What We Owe Each Other, by Minouche Shafik

Minouche Shafik, Director of the London School of Economics
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 21st 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 21st 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 21st 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

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 20th century, the alignment of the parties on this issue switched over

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.

“A slow dawning that most companies are run pretty badly”

Sarah Gordon has written a memorable reflection today on her 20 years writing for the FT.

She reflects on a career with the paper that started with writing about what were in the early years of the millennium breaking technologies but which have been mainstream for so long that we can’t imagine life before them, which continued through the years of the Financial Crash and the great depression and bull run that has followed.  She writes about the routine reports of company news stories and mind-numbing performance data, and the occasional more gossipy pieces that appear to have been what the readers found more engaging than the hard news.

She found clearing her desk brought back memories of the events and personalities that have filled the business and company pages of the paper of the past two decades, and anyone reading the article be a share in the trip down memory lane.

Reflecting on these years, she reaches very strong conclusions about shortcomings in governance in response to the accretion of overweening power at the heart of companies.  She cites Dick Fudd at Lehman Brothers.  He is an easy target, but her description of what went wrong is compelling: “board members neither delved deeply enough into the real activities of the bank, nor did they challenge the person running it sufficiently. Being on the Lehman board, it seemed, was a social honour rather than a fiduciary responsibility.”  Writing of people like Martin Sorrell, who spent 33 years at the top of WPP, she observes: “Business bosses who enjoy too long a tenure lose self-awareness. They become reluctant to promote people around them who will challenge their point of view. Meanwhile, questioning a boss who enjoys such stature becomes all but impossible, encouraging hubris, and leading to bad business decisions.”

Gordon reflects that such problems, with accompanying shortcomings in governance, are not restricted to the private sector.  She cites the example of Camila Batmanghelidjh and the failure of Kids Company in 2015.  I reflect also on the ignominious departure of Sir Leonard Fenwick would was finally dismissed for Gross Misconduct by the board of Newcastle upon Tyne Hospitals NHS Foundation Trust, where he had been chief executive since 1998 having previously led one of its predecessor organisations since 1992.

She also reflects on the poisonous value destruction in so many big corporate deals, which appear to be motivated by executive greed and supported by a flawed network of advisory institutions corrupted by perverse incentives.

Her time at the FT was a journey of personal discovery and growing disillusion (albeit one shared by most of in parallel in other parts of our lives) : “As a child, lucky enough to grow up in comfortable circumstances in London, I simply assumed that the world was run efficiently by the grown-ups. It has been a slow — and sometimes painful — dawning that in fact most companies are run pretty badly.”

Gordon is hardly less critical of other institutions, regulators and politicians.  She also appears to despair that the wider lack of economic and financial literacy, and the gullibility of much of the general public.  She suggests that a public that feels exploited and even robbed by corporate excesses does, in some part, have itself to blame.

But she stresses that it is not business itself, as opposed to individual businesses, to blame, but it is within the power of business to improve popular understanding and dispel the blame:

“Many businesses are badly run, but business is not bad. Most people running companies whom I have met over the past 18 years care about the people they employ. Most entrepreneurs believe that there is a purpose to running their company which is greater than just making money.

“The voices of big business, and the big business baddies, too often drown out the stories from the millions of small companies that make up the bulk of employers in the UK and across the globe. I’ve interviewed many of them in the past few years, in Scotland, outside Cambridge, in Bilbao and Munich. Many are family-run, on the second or third generation, focused on building sustainable businesses. Unlike the UK’s big supermarkets, gouging dairy farmers with ever lower milk prices, they have long and mutually dependent relationships with their suppliers. They look after their staff, turning apprentices into engineers and keeping people on their books during extended periods of illness.

“The popular caricature of business, filled with profiteering bankers and gig economy exploiters, simply does not reflect the reality. But it is up to business to dispel it.

“……  business needs to do more than change its culture. It must challenge itself on what its purpose really is, not just what its investors want. It must be prepared to tackle the great ills of our time, such as climate change or modern slavery. And it must be louder in explaining why it matters.”

“You can’t have it both ways, Prime Minister”

“we should never forget the immense value and potential of an open, innovative, free market economy which operates with the right rules and regulations” (Theresa May, at an event to mark 20 years of the Bank of England’s independence)

With the Leader of the Opposition due to demonstrate his lack of understanding of markets in his keynote speech to his party conference yesterday, it was only natural that the prime minister should use the opportunity given by an invitation to speak at an event to mark the granting of independence by, ironically, a Labour chancellor of the exchequer to the Bank of England, to mount a defence of the market economy.

But what conclusion are we to reach about someone who manages to contradict herself so thoroughly, not just from speech to speech, or within one speech, or within a paragraph, but within a single sentence. When does oxymoronic become plain moronic?

Wikipedia helpfully spells out the roots and origin of “oxymoron”, and its evolution. “An oxymoron is a rhetorical device that uses an ostensible self-contradiction to illustrate a rhetorical point or to reveal a paradox. A more general meaning of “contradiction in terms” (not necessarily for rhetoric effect) is recorded by the OED for 1902.”   There is no possibility that the sentence from her speech, quoted at the head of this posting, is a rhetorical device. Markets are either regulated or they are “free”. Definitionally, they cannot be both at the same time.

One of the axioms underpinning the Escondido Framework is that, in the absence of a raft of elusive conditions (perfect information, symmetry, “unbounded” rationality, perfect competition etc), regulation is always required to make markets work sustainably. Mrs May has indicated clearly since becoming prime minister that she appreciates this instinctively. Am I being too generous to her in wondering whether her apparently casual use of language is a calculated sop to appease the more bone-headed in her party (which gathers for its own conference in Manchester later this week) and they will only hear the word “free” and not notice the reference to “rules and regulations”?

I can’t help wondering what was going through the civil servants’ minds when they inserted the heading “A well-regulated free market” into the published text[1] of the speech. Cock-up or conspiracy? While stepping through the black door of Number 10 feels a bit like stepping through a looking glass and tumbling down a rabbit-hole simultaneously and, in serving their political masters, civil servants are required to “believe impossible things” [2], the combination of “well-regulated” with “free” is so impossible that conspiracy seems more plausible than cock-up. If so, to paraphrase the Queen of Hearts,“Off with their heads!”

 

 

 

[1] https://www.gov.uk/government/speeches/pm-speech-at-20th-anniversary-of-bank-of-england-independence-event

[2] “Alice laughed: “There’s no use trying,” she said; “one can’t believe impossible things.” “I daresay you haven’t had much practice,” said the Queen. “When I was younger, I always did it for half an hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.” Alice in Wonderland.

1993 Tomorrow’s Company paper and latest paper for Cranfield Renewing Capitalism project

Two papers setting out some of the key ideas in the framework have been added to the site.  A paper written for Tomorrow’s Company, when in its initial phase under the sponsorship of the Royal Society of Arts, can be found on the Origins page.  A recent paper written for the Cranfield Institute’s Renewing Capitalism initiative can be found on the home page.