Chris is right in everything he says about nationalising the banks, and I think he’s wrong. It’s a completeness problem.

His core argument is this:

[Nationalisation] wouldn’t prevent banks losing money: these are inevitable sometimes because of complexity, bounded rationality and limited knowledge. However, when banks are nationalized, their losses would create only a very minor problem for the public finances as governments borrow money to recapitalize them*. That needn’t generate the fears of a credit crunch or financial crisis that we’ve seen recently. In this sense, nationalization would act as a circuit-breaker, preventing blow-ups at banks from damaging the rest of the economy. (Given that countries are exposed to financial crises overseas, the full benefit of this requires that banks be nationalized in all countries).

This argues for an exchange of private gain/public loss with terrible knock-on effects, for public gain/public loss, which is more balanced. You could argue that the former alternative has other remedies.

But the main problem I see is the other effects of nationalisation: costs, regulation and enterprise.

Costs are hard to control in public enterprises. Partly because of the effects of regulation, partly because they’re unbounded by the profit motive, costs tend to increase to fill the space available when next year’s budget depends on completely spending this year’s. Problems tend to be solved by more money and more management, rather than by eliminating the problems.

Regulation of public enterprises is, necessarily and rightly, more onerous than it is for the private sector. The latter needs to to focus on the prevention of abuse and dishonesty, the former needs to include both measures to prevent corruption and ostentatious displays of virtue. I don’t mean that in a bad way. Tenders to public bodies have to be ritualised in a way private buying decisions don’t.

But despite all the best efforts of those involved, corruption, or nepotism, tend to take over public allocations of funds. To be anecdotal, I was asked a few years ago to take part in a business that was to be situated in Wales. The business plan was, this bloke knew someone in the Welsh Assembly who gave out grants. That was it.

If public sector priorities took over banking, the case study for any sort of finance would become: “can I cover my ass if this goes wrong?” Worthiness would tend to take priority over business cases: you wouldn’t criticise a loan to disabled veterans, would you, you bastard?

What effect would that have on the economy?

There’s another, broader, way he’s wrong too, I think. He says:

My point here is, however, a broader one. One fact illustrates it. During the golden age of social democracy – from 1947 to 1973 – UK real total equity returns averaged 5.1% per year. If we take the fall of the Berlin wall in 1989 as its starting point, they have returned 4.9% per year in the “neoliberal” era. This alerts us to a possibility – that perhaps some social democratic policies are in the interests not just of workers but of shareholders too. Maybe the beneficiaries of neoliberalism are fewer than one might imagine.

All true, I’m sure.

But in 1973 I wore darned socks and trousers with patches, and my younger brother wore my old trousers. We lived in a three bedroom detached house in a nice cul de sac in Essex, just outside the M25 (it wasn’t yet built). That house financed the rest of my parent’s lives, a couple of decades later.

Today I wear socks that cost £5 for 5 pairs, from Tesco, and when they wear out I buy new ones, and I don’t ever see any kids with patched trousers. Torn knees in jeans became fashionable, much later. Then they meant you weren’t patching your kid’s trousers. Signals of actual poverty are never fashionable.

Meanwhile, the people making the socks and the trousers have become many times richer than they were in 1973. Chinese workers have seen their incomes rise by an average of more than 15 times. We’re richer, in terms of what we can actually consume, and so are they. Their increased wealth is more measurable than ours. I’ve never seen a graph of jean patching or sock darning.

That’s also something neoliberalism has achieved. It meant we came through a calamitous banking crisis with problems, for sure, but without the dustbowl economics and breadlines of the 1930s.

The undoubted problems of banking today could be addressed in different ways. Chris talks about a return to full reserve banking, but we don’t have fractional reserve banking, we have Basel Rules that let banks use dodgy securities as backing for loans. Maybe actual fractional reserve retail banking is worth consideration. Maybe lowering the regulatory burden but making it more effective would allow the banking sector to become more diverse, so banking failures were isolated, like failures of newsagents or engineering companies.

There’s no question we have a problem with banking. But making it run with the beige inertia of British Telecom circa 1978 isn’t the answer.

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That’s the headline, anyway. And the piece starts out as though that’s a reasonable description of what’s happened:

When Bosnia abandoned communism about two decades ago, officials devised a plan that wouldn’t mean mass layoffs for state workers. It was supposed to be a smooth transition after the 1992-1995 war that left 100,000 dead and devastated the country’s infrastructure.

But it has been a disaster for people like Munevera Drugovac, a 58-year-old widow, who works for a company that was bought by a businessman in 2004. She hasn’t been paid in 19 months.

“Back then, I didn’t have electricity and heating because of the war,” she said. “Now, I don’t have it because of unpaid bills.”

More than 80 percent of privatizations have failed, becoming a core reason behind Bosnia’s worst unrest since the end of the war. Many well-connected tycoons have swept into these companies, stripping them of their assets, declaring bankruptcy and leaving thousands without jobs or with minimal pay.

So that’s privatisation, is it? The problem here is the selling of state-run interests to the private sector, is it?

No. That’s not the problem:

The Bosniak-Croat Federation is further divided in 10 cantons, each with a similar set of institutions, meaning that nearly 4 million people are governed by more than 150 ministries on four different levels of government – an expensive and ineffective system that scares off foreign investors and is preventing the country from joining the European Union.

The monthly salaries of parliamentarians are the highest in the region — up to 3,500 euros ($4,750.55) — while average salaries don’t exceed 350 euros.

Corruption is widespread and high taxes for the country’s bloated public sector eat away at residents’ paychecks. Privatizations have decimated the middle class and sent the working class into poverty.

Some observers believe widespread corruption has been allowed to flourish, benefiting an elite group with political connections.

“They have penetrated the state, turning the government itself into a facade,” said Denisa Kostovicova, an associate professor of global politics at the London School of Economics. “What now appears as a dysfunctional state is in actual fact a very functional system that distributes the privileges, but only to the networked.”

The problem is a still over-powerful state, cumbersome bureaucracy and the habits of communism.

But glance at the headline and you’d think it was the opposite.

UPDATE: Tim points out the same sort of corruption happens here, largely among the Labour Party and Union movement.

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Microsoft are still fairly shy about releasing sales figures for Windows Phone 7 – saying they’ve shipped between 1.5 and 2 million copies to distributors (as opposed to end user take-up), and that they’re ‘happy’ with the ‘above target’ performance.

Google is less shy. Here’s a visualisation of Android activations worldwide.

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I think Nick Cohen was spot on here:

Conservative readers still don’t understand why the Coalition is hated in the poor areas of Britain. They would grasp the loathing better if they went back through the arguments they made in opposition, and realised that their leaders have failed to follow through the logic of the ideas they once espoused.

The best Tory criticism of Gordon Brown to my mind was that he had stood by while the boom bypassed large parts of Scotland, Wales, Northern Ireland, the North and South West. He left them with Soviet-style local economies, dominated by the public sector. Their populations’ prosperity depended on state subsidy rather than private endeavour.

True enough, but now Conservatives and Liberals are cutting the public sector, without ensuring that the private sector is ready to plug the gaps.

There’s more, all very pertinent to the question of what actually motivates the coalition. His remarks about crime are especially galling:

Note as well [the belief of working class people in Worksop] that the government will withdraw what protection the police offer them from the violent drunks and addicts, who infest their town.

If they really believed in Liberal economics, wouldn’t they try to create the conditions for growth in deprived areas that now have “Soviet-style local economies”? Tax breaks and free ports in Liverpool and Hull and Middlesbrough would drive wealth from the South East to the North, which would be a good thing, but also see new wealth generated there. People might even be weaned off the habits of Labour voting if they saw their areas regaining some of the dynamism of the nineteenth century.

I have seen nothing to undermine the suspicion that they don’t really believe their own free-market, enterprise-based talk. I hate to say this, but there’s a strong whiff of Tory protection of their own and disregard for the rest.

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Perhaps there ought to be an equivalent to Godwin’s Law for comparisons to slavery.

To say, as some libertarians do, that taxation is slavery is silly. It’s equally silly to say that the proposed requirement that unemployed people do some work in return for their benefits, aka workfare, is slavery.

Or is it?  Are they silly? And, either way, are they equally silly?

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This is a fantastic talk, from TED:

Two comments:

  • India making cheaper cars and prosthetic limbs enriches us all: we can buy their cars and prosthetics*. This isn’t a zero-sum game. The faster poor countries get richer, the faster we get richer.
  • Could you imagine this from Pakistan? It’s not like India isn’t a religious country, but maybe it does matter which religion people follow.

*And that prosthetic leg is amazing at any price.

UPDATE: Also see this post.

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There was an interesting passage on Radio 4’s Today programme this morning. Evan Davis was interviewing George Osborne, who has been making a point of using the words “progressive” and “fair” to describe Conservative policies. This is a significant trend in the approach of the current Tory leadership and must represent a deliberate tactic. Another arm of this tactic can be seen in the fact that Iain Duncan Smith’s think tank is called the Centre for Social Justice.

Evan Davis suggested to Osborne that he was using the words “progressive” and “fair” in different ways to the Labour Party. And of course, that’s right. That’s the point. The Conservatives are reclaiming these words for general use again and this is a very good thing. It also happens to have been one of the bees in my bonnet.

Words like “fair”, “justice” and “equality” have been used by the socialist left in ways that are deeply dishonest and damaging. They are dishonest because they are deliberate subversions of the real meanings of the words. A fair or just output or outcome is related to, affected by, inputs. If you work hard, it’s fair that you be rewarded. If you don’t, it’s unfair that you should be rewarded. But the socialist use of these words flips this on its back so it becomes “fair” that people who work hard have money taken from them and given to people who don’t work hard. It’s fair that people, all people, should have similar levels of opportunity (they are not going to have the same opportunities) but it’s unfair to penalise success and reward failure or laziness. Equality of opportunity is fair; equality of outcome is unfair, whatever other merits it might have.

The misuse of these words is also damaging. Removing consequences from actions makes it harder to identify and opt for successful strategies. The further down the social and economic scales you go, the greater this distortion. The richer people in society can see very clearly what works and what doesn’t work, and this affects behaviour and tends to increase wealth. Those at the bottom can rationally opt for gaming the system rather than seeking genuine economic advancement, and this acts to entrench them deeper and more permanently in poverty. A humanitarian rather than an egalitarian approach to welfare would avoid some of this problem.

In passing, the fact that Davis put this question to Osborne but hasn’t put it to any socialists who have misused these words in his interviews is yet another reflection of the institutional bias of the BBC. The website Biased BBC aims to highlight and combat this bias. Unfortunately, it sometimes displays an opposite bias of its own. In this post, David Vance expresses his disapproval of the BBC’s attitude to gay marriage:

The BBC relentlessly push the Stonewall approved line that homosexual people must be allowed to “marry” in the interests of fairness and “equality”. There is such an interview on Today at 8.48am. It’s remarkable how the State Broadcaster can blithely dismiss millennia of human experience and instead pursue this radical re-definition of the institute of marriage to accommodate militant gays.

Gay marriage, as an idea, is not the province of “militant gays”. Vance’s objections are rooted, ultimately, in a young-earth creationism that feels humans were designed, fully formed, for specific forms of heterosexual sexual activity and that anything else is a perversion. This is, of course, drivel – we actually evolved to have recreational and non-procreative sex. Mr Vance’s biases undermine the campaign to highlight the biases of the BBC. They make it much easier for those who defend the BBC to suggest that criticism come solely from reactionary political extremists.

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Cut through some of the fluff that surrounds this 20 minute talk, and the core is completely fascinating.

Laurie Santos has been experimenting with “monkeynomics”. She has taught a group of monkeys to use money – metal discs – to pay for treats then after straightforward “purchases” of treats, one grape for one disc, become routine she offers two scenarios in each of which the monkeys can decide between two options. These are scenarios in which human decision making has been analysed and found to follow a set pattern.

In the first scenario, the monkeys have a choice between two people, A and B, each of whom offers one grape. A always adds one grape when a money offers a coin, making two. B gives just the one grape 50% of the time, and 50% of the time adds two more, making three. This is a situation of possible gain. But rationally, especially with the opportunity to make multiple purchases, both average out at 2 grapes so it makes little difference which you choose. However, humans are biased towards one of these options; for our purposes it doesn’t matter which.

The second scenario is one in which both A and B each offers three grapes. A always takes one away before handing over two, B gives all three half the time, and 50% of the time takes two away, leaving one. This is functionally identical to the first scenario but feels different. A always gives 2 grapes, B might give 1 or 3, but in the first scenario it feels like possible gain and in the second it feels like possible loss. This time humans display the opposite bias.

This shows that human decision making is at least partly irrational. If we were rational, even if we displayed a bias toward one or other of A and B, we would display the same bias in both scenarios.

Monkeys behave in exactly the same way. The biases are the same in each scenario and, just as with humans, the bias changes between the two. The irrationality is the same, something that is more revealing than a similarity in rational decision making – which could be attributed to the underlying rationality of the decision.

More work needs to be done, but this at least raises the possibility that even decision making of this sort, that affects our deepest economic behaviour, could be hard-wired in us. Our common ancestor with the monkeys in the experiments lived something like 35 million years ago.

I recently argued with Chris Dillow about whether status is inherent (following an initial post by Tim Worstall); the evidence seems to show it is. Taking an evolutionary perspective, concern for status can be seen in most, perhaps all, of our part of the tree. These experiments in economic behaviour show how subtle and far-reaching inherited behaviour might be. That’s inconvenient for utopian political beliefs, because these generally rely on the possibility that human behaviour could be changed.

An evolutionary perspective can cast light on other political debates, especially when the fallacies of creationism are unpicked. That’s the subject for a later post.

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