplaces that, as I have described elsewhere, where the currency is political expression or force)

One particular exchange illustrated the shortcomings of the broader debate and demonstrated that thinking about value and that it means remains work in progress. We have known for years that national income statistics are fundamentally flawed in terms of failing to capture what is more widely considered as “value”. But Carney, notwithstanding his overall thesis that value is an elusive concept, appeared to fall into the “price =value” trap in a discussion of home-schooling, something whose value is not recognised in national income or GDP calculations. He talked as though this can be treated as lost and unmeasurable. However, there are at least two ways of quantifying the value placed on it even if it is not part of an market transaction with a formal price. One is the cost of alternative provision, reflecting either the cost per student of the child’s education in the state-funded schools or the price that a parent would pay for education in a private school. The other is the opportunity cost of the parent’s time if they were in salaried employment.

There are three more lectures in the series (to be broadcast on 9^th, 16^th and 23^rd December). I am sure that I will find them provocative, but I hope for more positive reasons than this opening salvo.

America decides……

Primed by Trump, militias gear up for 'stolen' election (Sunday Times — Primed by Trump, militias gear up for ‘stolen’ election (Sunday Times)

The US electorate (at least those who have not already cast their votes) goes to the polls today to choose a new president, senator, congressman, governor, mayor, and ratcatcher. The presidential campaign has been the most vituperative I can recall and has given rise to anxiety that the losing candidate’s supporters – whether militias driving pickups and toting semi-automatic weapons (including the Proud Boys who have been following the instruction to “stand back and stand by”), or masked rioters with bricks and molotov cocktails – will take to the streets.

The election itself and the accompanying scenario represent a living illustration of the “Three Sanctions” and their relationship.

One of the major underlying differences between the two parties is the view of the proper boundary between the cash and market-based sanction and the political sanction. The party of small government (and by extension, the dispute of states’ rights over federal responsibility, which goes back to the Founding Fathers*), is less inclined to recognise the market failures that others see requiring the intervention of government. On the other side, the interventionist Democrats recognise the merit of anti-trust measures need to curb monopolistic excess and deliver the benefits attributed to the market system; recognise that unfettered markets result in huge social inequality and that post tax income disparities in the US are way beyond anything required to provide incentives to maximise the nation’s overall material wellbeing; and fear for the future of the environment under a government that does nothing to address the externalities of unregulated commerce.

The threat of a violent response to the outcome of the election represents a potential failure in the political market-place, which depends on a degree of consent and recognition of the legitimacy of a constitutional settlement, anchored in a document drafted in Philadelphia in the summer of 1787 to meet the needs of thirteen small former colonies on the east coast in age bounded by limited horizons, communication, scientific understanding and technology. We will see in the next few days whether the political marketplace in the United States is operating under sufficiently favourable conditions – particularly consent for the constitutional settlement – for those who are disappointed by the outcome not to resort to resort to third sanction to address their sense of powerlessness and injustice. Even if they do not, the very fact of the threat that they might should prompt a deep search for an enhancement of the constitutional settlement to reduce the risk of political market failure.

*The diligent student of US history will recognise that during the mid 20^th century, the alignment of the parties on this issue switched over

George Schultz at 99

Over forty years ago, I attended a four session seminar at the Graduate School of Business at Stanford with George Schultz, then moonlighting as a part-time professor while serving as President of Bechtel Corporation. By that stage in his career he had already been a professor at MIT, dean of the Chicago University Graduate School of Business, and served in the US government as both Secretary of Labor and Secretary of the Treasury. Two years later, the Economist’s leading article gave a warm welcome to his appointment as Ronald Reagan’s second Secretary of State, after the disastrous Alexander Haig when the Cold War showed dangerous signs of overheating. The Economist reeled of a list of the world leaders with whom Schultz had built a close relationship over many years, which contributed the dialling down of threats to world peace during and following Schultz’s term of office.

Among the unexpected benefits of the Covid-19 pandemic has been the efforts of organisations to reach out to audiences with webcasts and webinars. My Stanford connections mean that I am on a mailing list for the Hoover Institution where Schultz remains, at age 99, a senior fellow, and to judge by the unmissable half hour session on Monday evening, a very active one.

I recall being put down in 1980 by Schultz when I made a case, the details of which I have long forgotten, for government intervention of some sort and he responded arguing against the approach I’d suggested and made the case for the use of economic, and specifically market levers. It was striking in this week’s interview how wide is the range of areas in which he now argues for intervention in relation to domestic policy, albeit still using economic levers, and international co-operation to address the range of threats to the future of our society, not least climate change and inequality.

As one of the architects of détente in the 1980s, and more recently an advocate for continued international collaboration (arguing for example that Britain should remain in the European Union), it was no surprise that he contrasted both the current deterioration in the relations between the superpowers and the America First foreign policy of the Trump administration with the post World War 2 settlement. He opened his talk by citing the vision both of those who gathered at Bretton Woods in July 1944 to establish a new international monetary and financial order and of the European leaders who met in Paris in 1951 to surrender sovereignty to establish the Europe Coal and Steel Community and thereby laid the foundations of the European Union.

He presented a depressing outlook for the world, given the scale of the climate change crisis and the apparent lack of reason in the approach of too many world leaders. However, I am not sure that I buy all the arguments that he made. In particular, he argued that the ageing of the populations of North America, Europe, China and the more developed countries of Asian (and given the need for population decline to reduce pressure on the environment and address global warming, the inevitability of an ageing of the global population), create the potential for an end to economic growth and squeeze on living standards, which seemed to take little account of the potential for extending productive lives.

But, however interesting his view of the global outlook and whatever the pleasure for me of this trip down memory lane, what justifies including an account of Schultz’s webinar in this blog? The “takeaway” is his account of the importance of personal relationships and human interaction. It is clear from his anecdotes that his ability to rub along with people made a huge difference to the resolution of problems in the United States’ relationship with the rest of the world both when he was Treasury Secretary and, most critically, Secretary of State. The Economist was right in 1982 to hail the appointment of this massively networked figure. Interpersonal skills are important to the management of the interface between organisations, right up to the size of superpowers. They are also critical to the effectiveness of internal operations. In answer to a question about the dysfunctionality of US government and politics today, he observed that the key figures in both executive and legislative branches all lived in Washington for most of the year, and he would regularly meet over dinner with congressmen from both sides of the aisle, in contrast to the situation today. A glimpse perhaps of the Dark Matter that makes organisations work?

My recollection from our encounters in 1980 is of a solidly build man in late middle age (at least from the perspective of a 24 year old) with a gravelly baritone, a contrast with the smaller man of today with a voice pitched an octave higher. There is only so much we can do to hold back physical ageing, but it is inspiring to see that there is every reason for remaining engaged and committed to public debate. Schultz’s recipe for a long and active life was revealed in answer to the final question addressed to him: “Don’t stop working on the things that interest you.” There is no sign that George Schultz intends stopping soon.

Black Lives Matter: Three Currencies at work

The Black Lives Matter campaign, given the most enormous boost by the killing of George Floyd, provides a powerful example of the “three currencies” at work.

The roots of the movement illustrate the three currencies: in the cash employing commerce of the Triangular Trade of the late seventeenth and eighteenth centuries and the slavery plantations of the Caribbean and the American South, the brute force employed by tribal chiefs and British slavers in West Africa and subsequently by slave masters, and in the cultural norms that facilitated the establishment of companies by royal charter and act of Parliament and, in the United States until the Civil War, tolerated and legitimated continuing enslavement of uprooted black people for two hundred years.

The current movement illustrates the three currencies too.

Policing, principally but not exclusively in the United States, that relies on physical (in the case of George Floyd deadly) force is an application of power where the application of persuasion and influence have failed. Many observers argue that the overuse of force (including, in the United States, widespread resort to guns by police) ultimately frustrates the objective of achieving peaceful civil society, but that is generally not the belief of the shooters at the time. It is impossible to get into the mind of Derek Chauvin, the police office filmed with knee on Floyd’s neck. However, unless he mounts a defence in court of diminished responsibility as a consequence of a mental health disorder, we can only assume that his defence was that he believed that anything short of the force that he and his colleagues applied was insufficient.

Correspondingly, demonstrators who become rioters and throw missiles or charge a police line (albeit a police line is an application force) are deploying physical force reflecting the belief that the political expression of the demonstration is insufficient to achieve their purpose. Of course, it is possible to argue that rioting and throwing missiles may frustrate the purpose of the demonstration in the eyes of other demonstrators and the wider audience, but that is not the belief of the rioters themselves.

The toppling of statues, particularly that of Edward Colston, is an interesting case in terms of where the line is drawn between the application of physical force as a currency and the application of influence. It is indisputably criminal damage and the equally indisputable that the removal of the statue involved physical force. But the removal of the statue was an exercise of political expression designed to further a shift in a political and cultural norm in pursuit of a wider objective.

The expression of the mass demonstrations, particularly in the context of restrictions on public gathering as a result of the Covid-19 pandemic, has clearly been a very powerful application of power to influence an outcome through political means. There was already disgust felt widely across the world and within the American establishment without the demonstrations, but they have helped keep the story in the deadlines, have elicited positive responses from people in power (even if not from Donald Trump), and have generated accounts across mass media channels that probably both reflect a shift in public mood and reinforce it.

But what about Black Lives Matter as an expression of the third currency, cash? Just look at the way that corporate America has responded. What little I know of some of the corporate leaders who have spoken up to express their disgust at the conduct that result in the killing of George Floyd and others before him, satisfies me that most if not all of them instinctively oppose racism. However, most have spoken as clearly as they have in the knowledge that this will be good for their businesses. The messages coming out from the board room are not dog whistle statements designed to appeal to a “woke” audience without turning off an audience that is hostile to Black Lives Matter. Opposing racism is good for their businesses. Similarly, as a merchandise director with the UK’s largest retailer of stationery, in the 1980s I justified developing environmentally friendly (or at least environmentally less harmful) not just because I wanted to do my bit to help the save the planet, but because I was confident that it was going to be good for business – helping grow our sales and market share, enhance the standing of our brand, and attract the best and brightest young people to work for us. It hasn’t required a threat by the black community to boycott these US corporations, but the knowledge that wide swathes of the American population, black and white, will be influenced positively by the corporation taking a stand.

Markets, State and People by Diane Coyle

Rousseau observed that “Man is born free but everywhere is in chains”. Many people in business, politics and media talk about markets in a similar way, as though “free markets” are the natural state and desirable order and any intervention by an agency of the state or collective popular action is represents an undesirable fettering of enterprise.

Economists since Adam Smith have recognised that markets can fail and may need to be subject to intervention. Even figures as inspiring to simplistic supporters of free markets as Milton Friedman recognise that there are proper roles for the state where markets fail.

Diane Coyle starts in much the same place as other economists who look at limits of markets and the place of government intervention in markets. She starts with conventional analysis of market failures, listing seven instances of failure in the conditions required for free markets to be efficient. She returns these seven types of failure throughout her examination of the relationship between markets, the state and people, and description of the appropriateness of state intervention or collective action to address.

In cataloguing the failures and the responses to them, Coyle assists the reader, from the economics or politics undergraduate or MBA student getting their first exposure to welfare economics and public policy, through to the general reader seeking a better understanding of how the world works. She draws on and explains clearly the work of people like Coase, Ostrom and Thaler who have broadened and deepened our understanding of how people both cause and respond to the seven types of failure she describes. The book is furthered enriched, and the lessons consequently rendered more accessible, by a peppering of case studies illustrating the core arguments.

Coyle also tackles government failure, highlighting the shortcomings in bureaucracies (or among public servants) and as a consequence of political failures (or failures of politicians) that result in the application of the wrong policies to address the market failures. The text seems to peter out in the final chapter where she addresses what she appears to hope is the solution to the problems of government failure, which is the application of evidence to economic policy. In this chapter that she reveals the limitations of her experience as a career academic and regulator, with a rather slight addressing of the use of statistics and cost benefit analysis. This doesn’t detract from the power (or readability) of the previous nine chapters, but point to the opportunity for someone else to write something of similar tone and quality to fill the gap on how to test public policy initiatives to address market failure.