A #longread for your weekend: Karl Polanyi in Beijing

Thank you for reading last week. If you would like this week’s posts collated as an essay you can download a pdf of “Karl Polanyi in Beijing.” You can also download a pdf version of Karl Polanyi’s The Great Transformation itself here. I recommend you do both. The collated posts also follow below the fold. I hope you’ve enjoyed reading these as much as I enjoyed writing it.

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Karl Polanyi in Beijing: why are China’s capitalists so successful?

The economic reforms introduced in the late 1970s were, argued the CCP, essential to combat economic stagnation and waste of the Mao years. So it was the Party that created the market in China. In Europe, Polanyi described an insurgent middle classes who “developed an all but sacramental belief in the beneficence of profits” and faith in the market. In China the market was introduced to break the bureaucratic control of the economy, but reform has ironically led to the enrichment of China’s bureaucrats. It has also left land and labour deeply unprotected. In contrast, China’s private and state-owned businesses are deeply embedded in social relationships. Its a deeply contradictory and complicated place as only a country of over a billion people can be.

In The Great Transformation (full pdf) Polanyi runs three chapters concurrently, Market and NatureMarket and Man and Market and Productive Organisation. These posts have followed a similar course and this penultimate post will look at China’s breakneck economic growth and discuss whether that invalidates Polanyi’s idea that “a embedded economy will be more efficient than a disembedded market.”

I started by saying that China’s party decided to create a market, that is how Polanyi and I talk about it, but it isn’t the normal parlance. The main school of thought on liberalisation emphasises the spontaneous creation of private enterprise wherever the state withdraws; this school draws on Adam Smith’s assertion about man’s “natural propensity to truck and barter.” I haven’t much truck with this. Capitalism got going in large part thanks to the fiscal strength of the British war state being able to enforce property rights and help capitalists accumulate capital through dispossession. Likewise in the US the government opened up the west with bloodshed and dispossession which helped America’s farmers accumulate land and helped prop up the wages of its working class. But I digress.

One half of Polanyi’s theory was that while laissez-faire was planned, the response was automatic and universal, even capitalists rebelled against the market. Good free marketeers like Tim and Chris see this as lamentable, they should see it as inevitable. Polanyi insisted that against the tide of market utopianism even capitalists will strive to protect themselves against the market. In China there has been no unconditional acceptance of the market, and its implementation has been limited, even if its effects have been broad. Contrary to the liberal belief that those engaged in private business will seek further economic and political freedom, it appears that those engaged in business in China prefer stability to economic liberalism. There’s more parallels to this: authoritarian capitalism can be pretty stable, Bismark’s Prussia, Meiji-era Japan and Pinochet’s Chile were all stable for extended periods of time. Just like in these countries, embedded markets can be remarkably effective at delivering growth.

China’s business operations rely more on connections than on private property, they are embedded networks of guanxi. I think you should conceptualise guanxi differently for migrant workers versus business men. For labour, it has arisen as a protective last resort, a countermovement which provides shelter in place of hollow labour laws. For businessmen it has become an integral part of “doing business.” Rather than decreasing as China’s economy develops, guanxi has increased its prevalence as businessmen develop new ties, and deepen old ones, in order to achieve their aims.On one level it functions, not as a system protecting against the market, but as a method for smoothing the transition between different state policies, in which extralegal activities are permitted in order to maintain smooth operation of business. There’s a parallel in the Soviet Union were boxes of cigarettes and bottles of vodka lubricate the workings of a badly drafted plan. In China gifts lubricate systems of insecure exchange.

At a macro level, the state also supports businesses and economic growth. The ideal developmental state, as described in Monday’s post by Evans possesses a “concrete set of social ties that binds the state to society and provides institutionalised channels for the continual negotiations of goals and practice.” Is is easy to dismiss guanxi as clientalism, or “crony capitalism” that distorts a natural market conditions. In reality China’s capitalists have the ear of the Chinese state and mutually assured destruction ensures they are focused on growth. Where Scott Sumner sees pragmatic policy making I see the fear in their eyes.

The state has laid the foundations for China’s economic growth and like other developmental states, it has sporadically suppressed market activity and supported strategic investment at the behest of its capitalists. China’s business situation is a system in which legal foundations of private property do not matter as much as ensuring that personal connections with local government and party are good. This can be a method by which private capitalists can extort money, power and influence from society at large. But it is also a method for ensuring capital investment is incentivised and profitable opportunities exploited. The institutionalisation of guanxi is a symptom of the decentralization of power which has occurred in China as both an impetus to, and consequence of, China’s economic rise.

To a degree the Chinese state has failed. For the majority of China’s development, while attempting to build global leaders the vast majority of the Chinese economy remained wedded to low-wage manufacturing. “Manufacturing” may prove to be  a superlative a word for what occurs in China. It can perhaps be better described as “assembling” imported inputs. High-value adding components are constructed outside and shipped to China for final manufacturing before being re-exported. The challenge for a developing country is to move up the value added chain. In the mid-2000s I was relatively sceptical of this happening, now I am more optimistic.

From The Independant, taken by Leonardo Finotti

From The Independant, taken by Leonardo Finotti

The tight state-industry link hasn’t been severed and remains very strong. In return for a huge degree of state control Chinese capitalists can help direct infrastructure spending. Britain has built one new runway since the Second World War. China has been building ten a year or more for over a decade. Britain was rather well endowed with runways following the war, but China’s achievement is colossal. China’s expanding its infrastructure at an astounding pace and it is a close coalition of capitalists and bureaucrats directing it. While some reports suggest lots of this investment is in empty ghost cities and roads to nowhere others are more optimistic:

In the case of Henan’s Zhengzhou—frequently dubbed China’s “largest ghost city”—Ms. Wong notes that a number of media portrayals of the city’s newer areas have used photographs taken between 2010-12, before the metro system connecting the district to the city’s more established neighborhoods was completed. On her most recent visit there in August, Ms. Wong said she saw many cars, “hordes of pedestrians” and considerable ground activity in addition to curtains and air-conditioners installed in numerous residential buildings.

“I asked local people about what they think…about Zhengzhou being a ghost city and the answer is, ‘What?’ They don’t actually have any idea they’re being labeled a ghost city,” Ms. Wong said.

Western reporters are the least likely to understand movement and patterns of production in China. Infrastructure investment is being directed by a coalition of capitalists and bureaucrats using local knowledge passed through to the might of the Chinese state.

From the BBC, taken by Pu Yongfang

From the BBC, taken by Pu Yongfang

Of course, the state can also be expected to expropriate the poor as necessary. As the poor and dispossessed become wealthier and therefore more powerful it seems that land grabs are becoming a little rarer than they used to be. This could also be because all the good land has already been grabbed. In any case, capitalist production is closely embedded in the state apparatus. Seizing land isn’t fair, but it is a pretty good way to accumulate capital. Capitalists are also more productive than poor people and development is all about putting things to their most productive use. This is the ugly side of development, and China is very good at it because its capitalists and government need to keep the economy growing.

The Chinese economy contains a business community embedded in close sets of social ties, this having given it the potential to direct its domestic industry in socially productive ways. To some degree it has certainly succeeded. In centres of development on the coast modern economies have grown up but it is unclear that this will spread to China’s interior. Firms are moving up the value added chain but China remains a very poor country. I’ve discussed in past posts that increasingly large tail risk is being built up in the poor treatment of China’s workers and its environment. China has managed to leverage some of the connections between business and state towards useful investment but at great cost to people and planet. Tomorrow’s post will tie together some of the ideas discussed over the last few days.

Karl Polanyi in Beijing: who are China’s workers?

The labour market in China is in its infancy. It is, in fact, incorrect to speak of a labour market in China at all; there are many disparate situations where we find working people. Although discussion will be on industrial workers it should not be forgotten that there are still more than 200 million peasants working the land in China, however for brevity these must be excluded from discussion. The state began allocating labour in the 1950s and continued until the 1980s when the attempt to commodify labour began. However, the creation of a labour market has not seen the state wither away; instead it has turned its already considerable repressive powers towards the task of creating a Labour market. Polanyi argued that the creation of markets involved a dramatic increase in the coercive power of the state; this is in marked difference to others who emphasise the natural germination of markets, which occur where the state withdraws from the economy as is typical with most economists.

In an examination of China, Polanyi’s account is by far the more convincing than that of conventional economists. Chinese workers have been reshaped into commodities. This has first been done by the central Chinese state through the smashing of the “iron rice bowl” and the stripping of state provided welfare from the employed, and the exclusion of China’s vast migrant workforce from what little support remains. Moreover, enforced redundancy and bankruptcy have created vast reserves of the unemployed, “freeing” them to find their wage on the market. These reforms were met by a series of Labour Laws, intended to mitigate their negative effects. However, the laws concerning minimum wages, factory conditions etc. go largely ignored due to a second movement towards commodification.

Local government has received much devolved power; for example, in fiscal terms, China has perhaps the most devolved government in the world. In return for this power, local government is charged with fostering economic growth, this usually entails the circumvention of these labour laws. Sole responsibility for the bypassing of these laws should not be levelled at the local state. For example, 78% of state-owned enterprise employees and 95 percent of state-owned enterprise retirees were to be covered by the state-run pension scheme. This reform replaced schemes run by individual enterprises but will not be honoured because of the fiscal limitations of the central state.

There are obvious benefits to China’s current configuration, Chinese workers no longer need to contend with the repression Maoist state, and there have been notable relaxations since the Tiananmen Square Massacre. However, this internal confrontation has been replaced by an external one; workers now have to combat the combined legal departments of several transnational corporations. For years they have been engaged in intensive lobbying against the extension of further labour rights in China, Arrogantly declaring that the labour laws in place, already largely unenforced, are enough for China’s workers.

The creation of a labour market has required de jure, and some de facto, ending of lifetime tenure. In 1983 state-owned enterprises were ordered to hire new employees on a contractual basis, this began the drive to convert labour into a commodity, to be bought and sold as a commodity, and abolished the socialist conunitment to full employment. This was consolidated in the mid-1990s with large scale redundancies at SOEs. However, those who still enjoy urban state sector employment remain very immobile; the real effects of market reforms have been felt by the vast and growing rural-urban migrants. The dissolution of the communes led to the creation of a vast migrant labour force, which numbered around 50 million in the late 1980s, and over 150 million now.

This process shares similarities with the making of the English working class: peasants, handicraft workers, artisans and small manufacturers all suffered displacement as their livelihoods were destroyed, whether, through land enclosure or market competition from more productive capitalist fawns and factories. However, in England as the attempt was made to commodify labour in Britain a countervailing measure arose to protect society: Polanyi interpreted legislation concerning public health, factory conditions, social insurance, public utilities, municipal services and trade union rights in Victorian England as countervailing measures to check the societal effects of the unfettered expansion of capital.

This countervailing measure is far from obvious in China. The expansion of the state required to commodify labour is described above. However, the application of the commodity fictions has only been partially implemented. The local state, at times, undermines the institutions designed to embed Labour within a social minimum. Deng aimed to refashion workers as commodities, to be bought and sold. However, the appeal of the Chinese economy was not just cheap labour; there is a wealth of the desperately poor in the world. China succeeded because its labourers were healthy, educated and disciplined. A population more literate, more educated, and with longer life-spans than any country with a comparable GDP, entered the world market in the 1980s. This was achieved with meal Communes and urban Danwei which operated as miniature welfare states, providing cradle to grave security.

The communes have long since been dissolved and so, as SOEs are transformed, most working people have lost access to their social safety net, including pensions, housing, health care and increasingly even primary and secondary education. To illustrate, after three decades of reform, healthcare is in freefall and the World Health Organisation ranks China last in terms of equal access to healthcare. Furthermore, China alone is helping to partially refute the idea that “wealthier is healthier.” The marketisation of its healthcare infrastructure has caused improvements in health to accrue more slowly, and less equitably, than in any comparable state in history — the poorest now go without healthcare altogether. As discussed in my last post, the countermovement against the commodification of land is notable for its weakness and for the damage which has been wrought in its absence; regrettably the same is true, to a lesser degree, of labour. Labour laws exist in China; there are a number of rights which have been introduced, from pension reform to minimum wages. However, the Double Movement is not a matter of formal labour rights. If rights such as those above go unenforced, as they do in China, they cannot be described as constituting a Double Movement.

After examining the conditions of workers in China; both their hardship and their lack of protection offers evidence that might be used to refute the existence of Polanyi’s Double Movement. However, informal institutions of embedding have arisen in order to overcome the abusive application of China’s labour laws. This essay will argue that, as with business in China, rural-urban migrants have developed a complex system of guanxi to insulate themselves from the market. The work of Granovetter describes the limits of spot markets between anonymous individuals to transfer information and build social trust. Moreover, it helps us to understand that legal protection and social security are not the only ways in which the economy can be embedded. Within China, informal systems of embeddedness have come to be incredibly important.

A brief description of the origins of China’s migrant labourers is necessary to place them in the correct context. Revolutionary China used a hukou, or household registration system, to all welfare provision to its population. It also constituted an intrusive method of social control, preventing all but a limited amount of internal migration. Initially registering the population was simply about finding out the numbers involved, but hukou soon became a tool to restrict mobility. The hukou system’s weakening has granted labour the freedom of movement around China, but it also prevents migrant workers from claiming the pensions, schooling, unemployment benefits, etc. enjoyed by those who have an urban hukou. In official Chinese parlance peasant workers in urban jobs are not migrants; as it would denotes a more settled status. They are a “floating population,” without the rights that those who possess urban hukou enjoy. It is this group who make the most extensive use of guanxi as it is they who lack the most basic of protections.

Guanxi is an informal set of ties and obligations whose origin can be traced back to Communist China. In contemporary business relations its importance is well documented (and I will discuss it more tomorrow). Granovetter’s study examined the behaviour of individuals within a developed market, and found that they often substituted embedded social relations for rational economic maximising behaviour. A similar and more intense version is employed to glean useful information from fellow migrants to find work, and protect themselves from unemployment. To illustrate, it is argued that because of the guanxi between current migrant workers and potential migrants as few as just five to ten percent of newcomers to Chinese cities could not find work within a week of arriving. The emphasis placed on guanxi  can help us to understand why it is that China’s rural migrants can survive and remain productive in such a hostile environment.

The demands made by the market can prove utterly disastrous for human beings if their basic needs are not protected. However, the Double Movement is more fundamental than this. Guanxi has helped to explain the survival of Chinese workers in a hostile environment, often devoid of the social protection Polanyi argued was essential; however, this only addresses one aspect of the Double Movement. It is also fundamental in embedding economic relations in a legal system that ensures that the commodity fictions are upheld in a market-society. As explained the Double Movement is not anathema to markets, it is a necessary condition.

Fred Block discusses the embedding of the economy in “law, politics and morality,” the economy insist be embedded within reasonable and lawful practices. Thus, even an approximation of a market system requires embedding within a social minimum. The evasion of Labour standards illustrates the weakness of the Double Movement in China. This view, though controversial in Polanyi’s time, is now firmly embedded in the new institutional economics of people like Douglass NorthDaron Acemoglu and James Robinson.

Non-payment of wages is a major problem in China, sometimes used to discipline workers, it is used to ensure workers do not quit, as if they do they risk losing all right to unpaid wages. It is incredibly widespread, in a survey it was reported to have had affected 72.5 percent of workers. It is cited as a major cause of protest in China; but by using it to discipline workers further protests are being prevented. The non-payment of wages is a method used in China by capitalists to enforce discipline and expropriate capital from their workers. This practice is credited with allowing such a large amount of wealth to be accumulated by such a small group, in such a short amount of time.

At times this is discussed as a shocking denial of human rights, the simple right to be paid what one has agreed as remuneration for one’s labour. It is presented as an example of how brutal capitalist development has been in China. But, the true interpretation of this practice is rather different. Capitalist exploitation under a market system involves the sale of labour as a commodity. The theft of labour is evidently not part of this. This practice illustrates again the weakness of the Double Movement in China; it has failed to provide an adequate legal framework to ensure wages are paid on time, or even at all. Without a Double Movement to embed market structures they don’t exist. You don’t get capitalism you get something even more brutal.

In law the situation concerning labour appears far better than that concerning land. However, in practice both appear to be subject to the damaging infliction of commodity fictions. Giovanni Arrighi suggests that the Chinese state has presided over gradual economic reform and met these with countervailing actions to promote a “synergy between an expanding national market and a new social division of labour.” However, this represents an astonishing, though predictable, misreading of what is occurring in China. With regard to labour the Chinese economy tacks not only the protection necessary to ensure wages are paid on time, but reform has also hollowed out the institutions that made the Chinese economy a success in the first place.

Since I wrote started researching China about half a decade ago a lot has changed. It’s a country that moves at an astonishing rate. Over the past decade, China has rapidly expanded the numbers going to university from from 2.2 million in 2000 to 6.6 million in 2010 students. Job creation hasn’t keep pace and there were 100 job applicants in mid-2013 for every 80 jobs which require a university education in China. The scenario was reversed for jobs which don’t require tertiary education, there were 100 applicants for every 125 slots in China. This has led to a narrowing in wages. Since 2009, professional wages have climbed 12 percent annually. In the same period, average wages in manufacturing, agriculture, and construction have risen 14 percent annually. I’ll chalk this one up as a success for Polanyi’s Double Movement and a sign I was probably too pessimistic 5 years ago.

China has been successful in destroying the old institutions, which allowed it to enter the world economy and out perform all previous expectations. However, they have not been replaced with new institutions to guarantee further success, although some elements are improving. On one level this is evident in the endemic non-payment of of wages, and the callous exploitation of the local state. You can also see the frictions in the mass gathering incidents documented by Jamie.

I would argue there are two seams to the protests now occurring in China. These can be used to locate where people feel threatened by China’s Great Transformation. Some occur because some workers have been left to the mercy of the market, protesting against enforced SOE dissolution, low wages, and a scandalous marketisation of basic services; such as healthcare and education. Others occur precisely because the same set of commodity fictions are not enforced, people are robbed of their labour and land because a market has not been instituted inside reasonable institutions. The same is true in the countryside where Chinese robber-barons have seized huge tracts of land. Both stem from the same source, the weak countermovement in China. If action is not taken to embed the market, then the ecological and human damage that will result will be matched by the collapse of China’s economy. We’ve heard lots about China’s capitalists in passing, but I’ll go into more detail tomorrow.

Karl Polanyi in Beijing: why is there so much smog in Shanghai?

To explain why the smog is so bad in Shanghai you can point to air pressure, christmas, temperature etc. But to really understand, like most things, you have to go back at least half a century. You might think its odd that I begin the meat of these posts with land and nature and not people. But until very recently China was an agricultural country. It makes perfect sense to start with the environment.

So, to kick off, I won’t pretend environmental damage wasn’t widespread in Mao’s China. “Political repression, utopian urgency, dogmatic formalism, and state-sponsored relocations affected and distorted Chinese relationships with nature in the Mao years” as Shapiro wrote in her Mao’s War on Nature. Among the most bizarre attacks was an utterly mad attempt to eradicate sparrows, rats, mosquitoes and flies, from the Chinese countryside. Unfortunately, the environmental degradation produced in the Mao years pales in comparison to the damage which contemporary reforms have fathered.

Mao’s death in 1976 ended the lost decade of the Cultural Revolution, but also created a power vacuum and a period of instability in the Communist Party of China. The elevation of Deng Xiaoping to leader offered a welcome solution to the Chinese people, and he entered office with a mandate for change. The change he proposed was described as “market adjustment” and “adjustment by the plan” at the December 1978 Third Plenum. Reform began in urban areas with an attempt to create an urban labour market by allowing selected managers to hire on a contractual basis. The reforms also included provisions to allow state owned enterprises to raise prices and retain profits. In 1981, amid rising inflation and urban unrest, urban reforms were brought to a halt and focus was switched to rural areas.

Rural reforms began not long after their urban counterparts in September 1980. They initiated a major step in the rural reform process; the commune based agricultural system was to be replaced by the Household Responsibility System (HRS). You don’t understand anything about China unless you understand this. The commodification of land began in the countryside; the HRS divided commune land into individual family farming plots, and tied earnings to the yields produced by each family. They had to make compulsory deliveries to the state but anything above that was free to be sold on the market. Within three years 98 percent of peasant households had been incorporated into this new system. Eager to taste the new life offered to them the Chinese peasants were keen to undertake this transition.

Although the land remained communal property, which was leased out to individual tenant farmers, the HRS amounted to a de facto commodification of land in the countryside. As well as abolishing the old order and implementing the HRS, the Chinese state has also played, and continues to play, a vital role in forcibly commodifying land; dispossessing China’s peasants of their plots . Reflecting on the HRS, The Economist credits the spectacular growth in the Chinese countryside to the free play of market forces. However, what Meisner calls the most “economically successful period in the history of Chinese agriculture” can more accurately be described as the culmination of thirty years of successful state led investment. The rise in productivity being the results of a one-off price increase on compulsory grain deliveries that corrected, previously low, state prices.

Most economists would argue that China suffers because of its ambiguous property system — uncertainty prevents long term planning and investment. However, by equating commodification with free-hold, they ignore that the commodification of land can be done largely on a leasehold basis, as it was in London and New York. Within the Chinese context it is important not to equate the commodification of land merely with status as “private property.” Even as commentators denounce China as Communist in name only, domestically the term private property has still not lost its subversiveness. Therefore, in urban areas, land is often traded in “primary” and “secondary” land-markets, while also remaining state property. This essay will argue, for both land here, and labour in the next chapter, that although unconventional, the commodification which has occurred is subject to the same analysis Polanyi used in The Great Transformation.

The Double Movement does not occur in a vacuum, class interests play an active role in fermenting and directing the countermovement. By mediating the enclosure movement in early-modern England, the monarchy and the Church represented the interests of society and prevented it from massive social upheaval. The countermovement against commodifying land slowed the pace of change and allowed new measures to be developed to deal with the new problems which were part of this new social system. After the experiment of Communal life many peasants were keen to taste the new life offered to them by the HRS. Moreover, the CCP officials who oversaw the dissolution of the Communes, often themselves profited directly from this process. Both of these factors may help to explain the initial weakness of the Double Movement in China. Unfortunately, the enthusiasm of the Chinese peasantry and the CCP for reform, has not prevented a catastrophic destruction of the Chinese environment.

The annihilation of the Chinese countryside is not a certainty; there are some embryonic examples of a countermovement. The Western Development Programme was an attempt to demonstrate the government’s commitment to national unity. It is not a simple or straightforward programme with a discernible single aim. Rather than just attempting to eliminate inequality, most of the programme aims at incorporating the underdeveloped Western China into an enlarged home market. However, this would ignore the element aimed at protecting the environment, the “Grain for Green” programme. In essence it asks farmers to refrain from using the land for profit, and instead to return it to natural forests and grasslands. This serves to protect the natural environment from over-exploitation and callous destruction.

However, projects such as the WDP do not alter the fact that the success of Chinese agriculture is threatened by the market. The institutions which had maintained the major works that allowed China to equitably feed the largest nation on Earth, have been dismantled in an effort to commoditise land. This has not been met by new coping mechanisms or new social projects. Polanyi argues that economies which are embedded will be more successful than those which are not. The HRS was the cause of a cumulatively huge one-off increase in the living standards of millions, but was followed by stagnation in living standard and declining grain yields. Grain yields declined because, precipitated by Deng’s call to diversify, many farmers turned to small-scale private business instead of farming. Moreover, most damaging for individual wealth of those Chinese tied to the land the HRS has put a halt to much mechanisation of Chinese agriculture – a centuries long Chinese ambition.

In 1997, it was suggested that China could take advantage of its backwardness, evade chemical pesticides and fertilisers, refuse to make extensive use of automobiles etc. and bypass the most destructive elements of development. One look at Shanghai shows you that this advice was not heeded and the Chinese people and natural environment have paid the price. The market as instituted in China is incapable of delivering the environmentally balanced development essential in China. Polanyi argued that only by mediating the change and embedding the economy, did the enclosure of England not result in social calamity.

The literature on the environmental damage of modern China abounds, but to be succinct we can restrict our discussion to idea of a “Green GDP” which has been considered by the CCP. A simple idea, the “Green GDP” subtracts the economic cost of environmental degradation, from the increase in a traditional calculation of GDP, more net domestic product than gross. Despite the fact that it “used low estimates of environmental damage to health and did not assess the impact on China’s ecology” the new growth calculations were so meagre that they were politically unusable. The CCP could not maintain its economic credibility with such poor growth figures. The commodification of land has caused huge damage; Vaclav Smil estimated that one seventh of China’s potential GDP in the late 90s was sucked up by environmental abuse. Despite, and perhaps because of, this widespread destruction, there have been some recent movements towards a rebalancing countermovement; such as the WDP described above.

I’ve tried to outline and analyse the problems that have confronted the commodification of the Chinese countryside. In light of; the “Green GDP,” the decline of public works, and the stagnation in peasant living standards since the mid 1980s, the foresight of Polanyi’s argument become clear. An embedded economy will be more efficient than a disembedded market. China is experiencing a continent-wide expropriation of social property, but without being coupled with a concerted effort to maintain the standard of the natural environment essential for the well-being of the Chinese people.

The market is systemically unable to deliver economic growth without doing environmental damage. It is possible to price these externalities, but just because it is possible does not mean it is happening. Pricing externalities requires complex institutional design and a class of people to make the case. The people most badly affected by the damage done to the environment are too weak politically to respond. That a pigou tax is possible but not in place strengthens Polanyi’s position that an economy works better when embedded. Wednesday’s post looks at labour and tells a similarly ugly story.

No, @chakrabortty‎, Britain is not a developing country, we just need to quit hitting ourselves in the face

Moderat_cover1There is a production possibility frontier. That’s the posh way of saying there’s a technological limit to riches. Then I think about developing vs developed countries I think about how can countries get closer to that frontier. Britain is at, or close to that limit. Britain’s challenge is finding new ways to do things and splitting the proceeds of what we can already do.This is why I think Chakrabortty (and by association Larry Elliott) is wrong here:

Let’s admit it: Britain is now a developing country

We have iPads and broadband – but also oversubscribed foodbanks. Our economy is no longer zooming along unchallenged in the fast lane, but a clapped-out motor

Britain has decided through its imperfect institutions that we want to have a little more of the economic pie in the hands of banksters (via bailouts), a little less in the hands of the unemployed and disabled (via cuts) and the rest more directed by the market than by benefits. That’s the consensus policy view since about 2009/10.

Until the 1870s [1] Lancashire was the high-tech centre of the world (stop sniggering at the back). To get richer we had to invent new things and new ways of doing things. That’s what the UK looked like then and its what it looks like now. A developed country needs to think of new ways of doing things to get richer. A developing one (or, to be less more accurate, an undeveloped one) needs to adopt them.

Argument by definition is the worst, but how else can this argument proceed? Britain doesn’t need to adopt new ways of doing things from elsewhere to solve the problems of poor investment in R&D, bad infrastructure, income inequality or gender inequality, that Chakrabortty discusses. We already know how to deal with them we’ve just decided, as a polity, not to.

The coalition slashed capital spending because it looks like an easy short term fix for the deficit, same goes for the disabled and the poor. Bankers got bailed out because they made a convincing case they would drag everyone else down if they weren’t. Manufacturing got dismantled in the 80s and 90s and fixing the UK’s supply chain will be hard because its a bit of a mystery for how we get from here to there. We can’t just set up a factory manufacturing lead toys with “Made in England” on them like the Germans did,  [2] we have to work it all out again.

As to being overtaken by Taiwan or South Korea. Good for them! This is what successful developing countries look like…

Export (1)

…that’s right. They look like developed countries. This is as good as reason to get the champagne out as any.

Chakrabortty has a point about the concentration of economic wealth leading to a concentration of political power. That’s something I’ve been writing about since I started this blog….so…I guess this isn’t a “developing country problem” at all, it’s a problem of power and it will never go away. Relegating the abuse of power by elites to a pathology of poor countries is unhelpful. Britain has problems but they’re problems we have created. We don’t need to learn anything new – the hallmark of a developing country – we just need to quit hitting ourselves in the face.


[1] After that things got a bit more complicated ask in the comments for MOAR History if you want.

[2] Okay! You get MOAR history anyway. The first things to carry “Made in X” on them were toy soldiers from, I believe, Sheffield because the Germans had got hold of some machinery and were making cheap knockoffs. The Germans didn’t know how to get richer when they were a developing country, so they adopted processes from us. Britain couldn’t steal back so it invented “Made in England” as a crude and effective branding to protect their business. See how it works?

Karl Polanyi in Beijing: what the hell is an embedded economy?

The account of economics provided by Polanyi rests on two connected facts. Firstly, that people rely on their natural environment and each other for their satisfaction of needs. Secondly, that the economy requires institutions, that distribute skills and knowledge, and guarantee the worth of human beings as things other than commodities. Traditionally, the economy is discussed as an autonomous sphere of human activity, in which the social environment plays only a supporting role, and modelled at a high degree of abstraction such that a “pure market” becomes an unreachable platonic ideal. However, Polanyi believed that the economy can only be examined within social relations, and that markets are therefore only useful when embedded within those social relations; they are marvellous servants but terrible masters.

Within the Chinese context it is important to examine others who have expanded on Polanyi’s concept of an embedded economy, most notably Mark Granovetter, and Peter Evans. Granovetter’s work is instrumental in understanding the social ties which have been essential in insulating China’s business and migrant workers from the market. The role of the state in economic transformation is examined in Evans’ Industrial Transformation. As addressed Thursday’s post, while the Chinese state has been central in fostering economic growth, it has failed to create an economy which promotes equitable national development. Their contribution to understanding the thought of Karl Polanyi will be examined later in this chapter.

In an oft quoted introduction Polanyi stated that “the idea of a self-regulating market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society.” Utopian, because a self-regulating economy is an impossible fantasy which can never be realised. Annihilation, because Polanyi believed that equating the economy with the market represented a slight-of-hand which presents an impoverished conception of the economy. The economy is the setting for numerous social interactions, equating the economy with the market ignores its role in reproducing ethics and protecting society. If man’s economic role is reduced to an input in the market “human beings would die of the effects of social exposure.” Polanyi’s theory of history views the expansion of the state apparatus and the creation of markets as intimately entwined.

In all previous societies, Polanyi believed, the economic had been subsumed within the social. “Capitalism” was not a term Polanyi used frequently in any of his works; he preferred the term market society. I think Tim Worstall might approve of this split. Besides a desire to distance himself from Marx, he used the term to draw attention to the idiosyncratic nature of his theory. The term market society does not refer to private property, or the means of production. What was unique, and dangerous, about it, was that land, labour and money were treated as commodities. His definition of a commodity as “not merely as a good exchanged on markets but a good produced for sale on markets” is irreconcilable with land, labour, or money. Therefore, he describes labour, land and money as fictitious commodities, that is to say that “labour is only another name for a human activity that goes with life itself . land is only another name for nature, which is not produced by man, actual money, finally, is merely a token of purchasing power.”

Thus, the attempt to commodify these three fictitious commodities is doomed to failure. For Polanyi it would have meant the destruction of society, of man, and of the natural environment. ‘therefore, the tendency towards the creation of a self-regulating market is met by a protective countermovement. This is what Polanyi dubbed the Double Movement and cannot be examined as anathema to markets, instead being essential in mediating the rate of change and instituting the process in society. “If improvement demands too great a social dislocation, society disintegrates” as Lord Glasman has written. Polanyi examined the attempt to create a self-regulating market in nineteenth century society, and witnessed its collapse into the New Deal, Soviet Five-year plans and Fascism.

Class is also central to Polanyi’s analysis; each class participated in the self-protection of society and at some point stood for interests wider than its own. In Polanyi’s view of history laird was protected by the landed aristocracy and peasants. Labour, or man, and hence the whole of society, was protected by the working classes. Hence they worked to protect the whole of society. Although they were the originators of the market, the middle class itself even turned against the demands of the self-regulating market “in the final instance even capitalist business itself had to be sheltered from the unrestricted working of the market mechanism.” Traditionally capitalist development has been led by a middle class keen to win more freedoms, but in the 1980s that class was missing in China. Now, it appears that business, and businessmen, are content within the embedded business environment of contemporary China.

The countermovement, examined above as a protective movement, describes one way of interpreting the Double Movement. However, Fred Block offers another reading, and argues that Polanyi describes an “always embedded economy,” in which countervailing movements not only act as a protection against the commodity fictions, but also help shape the initial environment for the development of a market society. This creates an economy that is instituted by exchange but is also “embedded in law, politics and morality.” The creation of a labour market by the 1834 New Poor Law was met by Factory Acts, and an education system, to provide the needed skills; farmers were protected from rapid price fluctuations that might force them from the land; and to embed money there was the institution of central banking. The countermovement not only works to create an acceptable level of protection, but is also responsible for embedding the market institutions in practices acceptable to society. However, this does not represent an optimum level of protection, the natural environment may still be degraded, infants may go without secondary education and business, and the economy may perform less well than it could otherwise do.

However, workers in China, specifically those who make up the vast migrant workforce, lack even the level of protection described above. In the context of a reformed socialist economy, and one of such massive size and regional variation, some deviation from Polanyi’s original thought is essential. Mark Granovetter examines the importance of examining social ties when analysing economic relations. As a practice, guanxi (personal relationships or social connections) has spawned a mass of literature in China, and it would therefore be foolish to ignore the influence it has there, even if it falls outside the remit of what was described in The Great Transformation. Guanxi, as an idiom of social trust, appears to have grown out of Communist-era China, and is now essential for the conduct of business in China. This essay will argue that for both workers and businessmen, this represents, not a distortion of a natural market order, but an informal institution of embedding, and one that has arisen directly as a consequence of China’s growth.

Expanding upon Polanyi’s work Granovetter works to dispel the notion that economic activities occur within a vacuum. He attempts to overturn both the “undersocialised” and the “oversocialised” accounts of economic behaviour. He argues that people do not ignore the social relations they find themselves in. They can rarely be described as searching for the most efficient solution to the set of preferences, instead using previous formed social relations rather than form new efficiency maximising ones. However, neither do they find themselves so “overwhelmingly sensitive to the opinion of others… that obedience [to social norms] is not perceived as a burden”  in that, they do not rationally follow a predetermined set of preferences to achieve their aims. Rather, it is proposed, a constant toing and froing occurs, in which preferences are formed and changed. His “embeddedness hypothesis” bears heavily in this essay because of the odd nature of reform, and countermovement in China.

The Double Movement has been read as presenting a minimum level of protection. But, Polanyi’s work has also been drawn upon by other writers to explain and advise economic behaviour and policy. That is to say, the minimum level provided is not an optimum level for, individual welfare, environmental protection or economic development. Most useful for this is the work of Peter Evans on the state’s role in industrial transformation. The function of the state has traditionally involved making war and ensuring internal stability. Evans argues that modern states are also charged with guaranteeing minimum levels of welfare and fostering economic transformation. Evans uses Polanyi as a starting point in describing the role that states have played in shaping their economies, and creating markets.

Evans recommends an active role for the state in directing businesses towards sectors of the economy that produce “multi-dimensional conspiracies” in favour of development. In his study, by directing entrepreneurs towards the information technology industry, states, which in the 1950s had no prospect of developing in this lucrative field, achieved unforeseen successes. Imperative to these successes were the close ties between state and business communities, and the ability of states to remain autonomous; to not become rent seeking cartel builders. Evans reiterates Polanyi’s point that it is useless to talk of “how much” state intervention, it is more useful to discuss how, where, and why, a state intervenes.

Important is the ability to cultivate close ties between both; bureaucracy and domestic business, and between those same individual businesses. Evans examines the most successful “developmental” states — Japan, Taiwan and Korea — and discusses their bureaucracies and industrial policies. He also contrasts them with both Zaire, the archetypal “predatory state,” and with the “intermediate states” of India and Brazil. Zaire, rather than having too many bureaucrats, had too few; everything was for sale, even justice and influence. Rather than being embedded in law, politics and morality Zaire’s officialdom were free to maximise their individual gain through corruption and exploitation. Evans asserts that not only were the benefits of a “coherent meritocratic bureaucracy” confirmed, but links between state and society were shown to be essential as well. Both, with some qualifications, are present in China, but whether or not they can be effective in fostering further economic transformation, remains to be seen.

If we examine China’s history the tradition of bureaucratic examination extends back to the Song dynasty in the seventh century CE. This bureaucratic tradition is supplemented by the close state-society ties created by the system of guanxi described above. Contemporary trends may however, see the domestic economy increasingly dominated by foreign firms, with little domestic integration. The history of China’s development has cast a shadow over what is now occurring. Therefore, Thursday’s post will discuss the dual nature of China’s economy. Dual, because it is embedded within close ties of social relationships, while also displaying systemic weaknesses that stand in the way of domestic upgrading.

There are, of course, difficulties in using Polanyi’s work. It was developed within a specific historical situation, and it reflects its immediate surroundings; Bolshevism, Fascism, the New Deal and Total War. Polanyi presented class as the mechanism for social change; peasants and landed gentry sought to protect land, while the working class ultimately sought to protect the whole of society from the commodification of man. Thirty years of Marxist-Leninist party rule, state ownership of the means of production, and relentless Maoist mass movements, have weakened class relations in China, and this will inevitably alter how they react to the massive upheaval it is currently experiencing.

Sixty years of economic discussion on the limits of markets has passed since the publication of The Great Transformation. However, Polanyi’s work remains important his lessons have not been learnt. The pope would agree. I’ll leave you with that thought. tomorrow we’ll pick this up with a post on the natural environment of China since Deng’s reforms were introduced. For now I’ll leave you with a photo of Shanghai at the moment and a link to the official safety advice.

From Instagram user euro_spring

Smog in Shanghai from Instagram user euro_spring

Karl Polanyi in Beijing: what is happening in China?

Mao’s China has been transformed – a market society has been created. This week I will be writing about the political and economic consequences of this event. Karl Polanyi dubbed a similar occurrence, that began in England over two centuries ago, The Great Transformation, and I will argue that no less a great transformation is taking place in China. The similarities between the two events are striking. Firstly, the processes of commodifying land and labour, which began two centuries ago in England are underway in China today. So too is the endemic environmental and personal degradation which occured throughout the first industrial revolution. Indeed the similarities continue, both China and nineteenth century earth have populations approaching one and a half billion.

Just thirty years on from the beginning of reform, an economy largely built on society principles has seen such a transformation that it now unarguably operates according to a capitalistic logic. However, this is not an occasion to celebrate. Polanyi argues that the attempt to commodify land, labour and money will only lead to social calamity. As will be be explain in tomorrow’s post, Polanyi insists that the trio of land, labour and money represent only fictitious commodities, because they are not created for sale. Representing the loci of weakness in a market economy they provided the structure for these posts.Tomorrow’s post will concentrate on land and environment the degradation which has resulted in its commodification. Wednesday we will talk about labour and the colossal upheavals as a market was forced upon China’s labour force. On Thursday we will discuss the productive organisation of China. It will examine the close ties between state and society. Friday I’ll try to tie it all together.

Contrary to the liberal fallacy that markets form naturally when humans interact Polanyi insists that “the road to the free market was opened and kept open by an enormous increase in continuous, centrally organised and controlled interventionism.” This is evident in China where state involvement has been central to the creation of markets in both labour and land. Polanyi argues that economic action is at all times embedded in social relations, thus to disembed it – to commodify land, labour and money – is tantamount to “annihilating the human and natural substance of society”. Therefore, to protect society the initial tendency towards the creation of the market is met by a countermovement; this countermovement is not antagonistic to the creation of markets, it is a necessary corollary. Polanyi not only argues that a countermovement is inevitable, but also that, when embedded, an economy will perform more efficiently. To illustrate this point we can examine the manner in which China entered the world economy at the beginnings of the 1980s. It did so not just with a cheap workforce, but with the best educated and healthiest workers in the world for any country of comparable GDP per capita. However, the imposition of the market has destroyed some of the institutions which created this competitive advantage.

As will be discussed, land and labour in China possess very little in the way of social protections, but constitute vital elements in one of the world’s most dynamic economies. This seemingly contradicts Polani’s assertion that embedded economies are more efficient, and will thus need to be addressed. The next post will unpick the theory of Karl Polanyi which will be applied throughout. Stay tuned, next post up at 10.

It is worth pouring an hour of your life into this Adam Curtis piece

While the old institutions that grew up over the past hundred years to protect us now find themselves unable to comprehend or cope with the new systems of power. Politicians, regulatory institutions, intelligence agencies, the mainstream press, the police, the BBC, the colleges of academia- all of them, as McClure said in 1903:

They do not understand

And cut off from the real power struggles – these old institutions are starting to prey on each other. Leaving us both confused and undefended.

One newspaper editor writing about the loss of the independence of the farmers a hundred years ago summed up the new system: 

“The farmers farm the land, and the businessmen farm the farmers.”

Maybe today we are being farmed by the new system of power. But we can’t see quite how it is happening – and we need a new journalism to explain what is really going on.


What the hell is Boris talking about?


That graph atop this post doesn’t look like any bell curve I know. Intelligence is distributed normally. Income isn’t. Connecting the two is stupid, but looks clever. Superficially I can see the appeal, but when you dig down into the mechanisms it just doesn’t work. The superstar effect looks important, but isn’t. No matter which way I turn it in my head I can’t understand what Boris is on about. Boris says that those with IQs below 80 are inevitably poorer and those with IQs above 130 inevitably richer. The mechanisms that drive inequality don’t work like that and the data don’t back him up.

What drives inequality? It varies by time and place. In 1960s America over 94% of doctors were men, since then women have been allowed to enter the field and now only 62% of doctors are men. Since then, 20% of medical productivity improvement can be explained by the entry of more talented women. That study isn’t about IQ but it does show that power plays a huge role in keeping one group well off by harming another. 

Moving back to the issue at hand when we talk about inequality we’re generally talking about the 1%. Who are they? The 1% are Doctors, Lawyers, Financiers, Executives and Entrepreneurs, according to this Economist article. Doctors and Lawyers are clever and earn a lot of money, but aren’t generally super rich. Just appropriately rich, I’m going to leave them. People working in finance and entrepreneurs are the wealthiest but there’s no story about how high IQ could turn into super-high income that correlates with the data.

As The Epicurean Dealmaker points out, genius is not required to make lots of money in investment banking, tolerance for brutal working conditions is:

Investment banking neither seeks out nor requires the allegedly “best and brightest”—whoever the fuck they are supposed to be—for its employees. All we seek are aggressive, ambitious, smart enough young kids to process our ridiculous pitch books, update our standardized models, and generally take our shit while we senior bankers do whatever is necessary to bring in enough revenues to ensure our continued employment and the consequent support of our dependent wives, children, mistresses, and bartenders. [Emphasis in original]

That quote points to the other key reason financiers make so much money: organisational capital. This is the rules, connections and technology that turn a building of arrogant excel-jockeys into a multi-billion dollar wealth creation machine. While it lasts, organisational capital is responsible for a huge amount of value that an individual creates and it has nothing to do with how clever that individual is. The same logic applies to why senior managers make so much money, sure they’re smart, but being super smart won’t have much effect against the background of the rest of the firm.

So that’s a partial pass for Boris for Lawyers and Doctors, but a big fail for Financiers and Managers for Boris’s pet theory. Where Boris’s theory makes the most sense is for the fifth class of the super rich, the entrepreneur. But it only makes sense at a superficial level. Supercleverman has supergoodidea and makes loadsamoney. But no, that’s not how it works.

Having an higher IQ really doesn’t really make you more likely to succeed as an entrepreneur. Most companies fail, and while somebody with an IQ of 150 is smarter than more than 99% of the population, everyone is more or less as equally ignorant relative to the complexity of the economy. Being 50 IQ points cleverer than the next guy doesn’t mean your company will succeed, you’re taking as big a punt as anyone else.

So what was the data I was talking about? The longest longitudinal survey ever conducted was started in 1938 and still going recording the lives of 268 American men. There was no noticeable difference in maximum income earned by men with IQs in the 110-115 range vs. men with IQs above 150. This matches another paper (H/T Chris) which is much larger and also finds very little correlation between IQ and income.

The bottom 16% of people with IQs under 80 will find it very hard to join the 1%. But there’s no explanation in the data to explain why someone with an IQ of 130 or 150 is richer than someone with an IQ of 110. There is some justification for inequality in market income due to differences in inequality, but there is nothing in Boris’s speech that justifies the inequality we actually have. Using intelligence to justify inequality is classic Boris. It looks smart but when you look closely and ask how it works in vanishes into smoke.

The end of growth, open borders, feeling pessimistic

I was thinking about economic growth, as you do, and I got really optimistic about how quickly people’s lives can change for the better, in decades not generations, then I got sad because I’m not sure that will last.

There have been lots of growth miracles. First was the UK, which moved from about zero annual per capita growth to 1% at the start of the 19th century (that’s the real miracle, btw, sod China). Then there was Germany which went to 2% at the end of the nineteenth century. Japan got up to 6% in the middle of the 20th century, Korea got towards 8% a year and at the start of this century China was clocking in at 10%.

The living standards for people living in the UK in 1870 were only marginally less miserable than those alive in 1770. And industrialisation had introduced whole new classes of misery. Incomes had more than doubled over a century, but people were still dirt poor. Generations saw change slowly. In China people see change quickly. The same generation of people is twice as wealthy as they used to be and before they retire they’ll be at least twice as wealthy again.

If this keeps but only a handful countries or so begin real catch up growth each year, in a generation we’ll have no more poverty. Plus those last few people who are in poverty will see their income double every couple of years. I know how good a 5% raise feels, imagine 50% wage growth, which is entirely realistic under the above assumptions. It would suck to be poor so long, but it would be awesome (in the proper sense of the word) to see your world change for the better so rapidly.

On my cycle home, I began to think those assumptions were just wrong. 

Manufacturing drives convergence. There’s very convincing evidence that productivity in manufacturing catches up with first world levels quickly regardless of policy. Services, resource extraction, farming just do not have the same kick to them. This is why our list of miracles features exporters.

Sadly manufacturing employment is declining worldwide. I say sadly, but this is good, because factory work is famously dull, arduous and monotonous. Not that being an office drone is a lot better, but at least its easier to tweet at a desk. Even in China manufacturing jobs are being lost as productivity surges ahead.

It is sad because as manufacturing declines there will be fewer factories in the developing world and this will decrease growth. Employment isn’t the best metric, but a similar trend is visible in value add for manufacturing. We want more services as we get richer. But services don’t help pull people out of poverty.

Added to this is a change in how we manufacture. At the moment clusters of factories in certain locations make stuff and send it to you. 3D printing will disintermediate this process and stuff will be made just where you are. This will lead to more investment in labour-free manufacturing in the west (where the money is) and less investment in transport to the global south (where the cheap labour is).

Where does this leave Africa, which is destined by history to develop last?

It is destined to be the continent most reliant on offering service exports because manufacturing will continue to shrink. India has shown there is a market for overnight service, doing paralegal work and admin while the wealthy west sleeps. But most services and admin need doing while people are awake. This means that due to timezones Africa will have to do business with Europe. A Europe which is going to get a bit richer and a lot older. This is not a recipe for a vibrant export market.

This means that Africa is still fucked, my dream of someone waking up on day a Lesotho farmer and quadrupling their income in a decade is receding. We need to look back to the 19th century. Migration improved more lives in the 19th century than automation did. Moving to where the work was or the land was plentiful was how people got on.

It is fashionable to say that we can have open borders, but not until the poor are richer. We will be flooded. But we may be heading for a world where the poor stay poor because there is no wage we can employ them at that distance. The only option will be to watch them suffer and wring our hands or let them come here and open a nail salon. An easy choice right? They haven’t got a chance. 

Depressions are bad for debtors and creditors, and workers and bosses

To raise a point I didn’t make this morning responding to Ros:

The rate of total individual insolvencies per 10,000 adults in England and Wales followed an increasing trend from 7.2 in 2000 to a peak of 30.9 in 2009; since then the rate has fallen each year to 24.5 in 2012.

She floated the idea that a low interest rate environment is good for borrowers, but harms creditors. That isn’t the case at all.

Company Liquidations in England & Wales

Company Liquidations in England & Wales

Individual insolvencies in England & Wales

Individual insolvencies in England & Wales

A zero interest rate environment today means a depression and that isn’t good for debtors or creditors. Or workers. Or bosses. And yet it pootles on.

Know your audience: look at this history porn infographic!

The vertical is time, the horizontal space and the coloured meandering blocks civilisations. Your best bet first time round is to start following one civilisation then jumping to another as your first one narrows to nothing. Repeat.

All the history

I agree, it’s a bit Eurocentric. No way that the Sung dynasty is a third as important as Byzantia! Making the Tang a third of the Arabs? Pfft. Plus the Mongolian and Chinese lines are far too distinct…I could go on. It was written in the 1930s and most of the history I’ve ever read could be read as a rebellion against this tradition. Still. Click through. It’s fascinating even if there is no Africa.

This “Histomap”, according to Slate, was created by John B. Sparks in 1931. Slate seem to think that the horizontal axis is a bit ambiguous and might indicate the author thought history was a zero sum game. The narrowness of the axis representing the reality of printing. No historian I can think of wouldn’t want to make this a fat bottomed pyramid (and who wouldn’t be disappointed when his published says he had a foot and no more).

Failing to plan is planning to fail. Plain planning to fail is worse.

Yesterday Mark Carney presented his first Inflation Report as the new Governor of the Bank of England. This was significantly more important than anything else that happened yesterday. It was also significantly more disappointing. Mark Carney presented his vision for forward guidance. His vision is for unemployment staying above 7% for another 3 years.

The Bank of England, as I’ve argued repeatedly, is responsible for our slow recovery. I was hopeful that the appointment of Mark might help accelerate the recovery, but I was wrong. The Big Idea, touted for some time, was “forward guidance.” This is the explanation of the internal workings of the Bank of England and what they predicted would happen.

Because the Bank of England controls interest rates and the nominal economy they in large part control their predictions. They are steering the ship, and their predictions tell us where they want it to go.  What have we learned? Mark and Co will set policy in such a way that…

  • Unemployment will stay above 7% until the second half of 2016.
  • Interest rates will stay at 0.5% until the second half of 2016.
  • QE will either stay the same time or increase the second half of 2016.


  • If we hit 7% unemployment early they’ll start thinking about raising rates, even though the economy stays depressed.
  • If inflation is predicted to be above 2.5% they’ll start thinking about raising rates, even though the economy stays depressed.
  • If the financial sector becomes too exuberant they’ll start thinking about raising rates, even though the economy stays depressed.  [1]

I hope I’ve done a good job spelling out why that’s not good enough. Just in case, it’s fan chart time!

Fan chart of doom

If you’re not au fait with fan charts, then lucky you, you’ve been out enjoying the sun. The Dark blue is the central 30% prediction, the lighter hue the other 30%, the lightest the another 30% and then the last 10% is elsewhere. What you’re seeing is a prediction of failure. High unemployment out to the end of their 3 year window.

Make no mistake, Mark Carney acknowledges that the economy is in the dumps and that tools exist to do more. That’s why he was hired. He’s just decided not to do more. He’s looked at NGDP targeting, which I and many others favour, and decided it is a bad idea (largely it seems, because they don’t want to understand it). He’s had the option of targeting lower unemployment more rapidly, but hasn’t.

In his letter to George Osborne (which I recommend you read) he claims his policy is “not a monetary loosening” because policy is already “exceptionally accommodative.” I agree it is not a monetary loosening, but exceptionally accommodative? Haha. The markets agree. The FTSE 100 is 1.4% down and sterling rose somewhat, implying slightly tighter money.

Both are still healthier than when Mervyn King was in charge, but an extra million or so are still unemployed than 5 years ago and there is little sign of abatement for the next 5 years. I got some heat on twitter yesterday for suggesting feminists’, well everyone’s, priorities were wrong. Can you blame me? The central projection is for a lost decade.


[1] Nothing brings calm to financial markets like a nice growth slowdown.

What has austerity cost *me*? Half a trillion fucking dollars!

I’m me, but I’m also a fraction of a cohort. The word always makes me thinks of the Visigoths sacking Rome, but we’re more likely to be looking for jobs at Caffe Nero. The Great Recession has cost us a lot in terms of lost current GDP, but it casts a much longer shadow one which will blight people my age for the rest of our lives.

Simon Wren-Lewis points me to a Vox article which tries to quantify the cost of austerity in terms of lost GDP, 3% of GDP. Although this is couched in caveats it is close to Simon’s own calculations that austerity has led to GDP being 2% lower today. This implies an average cost per UK household of £3,500 over three years (that’s £93bn so far).

taylor fig1 19 jul

I’m less confident that austerity is the culprit here. Incompetence and ignorance at the Bank of England is far more likely to blame. Either way, the failure to get the economy working again is an ongoing tragedy of almost inconceivable awfulness. Simon concludes:

Although all governments like to give the impression that they can have a big impact on people’s prosperity, few actually do. These numbers suggest that the current UK government has managed to do so, but unfortunately by making us all poorer.

Quantifying things is good. Turning those figures into graphs is better because I’m a visual thinker. But I still think Simon does a disservice in lowballing the harm that this mini depression is doing. Sadly these harms aren’t chronic, they’re acute. They’re hitting the young and the unemployed and that needs emphasising.

I’ll outsource my take on unemployment to Chris. In utilitarian terms is George Osborne worse than the UK’s worse serial killer? Answers on a postcard.

I want to concentrate on me (young people today are so narcissistic…) because I’ve written about this before. There aren’t just current costs to a depression: they scar people. The term for this is hysteresis. This refers to the damage done to people forced to stay out, or delay entering, the labour force.

Two years ago, I wrote a response to the question “what good is macroeconomics?” Roughly $100,000 is the answer. A one percentage increase in the unemployment decreases initial wages and worsens job match. Your job sucks and you’re in the wrong one. This has effects for the rest of your life, $100,000 of effects.

Now we run the numbers for the UK.

Pessimistically, we’ll assume that the new natural rate of unemployment is 6.5%. That there has been some long standing damage done to the UK economy. Heroically, we’ll assume we’ll get unemployment down from almost 8% now by the next election. Dating austerity to mid-2010, that means that we’ll have had half of 2010 with 8% unemployment, the whole of 2011, 2012, and 2013 too, maybe 7% in 2014, and a drop to 6.5% by May 2015.

Across those five years we’ll have 4.3 million people turn 21. If a 1% elevation in unemployment imposes a lifetime cost of $100,000, for simplicity I’ll assume that unemployment at  1.5% imposes a lifetime cost of $150,000. That’s probably overly pessimistic, but it makes the maths easier.

We multiply  out the elevated unemployment rate, the adjusted lifetime cost and the 800,000 or so 21 year olds coming of age in each year and voila. Austerity is imposing £555,817,500,000 lifetime cost on the young of this country. That’s over half a trillion dollars! I had to double check the numbers but, yup, that seems about right to me across the lifetime of a whole cohort.

It represents half a trillion dollars of ideas which people never had, of coffees never made, of children never taught, of diseases not cured and houses not built. This colossal heap of lost human creativity and perspiration is the real cost of the Great Recession.


[1] A link to a part of the ONS website which is actually useful and user friendly! Surely this is a time of miracles.

Replace “trans” with “foreigner” or “woman”

The bus that trans people were thrown under. Joke stolen from Stavvers.

The bus that trans people were thrown under. Joke stolen from Stavvers on twitter.

There’s an important coda to yesterday’s post. The poor and the vulnerable have often gotten ahead only by standing on the heads of those even worse off than themselves.

I’m not union bashing when I say that the growth of real job security post-war was at the cost of immigrants and women. Look at it this way. If it is harder to exit a job it is harder for everyone else to enter one. In a world where most working people are white, british born men that excludes women and immigrants.

There’s a reason that immigrants have been whitewashed out of the history of the labour movement. As Jamie says, it’s because a lot of rather awful things were done to them in the name of the labour movement, deportations were just part of it. We’re all rightly embarrassed, but it’s important to understand why it happened at all.

If you’re strong enough to organise and affect change then you’re probably not the most vulnerable. I’m not saying don’t organise, I’m saying check your privilege. [1] The victories won by the second worst off might help advance the worst off or they might not. It’s entirely situation dependent.

The victories won by the labour movement in the mid-20th century were spectacular. But they weren’t won by the weakest and they didn’t always benefit the most vulnerable, as Anna and Jamie’s pieces highlight. Thinking about this and yesterday’s post, a similar story can be told about the Equal Marriage Act.

Gay and lesbian people (and to a lesser extent bi people) have won a major victory. But trans people are still being discriminated against, despite everyone shouting about how we’ve passed “equal marriage.” That will rankle, and without the momentum of a much larger, more sympathetic, group behind them it will rankle for a lot longer.

For the LGB  bit what’s happening this week signposts the end of tolerance and the beginning of acceptance. David Cameron said (*cough* after me *cough*) that Tories should support gay marriage because its a conservative institution. He’s right. The gays have gone mainstream and this means a lot of trans people are getting left behind. Sadly, this isn’t an isolated incident.


[1] I’m a historian, looking for bias in your sources (and your own thinking and writing) is just what you do. Is there even another option? I was shocked to see twitter erupt in displeasure over the phrase “check your privilege.” You have no other choice.

Something that makes me happy


CC image courtesy of Elad Rahmin on Flickr

One of the few things I’ve written about here which I’m actually proud of is the death of Gabrielle Price. Covering the death of a child is difficult and I don’t really want to do it again because it made me sad. The ECB makes me angry, and has caused more harm than I can comprehend, but it doesn’t make me sad in the same way as a politicised death of a child.

If you’ve heard of Gabrielle Price, and you probably haven’t, anywhere other than this blog then it is likely you think she died at a party after taking mephedrone (or meow meow as nobody outside Fleet Street called it) . I started covering the drug and her death because it seemed a moral panic was in the offing and I wanted to document one develop.

Mephedrone did actually kill some people, but far less than reported – the weasel word “linked” does a lot of work in the literature. But that was enough for the then Labour government to discuss making it illegal as part of a job creation scheme for the underworld.

Gabrielle Price didn’t die from taking the then legal high, it was  broncho-pneumonia following a streptococcal A infection that killed her. You can follow the sad tale hereherehere and here. Hopefully one of the uses of  this blog is that people googling her name might know she died boringly, normally, of a lung infection not from a drug with a funny name.

Anyway, the drug which didn’t kill her and which didn’t kill many people was banned and promptly stayed available, decreased in purity, modestly increased in price. I’ve never been in favour of banning drugs, quit the opposite, and I found the linking of her death to the drug  depressing and enraging.

Yesterday, I found out today that New Zealand are taking a completely different approach and will test, monitor and regulate legal highs like mephedrone:

It’s the first nation to take a dramatically different approach to psychoactive substances like party pills and synthetic marijuana… [that] go by names like bath salts, spice or meow-meow.

In a 119-to-1 vote on Thursday, the country’s parliament passed the Psychoactive Substances Bill, establishing a framework for testing, manufacturing and selling such recreational drugs. (via)

Anyway, this made me think about the “Gabrielle Price” google alert I set up at the end of 2009. It returned depressingly misleadiong results about her for a long, long time after her death. But I realised I can’t have received one in years now. And that makes me happy.

Were the Victorians cleverer than us?

The Victorian era was marked by an explosion of innovation and genius, per capita rates of which appear to have declined subsequently. The presence of dysgenic fertility for IQ amongst Western nations, starting in the 19th century, suggests that these trends might be related to declining IQ. This is because high-IQ people are more productive and more creative. We tested the hypothesis that the Victorians were cleverer than modern populations, using high-quality instruments, namely measures of simple visual reaction time in a meta-analytic study. Simple reaction time measures correlate substantially with measures of general intelligence (g) and are considered elementary measures of cognition. In this study we used the data on the secular slowing of simple reaction time described in a meta-analysis of 14 age-matched studies from Western countries conducted between 1884 and 2004 to estimate the decline in g that may have resulted from the presence of dysgenic fertility. Using psychometric meta-analysis we computed the true correlation between simple reaction time and g, yielding a decline of − 1.23 IQ points per decade or fourteen IQ points since Victorian times. These findings strongly indicate that with respect to g the Victorians were substantially cleverer than modern Western populations.

Offered without comment because I’m seriously under-qualified to comment. But I don’t think they were. (Via Martin Robbins)

Is it time to nationalise the railways?

You can tell that the one state-owned train operator was never meant to be permanent by the goddamned awful name they gave it. They were probably right, directly operating railways isn’t a recipe for success, more competition is, as I’ll show below.

For this post I’ll refer to them as DOR. Directly Operated Railways seemed to catch the left’s imagination last month. A profitable, popular state-owned railway was going to be privatised! [1] Labour’s Maria Eagle attempted to seize the zeitgeist:

With the Government’s rail franchising programme in chaos, it is a bizarre and dogmatic decision to prioritise the privatisation of a service that is actually on track. Since running services on a not for private profit basis, the East Coast operator has returned £640million to the taxpayer and invested more than £40million in improvements to the service, achieving some of the best results for passengers since records began.

The company only exists because in 2009 National Express defaulted on the line in the face of recession and hubris induced gigantic losses. Are there convincing arguments for keeping DOR running the East Coast Mainline? Ed Miliband thinks so and has argued it should be kept in public ownership as a benchmark for private operators. I’m not convinced. Lets look at the arguments.

Maybe railways will just be better run by the state because at a state-owned rail company employees  are motivated by “knightly motives“, as Julian le Grand describes. I doubt this for two reason. Firstly, these were people recruited from the rest of the rail sector to run a franchise. They don’t have a public sector “mission” like in the NHS, nobody does overtime etc. to set a benchmark. Secondly, I’ve met the people who run train companies, and they love running trains. They’re like children with toy sets. It’s sweet really. The problem isn’t passion for the industry, its service and profitability.

Perhaps DOR are run differently and more efficiently to other train companies? Nope. That’s not true. Nor is it really possible. Whereas, for example, Stagecoach have a couple of buses companies and rail franchises to run, gain experience, share best practice and variously enjoy economies of scale and scope DOR have one franchise and, of course, aren’t in a position to innovate if they’re meant to act as a benchmark.

So how can we make our minds up?

Luckily we have a comparator. There is also a West Coast Mainline run by a private sector company. They’re both much better than they used to be, that’s clear. You could probably argue that the East Coast Mainline offers as good a service at a lower cost, but you’d be relying as much on faith as on evidence. The data here is on overall service satisfaction and is taken from Passenger Focus’s National Passenger Survey and it illustrates gradual but real improvements in service on both.

East vs West Trains

The data I could find only went back to 2008 which isn’t far enough for my liking, but that’s what I’m working with. You can’t spot the National Express’s default in mid-2009 or the takeover by DOR. That is probably because National Express East Coast had been in trouble for some time and DOR had a mess on their hands to begin with and the data doesn’t go back to 2006 as I’d prefer.

What you can see is an accelerating improvement in service on the East Coast from mid-2011 onwards. Some people have argued that this is because it is a state-owned railway and therefore better. I’ve two words for you people: “British Rail.” That’s not good enough an explanation.

A good argument runs like this: DOR aren’t improving in a cost-effective because they’re state-owned, it’s because they face direct competition from better operators: First Hull Trains and Grand Central. Those two firms are Open Access Operators and run services in between those scheduled by DOR and they have always been better but smaller than the East Coast operator.

You could counterargue “well why is Virgin Trains so good.” But you’d only be falling into my trap.  During quality spurt visible 2008-2010 they were facing competition from an Open Access Operator call Wrexham and Shropshire. In 2011 the company, stymied by regulation which favoured its larger regulators, folded and improvements in Virgin’s services somewhat plateaued.

What we learn looking at the East Coast and West Coast Mainlines is that improvements in rail service are not correlated with state ownership. If you look at Passenger Focus’s surveys, service has improved across the board (as have prices, but that’s another story), but service quality has really accelerated where competition was most intense.

So, should I answer my linkbait title? No, we shouldn’t nationalise the railways, what they need is the opposite: less direct state involvement, more private train operators and more competition. Rail is almost a natural monopoly but not quite. As I’ve shown competition is possible and where it can work it works really, really well. It should be encouraged.


[1] Actually, we’ve had profitable, popular state-owned railways in this country for a while, they’re just French, German and Dutch state-owned railways: Keolis, Arriva and Abellio.

Full disclosure: I occasionally help organise events in the rail sector.

War is a very particular accounting issue

For me, like Chris, [going to war] is an accounting issue.

Thus sprach Paul. But I think that’s an ugly, confusing way of phrasing it. In retrospect perhaps you can decide whether a war was a good idea with a quick tally ex-ante and ex-post death tolls with some role for economic performance, but a forward looking evaluation is very different.

My priors suggest strongly that killing people is very wrong. My priors are very strongly biased in that direction. Call it a personality flaw! I think you’d have a tough job convincing me that killing one person was worth probably saving a hundred.

Thinking about war as something likely to be fucking terrible and which definitely has incredibly high costs and definitely has incredibly uncertain benefits is useful. It sets the bar for war incredibly high. No particular policy position needs be behind the war or your opposition, I am just talking about stacking the deck.

Stacking the deck gets a bad name, but stacking the deck against killing people is a self-evidently pretty good idea. War is one subject where I think the principle “first, do no harm” is a good one.

Why? Because history. The historical record says that some truly awful actions can lead to prosperity but that truly awful wars normally just lead to death and suffering. So, for example, my priors tell me to somewhat support what’s happening in coastal China, but not what happened in Iraq. I’ll do the same in the future too.