Armed with the confidence of meritocratic superiority, the vanguard readily saw themselves as the new Platonic Guardians, entitled to override the values of others.
Now, the Libertarians restored the rights to individuals, but not the obligations.
This impetus to rights for individuals allied with a new political movement that also claimed rights: the rights of disadvantaged groups. Pioneered by African Americans, it was emulated by feminists. They too found their philosopher - John Rawls - who countered Bentham’s critique of natural rights with a different overarching principle of reason: a society should be judged moral according to whether its laws were designed for the benefit of the most disadvantaged groups.
A willingness to help others is generated by combining three narratives: shared belonging to a group; reciprocal obligations within the group; and a link from an action to the well-being of the group that shows it to be purposive.
If shared identity unravels, it undermines the willingness of the fortunate to accept that they have obligations towards the less fortunate.
The part of the population that is skilled and educated has tended to sheer off from nationality as its core identity, leaving the less fortunate clinging to its diminished status.
We trust people if we are confident that we can predict how they will behave. We have more confidence in our predictions if we can safely use the techniques of a ‘theory of mind’: I predict your behaviour by imagining how I would behave in your circumstances. But using this technique is only reliable to the extent that I am confident that we share the same belief system. If we have radically different belief systems, I cannot put myself in your shoes because I do not inhabit the mental world that shapes your behaviour. I can’t trust you.
People in modern prosperous societies have grown up with power already transformed into authority and so take it for granted.
Indeed, rather than building larger identities, many people are retreating into smaller ones. After over 500 years of being Spanish as well as Catalan, many Catalans now want to retreat into being only Catalan.
They are rich regions trying to exit obligations to the rest of the country. Catalonia is the richest in Spain and objects to paying taxes to poorer regions.
On average, across the advanced modern economies, somewhere around 40% of income is scooped up in tax and redistributed in various forms, such as direct transfers to poorer people, social spending that benefits poorer people disproportionately, and infrastructure spending that benefits almost everyone. So, you remain happy to have 40% of the country’s income scooped up in tax, but now want tit to be distributed globally rather than nationally: you do not see anything special about your obligations to your fellow-nationals.
Smart phones are at the extremity of individualism - the selfie indiscriminately posted to ‘friends’ in the hope of attracting an impressive tally of ‘likes’. We see the withering of spatial community, and indeed we live it as we sit in public spaces, such as cafes and trains, surrounded by people who are proximate yet invisible as we peer at our screens. Space binds us through public policies, but it is no longer binding us socially. It is under assault both from substitute communities of digital echo-chambers, and by a more radical withdrawal from face-to-face interaction into the isolation of anxious narcissism. My prediction is that unless this divergence between our polities and our bonds is reversed our societies will degenerate, becoming less generous, less trusting and less cooperative. These trends are already underway.
To function in a way that enables everyone to flourish, a society needs a strong sense of shared identity.
As national identity has become unfashionable value identity has intensified, and the result is ugly. It has been reinforced by the greater ease of restricting your social interaction to those with whom you agree - the ‘echo chamber’ phenomenon. Far from being a route to social cohesion, these value-based echo-chambers are tearing Western society apart. The level of insults, vilification and threats of violence - in short, of hatred - found in value-based networks now probably exceeds ethnic and religious abuse.
So, if values as the criterion for shared identity hit the same rock as ethnicity and religion, is there anything else? Should we instead try to make the citizens-of-the-world agenda viable by dissolving nations and shifting political power up to the UN? In reality, as the name United Nations implies, the organization presupposes that nations, not individuals, are the building blocks of political authority, for the evident reason that in most societies the nation is the largest feasible effective entity of shared identity. Were political power to become concentrated at the global level, people would not willingly comply with its decisions: power would not turn into authority. World government would come to approximate a global version of Somalia.
People have a fundamental need to belong. The key dimensions of belonging are who? and where? Both of these are set in childhood and usually endure for life. We answer who? by identifying with some group - this is what Identity Economics has focused on to date; we answer where? by identifying with some place as home. Ask yourself what you mean by home. For most people, it means the place they grew up.
‘He gets $5M and I only get $4M: it isn’t fair.’ At the heart of this is not even greed, many of these CEOs are not hedonists but driven workaholics. It is the changed source of peer esteem arising from redefined identities. The $4M CEO may not have been thinking of what he could have bought with the missing million dollars, but of the condescending sympathy of his $5M colleague when they next met at Davos.
If a CEO has to drive up quarterly profits, how can it be done?
- Build a company like Johnson & Johnson, with good, trusting relationships between the firm and its workers, its suppliers and its customers. This pays off handsomely in the end, but the snag is that it takes a long time.
- Cut all expenditures that are not essential for production. This sounds as if it drives the company to efficiencies that are valuable for societies, even if they are painful for the company itself. But since past CEOs will already cut the fat, the largest remaining category of expenditure that can be cut most easily without rapidly affecting production is investment. Naturally, in due course, cutting investment will hit output, but ‘in due course’ the CEO may be out of a job anyway.
- Not to wast time on any real decisions about production or investment, but to rearrange the company’s accounts. Those of us who are not accountants imagine that the profession has established clear rules as to how accounts are drawn up, but in practice there are many grey areas that enable profits to be increased, decreased, or shifted from one subsidiary to another.
The enemy of competition is vested interests. Vested interests use their power to build impediments to competition via a range of strategies. At the legal end of the spectrum is lobbying, which has grown into a huge sector that burns up resources in a quest for privilege. In the middle of the spectrum we find corruption: the abuse of public office to sell permits and court judgments, and to grant monopolies. At the extremity of the spectrum is the total capture of the state.
Currently, many African youth have a vision of hope: escape to Europe. This is a tragedy. It is manifestly unviable as a solution to mass despair, and the exodus of the brightest and best can often compound the problems of a poor society. In an ethical world, each society should be in a position to offer credible hope to its youth. The role of affluent societies is not to tempt a few bright young people to lives of marginality in our own societies, but to bring opportunities to the many remaining at home in their societies.
Underlying the forces that are causing the new divergence are two simple relationships that date back to the industrial revolution. One is between productivity and specialization, and the common phrase for it is ‘learning by doing.’ When people specialize at fewer tasks they are able to develop deeper skills. The other relationship is between productivity and scale: the common phrase for this is ‘economies of scale.’
To harness scale and specialization people need to cluster together in cities. For a company to operate at scale it needs to have a large pool of workers, a large pool of customers, and to be located near other similar companies. As workers specialize, they need to work near others with complementary specialist skills. Cities provide the proximity that enables all these connections. But connected cities need enormous investments in metros, roads, multi-storey buildings, airports and rail hubs. Until the 1980s, only the cities of Europe and North America were able to afford them.
The productivity pay-offs from this easy connectivity were staggering, and many cities developed a cluster of firms in some particular industry that enabled them to be world-beating. My own home city of Sheffield established such a constellation of specialist steel manufacturers, and a correspondingly highly specialized workforce. By around 1980 the typical worker in these cities was astonishingly more productive than workers in those parts of the world that lacked industrial clusters. Since incomes tend to correspond to productivity, people were astonishingly more prosperous too.
Starting around 1980, this situation was disrupted by two coincident but distinct processes: an explosion in knowledge, and globalization. The explosion in knowledge turbo-charged the old relationship between specialization and urbanization, leading to spectacular growth in the largest cities. Globalization opened up new possibilities for harnessing the gains from scale, but also exposed the established clusters to new competition, sometimes leading to their demise.
Home owners become trapped by negative equity, and struggle to move to the booming cities where homes are much more expensive. The fall in the price of commercial property indeed attracts some activities, but they are the stuff that forms the underbelly of the national economy: warehouses that serve the local region; low-productivity manufacturers that can only survive if their premises are very cheap; call centres that rely upon cheap premises and low-waged, casual labour. As the city fills up with such activities, property prices and wages partially recover, but the city has stumbled into a cul-de-sac. These activities are low skilled, and so the workforce is no longer participating in the ever-rising productivity of complex specialization. The superstar firms in the metropolis remain at the technology frontier and so the metropolitan population benefits from rising incomes, but neither the technology nor the incomes trickle down to the broken cities.
Nevertheless, the strategy of putting the clock back is doomed to failure. The key reason why is that the Emerging Market economies, like South Korea, that have established the new world-beating clusters, have no interest whatsoever in putting the clock back. Globalization has enabled them to achieve unprecedented reductions in poverty. If South Korea continues to dominate the steel industry, no amount of protectionism by Britain can restore the pre-eminence of Sheffield in the world market. At most it could deliver the British steel market to Sheffield, but this would not be large enough to restore the high productivity that Sheffield once had, and in the process the higher cost of steel in Britain would handicap all the industries that needed it.
The more highly skilled you are, the more that being in the metropolis raises your productivity. But as people move to the city, the rents get bid up as previously. So, who moves and who stays put? Pretty clearly, the people who gain most by moving are single people with very high skills. So, the specialist corporate lawyer who works long hours in the office and spend her free evenings out on the town before returning to her bedsit is hugely more productive than if she worked in a small town, and she will to be spending much of her correspondingly spectacular income on rent. It is often useful in economics to look for the people who are indifferent between two choices, in this case between moving to the metropolis and staying in a small town. We know that for them the gain in productivity will be precisely offset by the extra rent they need to pay, but who will they be? Some will only be semi-skilled: they are single and only need a bedsit, but their earnings are not much higher than in a small town. Others may be highly skilled, but because they have a large family they need a lot of housing and the rent eats up their extra earnings. These people are important for the analysis (in economics they are termed marginal) because they are only just willing to live in the metropolis; if landlords were to charge a higher rent these people would leave and the landlords would be short of tenants. These ‘marginal’ people determine the rents that landlords can charge. That corporate lawyer will be paying the same rent for her bedsit as the semi-skilled singleton who rents the neighbouring one. We have arrived at the punchline: that corporate lawyer has been able to capture some of the gains of agglomeration.
Generalizing, because of the differences in skills and housing needs, many of the gains from agglomeration no longer accrue to landlords, but stick with those highly skilled singles who don’t need much housing. When I simulated what might happen in a metropolis like London or New York, we found that around half of all the gains from agglomeration end up with such people rather than with landlords. Once we allowed for a further layer of differences, this time among smaller cities, the share captured by landlords fell even further. The key implication is that no matter how heavily the government taxes landlords, it cannot get hold of most of the gains of agglomeration.
Food can be produced anywhere, but services can only be produced in those countries that have the rule of law. You can think of this as a proxy for many other aspects of good governance. In turn, the rule of law depends upon ordinary citizen cooperating and working together to support it. If each citizen just sits back and leaves it to others, that is, if everyone free-rides, the public good of rule of law is absent.
These two scenarios have a significant feature in common, that the smart workers who capture the gains of the agglomeration sincerely believe that they deserve them. Their belief is anchored on the fact that their earnings are high because their productivity is high. In turn, they believe that their productivity is high because they have developed a highly skilled specialism or because they are atypically smart. There is indeed enough truth in these propositions that, given how convenient they are to such people, it is understandable that they believe them. But they are not the whole truth. The productivity of the metropolis depends upon public goods that have been provided by the entire nation, such as the rule of law and past investments in the infrastructure for connectivity. These provide some benefits for everyone, but they disproportionately benefit skilled metropolitan workers. More fundamentally, the gains of agglomeration are, by their nature, collectively produced. They are the the result of interactions between millions of workers, not merely the outcome of the individual effort of each highly paid worker. The super-skilled deserve to retain a share of their high productivity. But they do not deserve all of it. Nor do they deserve as large a share as someone who is not based in the metropolis and whose productivity is not so augmented by others.
The key insight is the concept of economic rents. They are any payments that accrue to someone for doing something that exceed what would have induced them to do it. On our previous criterion of ethics, the concept is irrelevant. Just because a star tennis player would be willing to play for less than the tournament prize money she wins does not delegitimize her keeping it. The star play earns economic rents on her exceptional talent, but since that talent is hers, so is the income arising from it. But when we switch from ethics to efficiency the concept of economic rents becomes really useful. By definition, taxing the rent does not affect the decision to work, and so the revenues do not come at the cost of inefficiency. The gains of agglomeration are economic rents: on the criterion of efficiency, they are the ideal target to tax.
In terms of tax efficiency, finding economic rents are the equivalent of finding the Holy Grail: revenue without collateral damage. If this sounds too good to be true, brace yourself: it is about to get even better. For this we need another handy economic concept - rent-seeking.
Rent-seeking is a menace; here is an example. Suppose that a legislature passes a law that grants a monopoly to a group of producers. Why did the legislature do such a thing? Because the legislators were lobbied and coaxed with rewards. The regulation generated rents; the lobbying was rent-seeking. The distinguished economist Anne Krueger showed that lobbying, and other rent-seeking, will increase up to the point at which one extra dollar spent on it yields one extra dollar of rent. The resources devoted to rent-seeking are a total waste.
The gains from agglomeration are rents: so, do they attract rent-seeking? Economists have never posed that question and there is a simple reason for their neglect. If the Henry George Theorem is right and the gains accrue only to landowners, then there is no scope for rent-seeking. Land is in fixed supply and so not amenable to lobbying or any other action. But the Henry George Theorem is wrong. In a metropolis, most of the gains of agglomeration accrue to those with high skills and little need for housing. Suddenly, many opportunities for rent-seeking open up. People elbow their way into jobs by lobbying well-connected relatives; they pay tutors for the extra study that gets them more credentials; they go to hundreds of interviews. Or they squeeze their need for housing by delaying marriage, or delaying children. Each of these is a form of rent-seeking. Behaviour gets distorted in the competition to capture the lucrative rents of agglomeration. The rent-seeking does not increase the overall size of the pie, it just inflicts a collective loss of well-being upon mid-career people scrambling against each other. Potentially, these losses from rent-seeking are massive.
By taxing the gains of agglomeration, we reduce the pressure for rent-seeking. Getting that job in the metropolis would still be worth doing, but since it would be less lucrative, people are less likely to be driven to extreme measures. Delaying having children in order to be able to remain in a pricey London or New York City apartment might become a sacrifice too much. The economic rents of agglomeration in our thriving big cities are currently staggeringly large. Not only is the scramble for them probably inflicting damage on the people who are scrambling, but its sheer momentum may blind people to the irreversible damage they can do to their own lives.
What all this means is that the basic rate of law, which is the only one paid by most people, would continue to be applied nationally. But each tax rate applicable to higher incomes would carry a metropolitan supplement that would target the rents of agglomeration captured by that skill group. Since the gains for agglomeration are far greater for the most highly skilled, the supplements would be progressively larger at higher levels of income.
Since tax administrations know where people live and work, this is in practical terms surprising straightforward: indeed, as in the New York example, many taxes are already geographically differentiated. The most likely obstacle is the disproportionate political influence of wealthy city-dwellers, not least through being heavily over-represented in legislatures. Despite their high estimate of their moral self-worth, this proposal for an ethically just and economically efficient tax is likely to be greeted with self-righteous outrage. But recall, since we are taxing economic rents, the predictable arguments about disincentives and desert are self-serving: prepare for an avalanche of ‘motivated reasoning.’ Taxation is not analytically warranted: it is a fitting response to the new urban arrogance.
I saw no reason why private landowners should profit form an increase in land value brought about by economic development and the infrastructure paid for with public funds.
If the metropolis is to be subject to supplementary taxation, then why not use the revenues to finance correspondingly reduced taxation of firms in broken cities, thereafter leaving it to the market to determine which firms move where? This, however, does not address the co-ordination problem, and it fails for the same reason that the market works to maintain clusters once they have formed, but not to establish them. Knowledge that firms going to a broken city would pay reduced taxes does not help a pioneer firm know which firms will move, where they will move, or when they will move. Mayors would still have no option beyond bidding for mega-firms. But the mega-firm auction would now have an added twist. Since all broken cities would have this fiscal advantage, they would still have the same incentive to bid against each other to win the auction. As before, the mega-firm would capture a payment equal to the value to the city of the prize, but now it would also get the tax subsidy as a bonus. So, what might work?
Compensate pioneers.
Broken cities need to attract firms that are dynamic enough to start a new cluster in their wake. Such pioneering firms are scarce, however, because, unless other firms follow them, they are likely to go bankrupt. Even if other firms do follow, the pioneer will still be a disadvantage relative to these later entrants.
It is one thing to allocate money to a good objective; it is another to spend it effectively. The agencies that channel public money into investment in firms are development banks, and their mandate is to invest in the private sector to promote some public objective. All major governments have them: the EU has an enormous one, the European Investment Bank; Japan and China have equivalent agencies. A development bank that was mandated to focus on reviving provincial cities is a potential vehicle for spending the revenues raised from the new taxes on the metropolis. Some development banks have been highly successful in achieving their objectives, others degenerate into troughs of corruption: everything hinges on them having a clear mandate, high standards of public probity, and a motivated staff who believe in the mandate and who face realistic scrutiny. That word ‘realistic’ is critical. Unless this is understood by politicians and the public to whom the bank is answerable, it will become too cautious to be effective. A development bank that is trying to revive a broken city, financing activities with the potential to make local workers highly productive, will need to be bold, informed and engaged. As with the venture capital model, its staff will sometimes need to get involved with day-to-day management, and sometimes even highly motivated staff who work on a project for years will end up facing failure. The bank can only be judged on its overall portfolio and its long-term record. But given the general inadequacies of conventional financial markets, with the right staff they are worth trying.
Somehow, the proposition that two-parent families are something to be encouraged has become identified with the political right: ‘social conservatism.’ But only the wildest shore of anarchism have ever espoused free love. As Baroness Alison Wolf, one of Britain’s most revered experts on social policy, says: ‘no known human societies have ever operated a sexual free-for-all. On the contrary, they have all had a well-recognized institution of marriage… Society after society has had rules, often draconian, designed to force men who fathered children to wed the mothers.’
Pragmatism is an admission of ignorance, and the confidence that comes with an ideology is much more satisfying.
For pre-teens, the key differentiating behaviour is pitifully simple: reading. The children of the educated class read; the children of the less-educated class don’t. Reading opens doors and the children of the elite go through them. School is supposed to fix this problem; children are taught the mechanics of how to read, but this is very different from acquiring a habit of reading.
School is not really a preparation for life: it is a preparation for training. At its best, it will have equipped some people with cognitive abilities that can be honed into skills that are highly productive in some occupations. But the non-cognitive abilities will not have received the same attention. Many productive occupations depend less upon good cognitive abilities, and more upon well-honed non-cognitive abilities such as perseverance.
The training that a worker needs in order to acquire a skill is costly, and someone has to pay it. To the extent that the worker pays for it, she worries whether the firm will employ her on a higher salary for long enough that her investment in training is worthwhile. But to the extent that the firm pays for it, it worries that, once trained, the worker will quit and take a better-paid job with another firm. Guaranteed job security can give the worker the confidence to overcome that first worry. The unemployment generated a side effect of wage controls can give the firm the confidence to overcome the second one. But guaranteed job security and wage controls discourage firms from hiring workers, and so impede the matching function of the labour market. That is why it is better to solve the firm’s investment problem not by using high unemployment to discourage workers from quitting, but by paying for the training through a government-imposed levy.
I would like to retire, but please not yet. But I already know the incomes I will receive from my state and university pensions: I am secure until death. Not so, many others.
Risks can easily be pooled, and for most types of risk, if they are pooled they evaporate. The reason for caution in pooling risks is ‘moral hazard’. In some situations, once the risk is shared, everyone takes greater risks: because we all have fire insurance we are more careless.
Owning a home enhances the sense of belonging, and that, as I have suggested, is a vital social good. Belonging is the foundation for reciprocal obligations. Home ownership also gives people a greater sense of having a stake in society, and inclines them to be more prudent: once people have something, they become highly averse to losing it. And owning a home anchors people. A street in Oxford was once divided because of the height of the trees - only owners planted them.
Many of the educated people who are highly productive are hugely beneficial to society. But many are using their skills to enrich themselves at the expense of others.
The nexus of jobs in finance and law is the core of this diversion of talent. While active transactions can be useful to make assets liquid, much of the trading is zero-sum: were the volume of transactions reduced there would be no loss to society. If they are zero-sum, why do they happen? The answer is that the very smart outwit the slightly less smart. The winners are those with the exceptional abilities and resources to outsmart others; as a result, they earn staggering amounts of money. A company invested in a high-speed cable between Chicago and New York that skims milliseconds off the transmission of price information between the two markets. A society in which investment in such a cable is undertaken while bridges are left to collapse due to lack of maintenance has not got its priority right.
Pension funds cannot pay the mega-salaries that would be required to recruit stars, and so they are managed by the slightly less smart. Transactions between the two groups generate a gradual transfer from future pensioners to the super-smart.
Corporations have globalized, morphing into legally complex networks of subsidiary companies that trade with each other but are controlled by a parent. For such companies, tax has become voluntary. In Britain, this was exemplified by Starbucks: despite selling billions of cups of coffee, during an entire decade the British subsidiary made virtually no taxable profits.
An even less salubrious aspect of corporate globalization is the growth of shell companies and havens of banking secrecy. A shell company, established by highly skilled lawyers in a metropolis - typically London or New York - is one whose true ownership is concealed. If such a company opens a bank account in a secrecy haven jurisdiction, the money deposited is shielded from scrutiny by a double wall of obfuscation. This structure has become a major means of protecting corrupt and criminal money from detection. Bitcoin has recently added a further option.
Why did political parties not turn to pragmatism? Most probably, this was the fault of voters. Pragmatism calls on people to attend to the evidence of context and to use practical reasoning to assess whether proposed solutions would actually work. That requires effort. An informed electorate is the ultimate public good, and as with all public goods each individual has little incentive to provide it. Most public goods can be provided by the state, but this one can only be provided by people themselves.
Instead, the vacuum created by the implosion of social democracy was filled by political movements tha offered voters a bypass to effort. Pragmatism has two enemies: ideologies and populism. The ideologies of both left and right claim that context, prudence and practical reasoning can be bypassed by an all-purpose analysis spewing out truths valid for all contexts and all time. Populism offers an alternative bypass: charismatic leaders with remedies so obvious that they can be grasped instantly.
What I advocate is not a variant of Marxism. Marxist ideology relies on a hate-filled narrative that replaces shared identity with extreme divisions of class identity. It replaces mutual obligations with the assertion of the rights of one class to expropriate what belongs to the other. Like radical Islam, its version of enlightened self-interest invokes a distant paradise in which the state ‘withers away’. The actual outcome of Marxist ideology, which has been invariably proved, is social conflict, economic collapse and a state that, instead of withering away, imposes overweening and brutal power. The difference between a society that pragmatically steers capitalism on a foundation of rational reciprocity, and one run by Marxist ideologues, is that between one at peace with itself, and one that is lacerated by mounting hatreds.