I met Paddy MacAloon from Prefab Sprout today, in the food hall at Fenwick. He looks like Gandalf.
As well as being one for the greatest song writers of the 80s he had a rather cool looking man bob, which as a young man I decided to copy. The 80s man bob hasn’t aged well, particularly if like me you have a touch of ginger.
At the time that I was growing my floppy hair I was studying Economics at Warwick as an undergraduate. I was so good at it that I graduated with a History degree from Liverpool University.
In fact I was a rubbish economics student. Admittedly some of that may have been lifestyle choices I made at the time, but I just didn’t get it. I went from being great at Economics A level to being totally lost with undergraduate studies.
At the time we spent a lot of lectures and seminars studying a set of ideas which would later become lumped together as neo-liberalism, chief of which was the efficient market hypothesis. I am not really sure how much we should regard neo-liberalism as an actual ideology, or really just a way to describe an assortment of techniques used to move resources from poor to rich.
The efficient market hypothesis states markets are inherently more efficient at allocating resources, setting prices and volumes than any other system. It is based on the assumption that people are inherently rational. The freer the market, and the more rational the participant, the more efficient it is.
The attraction of the hypothesis is because it is easily understood and you can think of examples from everyday life where it works well… like buying fruit and veg in the market.
Somewhere along the line the hypothesis bit became forgotten, and despite being really hard to actually prove it became accepted as true by economists and politicians.
Because it was such an easy to understand idea it was introduced as a fits all solution. Where markets did exist, like financial markets, they were de-regulated to make them freer and more efficient. In areas like healthcare markets were introduced, despite the high risk of market failure. Transaction costs soared, as gangs of contracts managers, outsourcers and commissioners were recruited.
When Margaret Thatcher came to power management cost in the NHS was about 6% of budget. By the time she had introduced the internal market and Unit General Management they were 12%. Given how stingy the uplifts to NHS budgets were during her era it is shocking that so much of it went into administration.
I spent 20 years in the public sector most of which was spent as an intermediary – creating and administering markets for public services, most of which would have worked at least as well without me. That doesn’t mean that my time was wasted, just that the system could have deployed my talents a lot more usefully. Despite being awful as an Economics student I was naturally gifted at creating and administering markets for public services, mainly because I ignored all of the guff about rationalism and just kept everything brutally simple – do what I tell you and I give you money.
The problem with EHM at it’s core is that people just aren’t as rational as the theory would like us to think.
Back end of last year I was looking for a new pump for the distillery on Ebay. Ebay is the closest to a perfect free market that we are ever likely to encounter. I spent ages comparing price, specification and ATEX rating (the ability of the pump to operate in contact with explosive gases like Ethanol with causing an explosion).
In the end I got bored and bought a new pair of swimming goggles instead.
I bought my new pump a few days later from Durham Pumps (the North East’s number one pump supplier in my opinion), not because they were particularly cheap, but because they have an old bloke who knows loads about pumps, and has a massive box of old parts so that he can fix pretty much any kind of commercial pump no matter how old.
Also because I find the name Durham Pumps childishly funny.
We are not rational utility maximising consumers, but a mess of conditioned responses, emotions, and aspirations. Sometimes we are so predictable that our actions can be guided by Google algorithms. At times that makes us predictable, other times hard to guess. Sometimes were act in a way that Economists would never predict, particularly when we act in groups, sharing ideas, debating. We are easily swayed by arguments that economists regard as irrational, particularly in the internet age. Predictability and rationality might not be the same thing.
What this means is that predictions based on efficient markets and rational utility maximising participants don’t always work, no matter how prevalent these ideas are among economists. Rational people wouldn’t have celebrated Brexit by borrowing loads of money to buy brand new, big engined Diesel cars. But they did, and the boost to consumer spending helped turn a recession into a palid form of growth.
Maybe I am being unfair to economists, after all there are plenty of them who don’t agree with the Efficient Market Hypothesis, and who don’t have a mechanistic version of rationality baked into their thinking. The problem is that the economists who matter – those who advise Governments, big Companies, and appear on TV, too often do. This is the consequence of the way business and Academic Economics have blurred. A relative of ours was lucky enough to graduate recently from Harvard in Economics. He recognised the right wing bias in what he was being taught but believed that was a natural feature of economics departments because of their close relationships with the big companies who funded their research and hired their graduates.
Free markets in people are the worst of all for unpredictability and market failure. If people don’t act rationally when they are buyers and sellers then rational action is even harder when you are the commodity being bought and sold. That’s why markets in people need to be regulated more than markets in products
It is also why free movement of people within the EU has produced so many problems, and so many examples of market failure. The demands to regulate free movement are really just demands to regulate the market in people to prevent people suffering the consequence of market failure.
For some reason both major political parties are going into the General Election with daft policies; The Conservatives/UKIP want to de-regulate the Labour Market, but tightly regulate entry into the Labour Market from outside the UK. Labour want to de-regulate entry into the Labour Market from outside the UK, but reintroduce regulation into the Labour Market. Both are equally preposterous.
Don’t get me wrong – I hate the idea of more government regulation as much as the next small businessman, and I benefit from being able to hire from the widest possible pool of workers. And I like the idea of free movement, because I am in internationalist.
But the whole concept of efficient markets is flawed, and nowhere are the consequences of market failure more obvious than in Labour markets.
The distrust of experts that Michael Gove tapped in to so successfully is a conflation of 2 things.
The first is the belief that life, not books, is the best teacher. Clearly this is a dictum of limited value – there are lots of things where book learning is essential; brain surgery, building suspension bridges, designing aircraft. But this does tap into a real truth – that academic learning is far divorced from most people’s ordinary lives, particularly in fields like social sciences. Middle class economists study the lives of working class people with the same patronising detachment that white anthropologists used to use when studying people with darker skin tones.
The second is the sense that independent experts aren’t really as objective as they claim. They have their own agenda, often shaped by business and academic norms – pro-market and socially liberal. To people outside of these institutions these seem less like timeless truths or eternal values, and more like fashionable things to say.
Chancers like Michael Gove are able to tap into popular distrust of experts because people instinctively had worked out that their objective opinions are simply another persons agenda dressed up in fancy language, annunciated by people with no connection with their lives.
The agendas that lots of economists, both academic and popular, promote was formed in the 1980s. Post Credit Crunch it looks like the intellectual equivalent of my man bob.