And, not or: state and market

A holiday weekend, so I’m working my way through the book pile. I’ve raced through the absolutely excellent Privatizing Welfare Services: Lessons from the Swedish Experiment by MÃ¥rten Blix and Henrik Jordahl. This should go on any public policy course reading list in future, and is also a must-read for the policy world too. Lessons from other countries can be valuable, and in the UK we tend mainly to look at the US and to a lesser degree other Anglophone places, so this overview of Sweden’s experience is very welcome.

For Sweden has experienced a transformation in the past 4 decades from the post-war comprehensive cradle-to-grave welfare state to one where 17% of public services are provided by the private sector. This includes major services in healthcare, nurseries and schools, and elderly social care. As the book says, there has been a large amount of evaluation of the reinvention of Sweden’s welfare state, but not much of it in English. So this critical overview is invaluable.

The authors argue that without reform, the old-style welfare state would have become increasingly costly and ineffective. Citizens were by the 1980s dissatisfied with quality. The first, and controversial, steps came in the mid-1980s; for example in 1984 the first private pre-school received public funding. The economic crisis of 1992 cemented what seemed inevitable. However, service privatization has proceeded gradually if steadily rather than in a Thatcher-style ideological wave. This meant that its evident early successes, in expanding availability and improving choice, made it too popular for Social Democrat governments to reverse. In addition, different municipalities proceeded at different paces, so successes spread by imitation.

The book is organized thematically. Chapters cover quasi-markets, spending controls and efficiency, welfare reform, competition and choice, management of welfare services, and public opinion. Its conclusions are nuanced. Service privatisation has generally been effective in improving outcomes and improving the financial sustainability of the social contract, the authors conclude. But there are challenges.

One is the existence of information asymmetries between the state and private providers (I’m reminded of the excellent Hart, Schleifer and Vishny paper, which also always goes on my reading lists). Another is that the world is constantly changing, so no arrangement of collective choices is likely to stay unchanged for ever; it must respond to context. However, the other point that leaps out for me is the benefit of having both public and private service provision. This both reduces the information asymmetries (as the state is a provider too), and ensures that competition occurs along more dimensions than price alone (mitgating against cost and quality reductions for the sake of profit). All conclusions consistent with the view I set out in Markets, State and People.

The only downside – it is, alas, an expensive book. But one well worth recommending to your library.

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Wolves on the trading floor

My lockdown days have become filled with Zoom meetings at the expense of reading on tubes and trains. I’m definitely going to try to cut down on the online calls, which are exhausting (& I hope tech-land is working out why, and trying to fix it).

Meanwhile, I read a very good biography of Walter Gropius by Fiona MacCarthy, another of the wonderful Maigret novels, and also The Hour Between Dog and Wolf: risk taking, gut feelings, and the biology of boom and bust by John Coates.

It’s a really interesting book about the role biological/neurological responses in decision-making, applied to the financial market context. It will surprise nobody to learn that testosterone is one of the key players, generating bull markets (hah!) and excess risk-taking. “Traders are walking time bombs, and banks invariably light the fuse, dangling before them huge risk limits and bonus payments.” There seem some obvious regulatory interventions in the financial context eg ban bonus structures and mandate 50% female employees on trading floors. The book points out that at most 5% of traders are women, even though they outperform men over the long term.

The book braids together sections on the biology and sections tracking the various hormones and nervous impulses in a financial market boom. It’s a terrific read and super-clear. The author is a financial markets guy turned research scientist and having both sets of insights is illuminating.

The part that most interested me though – and that put me on to the book via an FT article about the impact of uncertainty on our health – was pondering what it means for a computer to think and make decisions when human decision-making is so firmly embodied, driven by our physical features, the way the chemicals in the blood stream and the nervous signals shape perception and emotion. The book I’ve now started (Economic Life in the Real World by Charles Stafford ) cites Antonio Damasio’s work in Descartes’ Error: people whose emotions are affected by brain injury are worse at making ‘rational’ decisions. Reason and emotion – involving biochemical and neurological phenomena – go hand in hand. Meanwhile, we are building AIs according to an idea of ‘reason’ modelled on homo economicus.

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Calculating the economy

One of the books I’ve read on this trip to the AEA/ASSA meetings in San Diego is The People’s Republic of Walmart by Leigh Phillips and Michael Rosworski. This is a very entertaining projection of the socialist calculation debate onto modern capitalism.

41JGcj2r26L._SX329_BO1,204,203,200_The starting point is the Simon/Coase realisation that big firms are internally planned economies – if it works for Walmart, why wouldn’t it work at larger scale? The authors’ hypothesis is that economic planning might work better now that we have so much more powerful computers and better data.

I’d recommend the book as an introduction to the socialist calculation debate for those unfamiliar with it (ideal for students). It cites some of my favourite books including Francis Spufford’s Red Plenty and Eden Medina’s Cybernetic Revolutionaries. Some chilling lines – about Stalin’s purges, for instance: “Anyone with any expertise was placed under suspicion.” It’s a great read.

Am I persuaded? Not entirely. Technology clearly will change organisational configurations, but it has just as much been decentralisation of firms and extended supply chains as it has been giant Walmart-type firms. I’m also sceptical that the data available is actually the information needed to plan an economy, or that it’s easy to access and join up. Still, it’s the right question, and a reminder that the boundary between market, state and other forms of organistaion is not set in stone but needs constant negotiation – in fact, I know a great book about this about to be published: Markets, State and People.

0FBA95F6-E1DB-4017-A90A-89A2D3C43EB7As seen at ASSA2020 in San Diego

 

 

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Morals and markets

I’ve now finished Elizabeth Anderson’s Value in Ethics and Economics, with mixed reactions. The part I really liked is her critique of utilitarianism/consequentialism. She advocates a ‘pluralist-expressive’ approach to value.

Consequentialism “promises to provide a single, simple, precise and determinate procedure of justification that employs objective calculation to overcome disputes about what to do.” Deliberation – be it rational or not – aims to deliver an optimum result on a single dimension. This is inevitably reductionist because all goods need to be made commensurate. This approach has the merit of making decisions easy to explain, and an inherent pragmatism because after all choices are always inevitable.

Anderson’s ‘expressive-pluralist’ alternative requires choices to be guided by norms which refer to ideals or evaluative concepts such as ‘respect’, ‘friendship’, ‘charity’. “Because their constitutive concepts are essentially contestable, the expressive theory cannot provide a procedure for respolving conflicting interpretations.” Confusingly, Anderson also describes this as pragmatic; I think she means realistic. This is, of course, what we do. “No compelling theoretical or practical reasons demand the global maximization of value. Evidence form our actual practice and failures to construct plausible global measures of value suggests there is no single measure of value valid for all contexts.”

The realism here is attractive, the reductionism of the former is not. And yet in public policy contexts where people’s conflicting values have to be considered, consequentialism has great force. This is more than pragmatic, I think. It serves in its own right as a form of evaluative concept to try to build consent for decisions. Having said that, of course one has to wear the pluralist spectacles too.

The weaker part of the book is the second half, applying the philosophy to an analysis of markets and cost benefit analysis. Like many critics of ‘markets’ she treats markets as an abstraction characterised by anonymity and concerned ‘merely’ with ‘use value’, absolutely failing to recognise that they are social institutions taking many forms and embedding social relations. Some economists are equally abstract, many are not. None I know would disagree with the statement that “the market does not provide a sufficient domain for the expression of all our valuations but must leave room for other social spheres to operate on non-market principles.” And while there are certainly major  limitations with cost benefit analysis, some of which I’ve written about here and here, there is a choice when it comes to issues like valuing life (QALYs) or intrinsic environmental or heritage value: either try to do this in a common metric (money), or implicitly value them at zero.

Still, it’s an interesting book. And I’ve just been recommended her Private Government by my esteemed co-author Leonard Nakamura.

 

 

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Inventing the property market

Desmond Fitz-Gibbon’s Marketable Values: Inventing the Property Market in Modern Britain is an interesting history of exactly what the subtitle says: the institutions and practices that created the forerunner of today’s anonymous, professionalised property market out of the thickets of traditional social relations that still characterised property ownership at the end of the 18th century. It’s a very nice study of the development of an economic institution: the creation of physical marketplaces, the standardisation and publication of information flows, the development of relevant professions such as auctioneer, estate agent, surveyor, even the invention of suitable filing systems and procedures for enabling viewings of properties. This had to bring together the building of suitable premises for auction rooms or the purchase of estate agency offices, legal and governance practices, social norms, the creation of professional development pathways, and much more.

This all sounds a bit niche, perhaps, but I’m a sucker for the detail of markets as economic and social institutions (& never tire of recommending John McMillan’s Reinventing the Bazaar). This is a very nice study, and, importantly, ends with a chapter on the ‘Limits of Marketability’, looking at the battles to preserve open land and the struggle that led to the formation of the National Trust in 1970. The nascent property industry painted property markets as democratizing: “At present the land is held by the few but the day is coming when it will belong to the many,” said the Estates Chronicle in 1898. But land held by all is important too. To be read alongside Brett Christophers’ The New Enclosure (reviewed here).

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