Paul Collier on the new pragmatism
PAUL COLLIER
In The Future of Socialism Antony Crosland redirected the Left from Marxism to social democracy. Written in 1956, it anticipated what became the dominant European philosophy. Social democracy successfully addressed the major problems of the time; but new problems have since arisen for which it lacks a credible narrative, or a credible solution. Social democracy now lies in ruins, its ragbag of policies rejected by electorates. Its heyday was the trente glorieuses, 1945–75, but, as Marc Levinson recounts in An Extraordinary Time, the splendid outcomes during these years cannot be attributed primarily to good economic policy choices. Rather, fortuitous technological changes and one-off structural opportunities coincided to lift Western living standards. In the very different circumstances of today, returning to the Keynesianism and redistributive taxation of 1960s social democracy is unlikely to restore Eden. Levinson’s book, which takes the sorry story of economic mismanagement through to 1990, is a valuable antidote to all passionately held economic ideologies. Levinson shows that the Keynesian “fine tuning” of demand was abandoned for good reason; but its replacement by tax cuts for the wealthy and monetary targeting fared no better. For those so inclined, I recommend combining this study with Paul Romer’s brilliant paper “The Trouble with Macroeconomics” (freely available online), which demolishes the past twenty-five years of macroeconomic theory. Reading these two together it becomes clear that no shiny economic theory is going to restore mass prosperity.
Meanwhile, the only contemporary eruptions from the Left are pantomime Marxism. In the decade preceding the demise of Communism there was an upsurge in books predicting the demise of capitalism, and memories have evidently receded sufficiently to support a revival. The ideological vanguard will find Wolfgang Streeck’s How Will Capitalism End? satisfyingly turgid and pretentious, while for the useful idiots I recommend Peter Frase’s Four Futures: Life after capitalism as engagingly inspirational. If you enjoy these books, you may also, as the phrase goes, enjoy Harry Potter. Yet, while capitalism at last stands electorally victorious and philosophically without serious rival, its performance has become manifestly unsatisfactory. Its core credential of steadily rising general living standards has been badly tarnished: a majority now expect their children’s lives to be worse than their own. It is time for “The Future of Capitalism”. Unfortunately, nobody has yet successfully written that book. In its absence, I will try to weave something from the strands of recent contributions to the field.
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Whatever emerges will not be a new ideology. If Levinson is not enough to convince you, try Jonathan Tepperman’s The Fix. His title refers not to our current mess, but to ten case studies of how some political leaders really have transformed situations for the better. Tepperman searches for the formula by which these people have remedied serious problems. The cases are valuable in their own right: many leaders could learn from how Lee Kwan Yew drove out corruption in Singapore, how Pierre Trudeau defused Québécois separatism, and how Paul Kagame rebuilt cultural identities in Rwanda. But for present purposes it is Tepperman’s conclusion that is valuable: eschew ideology; focus on pragmatic solutions to core problems, adjust as you go, but be as tough as is necessary. A viable future for capitalism will cut across the ideological baggage of the twentieth century: forget Left versus Right, set aside the familiar pious moralizing and start from the problems. As Tepperman argues, the leaders who stuck rigorously to this approach initially faced intense criticism. Pragmatism is guaranteed to offend the ideologues of every persuasion and they are the people who dominate the media. An identity of being “on the Left” has been a lazy way of feeling morally superior; an identity of being “on the Right” has been a lazy way of feeling intellectually superior. Welcome to pragmatism: the hard centre.
The new problems that pragmatism needs to fix are manifested in the new anger against elites. The social basis of that anger is spatial, educational and moral. It is the regions rebelling against the giant agglomerations: Northern England versus London and the South, the heartlands versus the coasts. It is the less educated rebelling against the more educated. It is the struggling “just-about-managing” rebelling against the feckless. The ill-educated, toiling provincial has replaced the working class as the revolutionary force in society: not the sans culottes so much as the sans cool. So what are these people angry about? Partly their gripes are economic. The fortunes of the new elite have risen, often undeservedly, while those of the sans cool have deteriorated. Anger is tinged with fear: for the sans cool economic security is collapsing. But anger and fear go beyond the economic: people see that the members of the educated southern/coastal elite are intermarrying (“assortative mating”) and embracing a globalized identity, while asserting their moral superiority by encouraging their favoured priority groups to elevate characteristics such as ethnicity and sexual orientation into exclusive “community” identities. The sans cool understand that both the withdrawal by the elite and the emergence of new favoured groups apparently creaming off benefits weaken their claim to help, just as their need for support is increasing. Effectively – and pragmatically – addressing these three concerns of the sans cool is the challenge facing our leaders.
First, growth with justice. I start with that traditional battleground between the Left and the Right, taxation. The conventional dispute has been about how heavily those on high incomes should be taxed. Taxation matters, but this is the wrong question. In future, taxation needs to make distinctions based less on how much money has been made, and more on how it has been made. Ruchir Sharma makes the point in The Rise and Fall of Nations by the simple metric of looking at the billionaire lists and comparing, country by country, the number who made their fortunes from innovation against those who made it from capturing rents. In successful nations the former predominate; in badly governed societies it is the rent-seekers who thrive. But the increasing complexity of our economies has brought new scope for rents. Some markets are being stretched beyond their capacity to allocate resources efficiently without new regulation, a point ably made by Raghuram Rajan and Luigi Zingales in Saving Capitalism from the Capitalists. In response to complexity, taxes will need to become context-specific instead of income-specific. The new strategy will be to tax pockets of rents.
Why else are the provinces angered by the metropolis? By connecting firms to workers, customers and suppliers, a metropolis enables its inhabitants to reap the gains from scale and specialization. London, for example, provides extraordinary connectivity. Nationally, it is the node for rail and motorway routes. Internationally, it has both of Britain’s major airports and is linked to the Continent through the Channel Tunnel. As the location of government, it offers privileged connectivity to policy. As a result, such a megacity is a powerful engine of inequality. Exceptional taxation is justified because only some of the high incomes generated in a megacity are attributable to the few who appear to earn them. The rest are attributable to everyone who contributes to the connectivity, including those who do not live in it. A straightforward example is land values. Since locating in the city enables firms and workers to be more productive, its land becomes valuable. As London developed, the Duke of Westminster became the richest man in Britain by dint of owning land: money without effort. London abounds in such “undeserving rich” because governments have been slow to use the tax system to offset them. Despite Brexit, London is a vast reservoir of unexploited tax potential: it is the new oil. The provinces are right to be angry.
A metropolis differentially benefits the highly educated. The scope for specialization enables them to use specialist skills that become very valuable. Someone with the brains and opportunity to have fathomed the intricacies of finance will be hugely valuable within the City of London, and so will earn a fortune. But that productivity is in part due to advantages such as the integrity of English law and non-corrupt government, endowments from generations of national struggle. These super-returns from a London location accrue, by default and disproportionately, to the high-skilled worker; but there is a good normative case that they should be shared more evenly, and so highly educated Londoners are less deserving than they think. The less educated are also right to be angry.
Finally, we come to differences between sectors. The modern theory of economic growth is based on the idea that technological innovators cannot fully appropriate the benefits of their discoveries: inadvertently, innovators benefit society as well as themselves. More fancily expressed, the private returns to smart innovators are less than the social returns. But if the same smart person were to use his or her intelligence in some other sectors, the opposite would hold. Asset managers and lawyers are largely playing a zero sum game against each other. Some are even socially predatory: their considerable private returns are exceeded by the costs that they inflict on others. This is not the wilder shores of Marxism: in Phishing for Phools (2015), the two Nobel Prize-winning economists, George Akerlof and Robert Shuller, explained this in the context of the global financial crisis. Uncorrected, the market will generate too many asset managers and lawyers and too few innovators. What is needed instead is a redesign of corporate taxation. Social democracy imagined that corporate taxation was there to raise revenue for public spending. This was illusory because companies tend to shift taxation on to consumers. But smart corporate taxation would shift resources from those activities where there are too many people to those where there are too few. It would become an instrument in delivering growth, not public services. All taxes are gradually undermined by “smart” avoidance. This does not imply that using the tax system to curtail rents is doomed to failure, but that, analogous to the fight against disease, it is a continuous battle with no final victory.
In their heyday, both the political elite of social democrats and the technocratic elite of pro-market economists were cavalier about globalization. Globalization wrecked the pair of them by seducing their adherents into anticipating a post-national future. For social democracy, well-founded opposition to racism elided into the espousal of multiculturalism and global citizenship. For economists, well-founded opposition to high trade barriers elided into the espousal of unrestricted movements of labour and capital. Yet globalization spans two very different activities. Trade flows are driven by comparative advantage, whereas flows of capital and labour are driven by absolute advantage. This distinction has major implications for the distribution of the gains. Although trade does not benefit everyone within each country, it does benefit each country sufficiently that whoever gets the gains could fully compensate those who lose and still be better off. What is true of trade also applies to technological change. Economists were remiss in eliding the distinction between “could” and “does”: unless there is an effective mechanism requiring gainers to compensate losers there is no analytic basis for a priori assertions that trade and technological change are beneficial.
As to the other aspect of globalization, flows of capital and labour, there is no equivalent to the presumption that trade generates mutual gains. On the contrary, private flows of capital and labour are highly unlikely to benefit both the sending country and the recipient, and may well benefit neither of them: the only presumption is that they benefit their individual owners. Both flows need to be regulated. The brief reign of the mantra that flows of capital should not be restricted was rapidly abandoned following crises: even Switzerland, that paragon of global capitalism, now periodically restricts capital inflows. There is no moral basis for a global “right to migrate”. Indeed, the primary efficiency gains from migration accrue to migrants; the economic effects on host populations tend to be exaggerated. For example, the notion that a given national debt can be spread over a larger population ignores the obvious: more people need more infrastructure, which is financed by more debt. As concluded by the leading scholars Frédéric Docquier and his team, zero is the best estimate for the extent to which migration has affected wages across Europe. So the key effects are likely to be social.
International trade and the adoption of new technology will be curtailed by regulation, unless the huge potential for mutual gain is turned from “could” to “does”. People disrupted by change could be given the legal entitlement to substantial compensation: money that could be spent on restarting their working lives. For example, as Rajan and Zingales propose, such an entitlement could finance mid-career re-education. Per capita, Britain has the finest higher education sector in the world, but to date its financial incentives have been to expand through foreign postgraduates rather than mature nationals. Those changes that cause major disruption, such as Uber and the impending switch to driverless vehicles, could be taxed, not so heavily as to prevent them but to ensure that they pay for the social costs that they inflict. Currently, tax systems are so antiquated that the same transaction is taxed more lightly in the “gig economy” than in a conventional business: in part, Uber, airbnb (and Amazon) are tax scams.
Rights to compensation for economic change could be part of a larger agenda of empowerment. Currently, massive economic power is concentrated in the hands of chief executives, disciplined only by whether asset managers ditch their shares. This has led to two serious forms of abuse. One takes us back to rents: British CEOs virtually set their own pay, constrained only by City norms. As decency has eroded, their pay has risen 80 per cent in the past decade, with negligible evidence of enhanced performance. They are the highest-paid CEOs in Europe. The other abuse is that the bonus-driven short-termism of asset managers has made firms averse to long-term investment, not just in equipment but in their workforce. As labour markets have become more “flexible”, the low unemployment that flexibility has delivered has come at the price of reduced training. Training is a classic “market failure”: Germany has addressed it by industry-wide co-ordination; France by job security; Britain has let it fail. In parts of the economy, the job satisfaction that comes from skill and teamwork has been replaced by casual, atomized work. Training and the stability of employment have intrinsic value over and above their economic returns, and so should be encouraged beyond even their long-term financial pay-off to firms. The composition of corporate boards could reflect the range of society’s interests in such decisions, whether through the appointment of members to represent specific interests, or with legal mandates on all board members to give due weight to non-commercial interests. Either would force difficult trade-offs to be faced inside boards, internalizing them rather than relying on the external policing of regulation. The average duration of a shareholding in a company is less than two months: it is ridiculous that this is the only interest group represented on boards. Proper regulation could help to get companies to respect the wider interests of society, but the exclusive reliance on regulation repeatedly founders on the rocks of the superior knowledge of insiders.
Beyond meaningful employment, protection from disruptive change is also needed in families. For the burgeoning middle class, the release from past social conventions that once enforced marital commitment has been gloriously liberating. Strengthened by the rise of assortative mating among the educated, behaviour has settled down into outcomes far superior to 1950s repression and hierarchy. But class-based differences in childrearing have widened. For young working-class people, the lifting of social restraint has come at a high price: the discipline of “respectability”, for all its stultifying pressures, helped to reduce early mistakes that now trap people into long-term frustration. They suffer the twin tyrannies of social services and political correctness. Social service departments, run by tick-box decision-taking, remove thousands of “at-risk” children into a morass of foster care. A more viable alternative would be intensive and sustained mentoring and support for young parents. Political correctness has enforced the public narrative that all lifestyles are “equally valid”, confusing the necessary lifting of stigma with the damaging falsehood that the stability of a relationship is inconsequential for parenting. The huge financial costs of dysfunctional childrearing are currently borne by society: the responsible “just about managing” are right to be angry about single mothers on benefits (though not with them).
In liberal circles, shared identity has been replaced by an ostensible espousal of diversity. But acceptable diversity is confined to the favoured groups: it does not extend, for example, to most readers of the Daily Mail, or indeed to any of the sans cool. Shared identity based on nationalism has been so universally condemned as to have become unacceptable. Liberal disdain has been driven by fears that nationalism would incite a return to majority violence against minorities, and by the hope that nation-based governance can be superseded by multiculturalism and global citizenship. Neither the fears nor the hopes are well founded.
Majority antipathy to minorities is not intrinsic to nationalism but depends on which form nationalism takes. In its benign form nationalism is inclusive. A good practical example is what the Scottish National Party is achieving as a government of Scotland (as distinct from its moribund agenda of independence from Britain). As its name implies, the SNP is a nationalist party, deploying the conventional array of nationalist symbols such as flags and commemorations of historic struggles. But while it has successfully attracted many ethnic Scots living outside Scotland, within Scotland it has been inclusive of anyone living there. In the process, it has been remarkably effective at bridging the historic divides within the country. That between Protestants and Catholics had been deeper than anywhere else in Britain, as bitterly reflected in the Rangers and Celtic football teams. That between Left and Right had been similarly extreme, as reflected in the Marxist-led Scottish coal miners, and the patrician conservatism of Lord Hume. With 50 per cent of the vote, the SNP is Europe’s most successful centre party. As in all nationalism, a line is drawn, but the SNP has been careful to draw it geographically: all those living in Scotland are eligible to become Scottish; the “other” is, of course, the English. Many English people find the running hostility irritating, but it is unlikely ever to be of serious consequence: secession from Britain will be to the SNP what the “Clause IV” commitment to socialist ideas was to the Labour Party – an ideologically divisive form of entertainment. While inclusive nationalism has historically contributed to international wars, in modern Western societies such a risk has all but evaporated.
In its malign form nationalism is divisive within the society. One group of citizens claim exclusive title to the nation and vilify other citizens as lacking the characteristics that entitle them to belong to that nation. The difference between inclusive and exclusive nationalism is exemplified by that between the Scottish Nationalist Party and the French National Front. The perils of exclusionary nationalism are sufficiently evident not to require elaboration. But in practice, although much of Western Europe has a serious problem with social integration of some minorities, majority-on-minority violence is rare. The belief of the Left that any questioning of the benefits of further rapid inflows of migrants would license hostility to past immigrants may be precisely wrong: only by removing recent fears of future uncontrolled immigration will natives again be relaxed about those already here.
While multiculturalism and “global citizenship” are attractive notions as supplements to national identity, as alternatives they are romanticism. Multiculturalism needs to be bounded: Western culture is valuable and warrants support in the face of less functional rivals. Economic historians have recently established that the emergence of a new culture in eighteenth-century Europe was profoundly important. Deidre McCloskey’s Bourgeois Equality: How ideas, not capital or institutions, enriched the world (reviewed in the TLS, July 8, 2016) and Joel Mokyr’s A Culture of Growth: The origins of the modern economy are sledgehammers against conventional anti-Western political correctness, of which Sean Meighoo’s The End of the West is a poignant recent example. McCloskey’s book completes her trilogy tracing how the escape from medieval values unleashed modern industrial economic activity; Mokyr focuses more specifically on the emergence of new narratives of innovation. Meighoo evidently finds that acknowledging an intellectual inheritance from those from whom he is not genetically descended would be an affront. Such aversion is debilitating.
Similarly, global citizenship without national citizenship would be unviable: nationhood is the only force that has proved to be sufficiently powerful to bind millions of people together in a sense of shared identity. Although a nation is an “imagined community”, its fictional basis does not invalidate it: on the contrary, being “imagined” makes shared identity a fragile miracle. Without it there can be no notion of “the common good”: without a “we” there is no “common”. The scope for public policy therein shrivels to the administration of individual rights. At best the mutual regard of shared identity is replaced by the chill of mutual respect. The mutual regard that shared identity permits is the practical foundation for the generosity of the better off to the less fortunate. A world composed of “global citizens” would not be the universalist utilitarian paradise that liberals lazily imagine, but the brutally atomistic world of unchecked individualism. Shared national identities have permitted a globally unprecedented degree of generosity of the affluent to the poor. Beyond a point multiculturalism undermines that generosity and so threatens the poor. As recent work by David Rueda has demonstrated, across Europe the higher the share of immigrants the lower is the willingness of the wealthy to pay redistributive taxes.
For the liberal centre to recognize national identity does not imply revived narratives of shared ethnicity, or shared religion. But it does require a clear reorientation of objectives. Nationalism inherently involves putting the interests of nationals above those of foreigners. This indeed accounts for the rise of the SNP. New research by Kai Gehring and Stephan Schneider finds that the party’s success was due predominantly to appeals to the material self-interest of Scots, rather than to the revival of historic sentiments of distinct identity. They demonstrate rigorously that electoral support was driven by the discovery of major oil fields in Scottish waters, and the periodic increases in the world oil price: “It’s Scotland’s oil” was the precursor to “Take Back Control”. As the oil fields dwindle, continued SNP rule will depend on its evolution into a party of the pragmatic hard centre.
Western liberal contempt for nationalism has been practically calamitous. As Darrell M. West documents in Megachange, faced with the rise of extremist religious and ideological identities, it should be evident that the pertinent social menace is fragmentation into oppositional identities sustained by the echo chambers of social media. After Brexit and the rise of Donald Trump it should be evident that the pertinent political menace is exclusionary nationalism. New work by the political scientists Sergi Pardos-Prado and Jordi Muñoz finds that, across Europe, where the mainstream parties have become pro-immigration, exclusionary nationalism has surged in popularity. Having identified these problems, West himself is bereft of ideas for tackling them. But by eschewing inclusive nationalism, liberals have handed the only force capable of uniting our societies to the charlatan extreme.
Social democracy can justly be accused of social paternalism: the state was assumed to know best, but unfortunately it didn’t. For want of a better term, I think of the pragmatic policies I have suggested as social maternalism. In this model the state would be active in both the economic and social spheres, but it would not overtly empower itself. Its tax policies would restrain the powerful from appropriating rents, rather than stripping income from the rich to help the poor. Its regulations would empower those who suffer from creative destruction to claim compensation, rather than attempting to frustrate the very process that gives capitalism its astonishing dynamic. Its inclusive nationalism would be a force for binding together, replacing the emphasis on the fragmented identities of grievances. Its social interventions would aim to sustain those families that are stressed, rather than assuming for itself the role of parent.
Such pragmatic policies cut across the Left–Right spectrum that characterized the previous century. Each end of the spectrum will try to castigate the pragmatism of social maternalism as the enemy in disguise. But even if my sketch of a viable future political programme is broadly correct, Left and Right will not wither away. Each will retreat into its redoubt: socialism and exclusionary nationalism. The SNP, with its narrative of inclusive nationalism and its pragmatic approach to policy, may be a prototype for a viable social maternalism. But as in all politics, the government faces pressures of capture from special interests. As Tepperman demonstrates, the willingness of leaders to deny patronage to powerful groups was a hallmark of successful pragmatism: Lee Kwan Yew was prepared to jail his friends; Trudeau denied his fellow Québécois the separate and equal status they craved; Kagame denied his Tutsi team the customary spoils of military victory. The SNP’s measurably dismal record on education, traceable to its decisions to succumb to pressure from the teaching unions, may indicate that its leaders lack the stomach for such tough pragmatism. Nationalism combined with a timorous populism is a tried and tested formula for ruin: Latin America, not Scandinavia. Similarly, Theresa May’s government will be tested in navigating between the lobbying of the City of London and the exclusionary nationalism of UKIP. Pragmatism gives a government the liberation from ideology necessary to fix current problems, but it thereby increases its exposure to pressure for populism and patronage. A final proposition from Jonathan Tepperman is that leadership resolve is strengthened if the problems are so severe that they cannot be ignored. On that basis, we have good reason to be hopeful for 2017.
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