Tuesday, 26 April 2016

Uppers and Downers

John Naughton thinks that "The people who want Brexit are passionate in their hatred of the EU. But those who think ... that leaving would be a mistake don’t seem to be able to muster anything like the same passion for their belief. And therein lies the danger: for ... the combination of anger, hatred, xenophobia and illogicality combine to product a powerful narcotic". This is a revealing misuse of the word "narcotic", which is a drug that induces sleep - a downer, in other words. The outers give the impression that they have popped a handful of uppers (perhaps more in Boris Johnson's case), while the inners appear to be on a Mandrax drip-feed, even when they crank up project fear. George Osborne's attempt to make our blood run cold with his prediction of a £4,300 loss per household was naffly reminiscent of Doctor Evil's "One million dollars", while David Miliband's claim that Brexit would be "unilateral political disarmament" was the metaphor of a man pining for the past.

The remainers have a strategic problem with the referendum campaign. Their best argument is essentially conservatism - don't change anything because change is risky - but this may induce apathy among the voters, and so suppress turnout, which would disproportionately favour the more committed leavers. The consequence is a campaign that tries to combine flattery and fear, but with the exception of Barack Obama's intervention (this year's David Bowie moment), the result is often dissonant. It's an approach that worked for the Scottish independence referendum, but that had the advantage of the threat to shrivel pensions and savings overnight by confiscating the currency. The problem for the remain campaign is that many people suspect it may not matter how we vote because the threats relate to issues that are indeterminate, such as future trade terms, or don't connect at a personal level (the official case in noticeably light on workers' right).

This points to a significant change over time. The great nineteenth century debate on protection versus free trade centred on the price of food, notably the ability of ordinary folk to avoid malnutrition by buying cheaper imported grain. This evolved by the end of the century into the campaign for imperial preference, in which UK manufactures would be exchanged for dominion foodstuffs to mutual advantage. While "Buy Empire" gradually give way to "I'm Backing Britain" over the course of the twentieth century, the price of food remained a prominent issue in the 1975 referendum campaign, not least because of fears that the Common Agricultural Policy (CAP) might prove to be the Corn Laws writ large - i.e. a return to higher profits for landowners at the cost of more expensive shopping baskets for working people.

The last 40 years have seen a fall in the cost of food as a percentage of income (steadily down in the first 30 years, then slightly up over the last decade), which is largely attributable to globalisation and increased productivity, much of which has been coordinated at the EU-level both through trade deals and regulation (standardisation tends to increase productivity). The CAP has lost its resonance for most people while supermarket monopsony in the UK (e.g. driving down the price of milk to the disadvantage of smaller dairy farmers) is now more likely to evoke popular anger than subsidies to agribusiness. This is one reason why newspaper tropes have shifted from the price support and waste of butter mountains to the bureaucratic myths of straight bananas. The government case for remain does note the risk of higher food prices outside the EU but associates this with a falling pound, rather than tariffs, which would be beneficial in other respects.

It is remarkable that the out campaign, despite a quarter of a century of thinking time (the Bruges Group was founded in 1989, UKIP in 1993), has presented an economic case for Brexit that is incoherent and arguments on sovereignty that are delusional. There is no clarity on what an optimum post-EU industrial policy would be and even less clarity on the future status of the UK's devolved governments, particularly in the event of a different vote result between England and Scotland. Some critics see this as evidence of the impossibility of the leave case, but that only shows the limit of their imagination, while others are perhaps closer to the mark in seeing it as evidence of the opportunism of leading Brexiteers. Personally, I think it is because the arguments for leaving have predominantly been developed by newspapers, for whom consistency and empirical foundations are not priorities.

There are two reasons for this. First, the EU has provided a means by which the papers have sought to discipline the Tory party since the 1980s (it's worth remembering that the press was overwhelmingly pro-EU in 1975), filling an instrumental gap left by the government's retreat from direct control of financial markets (particularly after 1992). A well-known paradox of right-wing newspapers is that they demand the retreat of the state at the same time that they demand a strong and decisive state. As neoliberal governments have ceded more to the market, areas that the state cannot easily divest, such as security and foreign affairs, have become more significant to the assessment of their performance and led to more demands for "action". The second factor is framing politics in the idiom of "national interest", which means a teen-like tendency to divide the world into friends and enemies, an obsession with international league tables, and a periodic rediscovery of strategic interests (e.g. steel).

This is a structural bias that arises from the nature of newspapers as much as from the dynamics of politics. Since the 19th century, the national project has been pursued through the standardisation of language in parallel with the building of a political consensus, hence articles on grammar remain as popular with the press as articles about social etiquette or property prices. In addition, nationalism creates a common market for the press, so there is a strong commercial imperative to align ideologically with the imagined nation, and thus be coterminus with the market, hence the easy recourse to xenophobia and the celebration of national tradition, no matter how spurious. But this also leads to a positive desire for integration by immigrants into the market, hence the emphasis on their need to learn English. Newspapers, as a language product, are structurally nationalist but not necessarily racist.

Newspapers that promote internationalism, like The Guardian, are consciously identifying themselves as a progressive fraction within society, but they don't fundamentally challenge national or class boundaries. Their cause is free trade and globalisation rather than social reform, which depends on the institutional protection provided by the nation state. They identify with the supranationalism of capital and the language of international business, so their grammar articles tend towards pragmatism rather than prescription and they have an appetite for American loan-words (e.g. "movie" versus "film"). They approach domestic nationalism through cultural goods, particularly those with international appeal, such as Shakespeare, and by evoking imagined national characteristics such as "tolerance" that emphasise accommodation and interchange.
It is no coincidence that the leading lights of the leave campaign have been newspapermen, that is politicians whose thinking has been formed by working for newspapers and whose political careers (and bank balances) are heavily dependent on favourable coverage and access to the opinion pages, such as Boris Johnson, Michael Gove and Daniel Hannan. Their prominence is not merely a reflection of the poor intellectual quality of other Brexiteers, such as Chris Grayling or Nigel Farage, but a sign that the Brexit discourse has more to do with a particular form of rhetoric than political or economic calculation. Its incoherence owes much to the leavers being the spiritual descendants of the Tariff Reform League but employing the language of free trade.

The limitations of this rhetoric can be seen in the way that the leavers have passed up opportunities to turn the remainers' threats to their advantage. For example, a fall in inward foreign direct investment, as a result of foreign businesses relocating to elsewhere in the EU, might increase unemployment in the short term but it would help our balance of payments in the longer term (monetary flows are increasingly more significant than trade to this balance). Similarly, the absence of trade deals is an irrelevance for those increasingly dominant parts of the export sector that deliver goods and services within the UK (e.g. concierge services in London) or online. These aren't killer arguments, but they aren't irrelevant either. The reason they don't feature is that they don't fit the newspaper narrative of an industrious "UK Plc" or the image of heavily-laden cargo ships.

The referendum contest is a classic non-meeting of minds in which one side presents feelings and the other side presents facts. One is not superior to the other, though over a long campaign the slow accretion of facts (no matter how individually dubious) tends to leave the latter side looking more substantial if not conclusive. In this it is simply an acute form of the perennial debate over immigration. It is interesting to note the contrast with the 1975 contest, when there was a mix of rhetoric and calculation on both sides. Roy Jenkins was just as high as Peter Shore, largely because both sides felt they could offer a vision of a better future. Today's Brexiteers may look like they're about to trip over into frothing psychosis, but that reflects their dependence on newspapers and their addiction to the synthetic drug of nationalism.

Sunday, 24 April 2016

Hayek's Ignorance

A feature common to economics and sci-fi is abstraction, from the homogeneity of types (aliens, like utility maximisers, are usually representative rather than idiosyncratic) to the monocausal nature of change (the rule of ceteris paribus is usually only broken in sci-fi for comic effect, such as when an entire alien battle fleet is swallowed by a small dog following a terrible miscalculation of scale). This claim might appear questionable in hard sci-fi, where the writer delights in the scientific rigour and plausibility of her imaginings, but it is impossible to completely describe a speculative world within the confines of a single book, or even a series. The map is selective and approximate to the territory. The choices the author makes about which features to describe and which to ignore reflect not only the needs of the plot but her interests in the imaginary world. Much the same can be said of economists, hence the old joke, assume a can opener.

Price is not merely an efficient mechanism for the allocation of scarce resources but an abstraction that allows us to maintain a distance from the world. As Friedrich Hayek put it, in his 1945 essay The Use of Knowledge in Society, "The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement".

What's interesting about this is not just the prescient idea that price is "a system of telecommunications" but that obscurity ("how little the individual participants need to know"), rather than clarity, is its defining characteristic. Ignorance is a feature, not a bug. Hayek describes a world of "dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess". This dispersal, together with the fact that we cannot know who all the relevant individuals are in the composition of any given price, makes it impossible to gather and collate the underlying knowledge. Its meaning arises not through its aggregation but through its abstraction, "the movement of a few pointers". But where the metaphor breaks down is that we cannot reverse-engineer the mechanism, discovering and replicating the inputs that drove the needles on the dials. We have to take the output on trust. It's not too far-fetched to describe this as an occult theory of information.

The parallels between Hayek's system and a computer are obvious, if ultimately misleading: individually "dumb" calculations, massively-parallel processing, dynamic feedback and error-correction. In recommending the price system, he approvingly quoted Alfred North Whitehead from 1911: "Civilization advances by extending the number of important operations which we can perform without thinking about them". The relevance of that to recent developments in automation and AI hardly needs to be stressed. But Hayek's system was driven by its lack of self-understanding, the absence of a coherent underlying intelligence as much as a central coordinator, not just its tolerance of incomplete information: "The problem is precisely how to extend the span of our utilization of resources beyond the span of the control of any one mind; and therefore, how to dispense with the need of conscious control, and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do" [my italics].

The advance of IT since the 1970s has increasingly called into question Hayek's assumptions about what is possible, let alone desirable. Consider this: "Even the single controlling mind, in possession of all the data for some small, self-contained economic system, would not—every time some small adjustment in the allocation of resources had to be made—go explicitly through all the relations between ends and means which might possibly be affected". What seemed impractical in 1945 is now merely an electronic spreadsheet. Though social media have recently popularised the idea of "living our lives online", the dispersed knowledge that underpins price has been migrating to the digital realm (and thus becoming more consolidated and visible) since before Hayek picked up his Nobel Prize in 1974, not just in the growth of corporate resource planning and finance systems but in the spread of personal bank accounts, credit cards and so on.

While this has prompted some to speculate (with no little irony) that central planning might have been an idea ahead of its time (e.g. the debate around Francis Spufford's Red Plenty), most commentators on the intersection of IT and economics are dazzled by the promise of "big data" to reveal new opportunities for profit by isolating hitherto unknown signals in the vastly expanded noise. Some on the right have expressed unease at the potential challenge that big data presents to the Hayekian model of dispersed and fragmentary knowledge, but most have resolved this by accepting that data omniscience, like central planning itself, is fine as long as it occurs within a private firm operating in a competitive market. It's only a problem when done by the state, apparently.

But this ignores Hayek's crucial point that the justification for private action is ignorance not superior knowledge. As he put it in The Constitution of Liberty, "If there were omniscient men, if we could know not only all that affects the attainment of our present wishes but also our future wants and desires, there would be little case for liberty". Today, the impetus towards omniscience comes not only in the form of the state's appetite for mass surveillance but in the "imperial ambitions" of companies (working in tandem with the state) that seek to "organise the world's information" for profit. This desire has given rise to a business model in which information-rich services are offered for free (i.e. cross-subsidised to promote growth), which consequently inverts Hayek's system: greater visibility of preferences and the ability to infer expectations (i.e. knowledge) combined with price signals that are increasingly unrepresentative of "true cost".

Isabella Kaminska notes, "we are reverting to a world where a technocratic elite makes economic planning and allocation decisions based on their subjective interpretations of personal behaviours, status and privilege, who it’s fair to overprice and who it’s fair to subsidise, rather than clearcut at cost price signals from the market". Even technologies like blockchains, that seek to democratise information by avoing the "walled gardens" of the tech-titans as much as the central authority of the state, tend to do so by dispersing large datasets that are in regular communication with each other, to the point where we can reasonably talk of a distributed intelligence in which price is merely one property of a growing number of information classes. The desire to exploit that underlying intelligence is increasingly compromising the value of the price signal, which ironically makes Hayek's point that the power of price is a product of ignorance.

Sunday, 17 April 2016

Brics Made of Straw

The survival of Germany's lese majesté law, under which a comedian is to be prosecuted for insulting the President of Turkey, is a reminder both of Germany's legalistic rigour and the way that the postwar occupying powers, specifically the UK, influenced the institutions of the Federal Republic. The irony is that desuetude, the customary ignoring of obsolete laws that allows the UK to resolve the conflict of past and present with a blithe "whateva", is alien to the more prescriptive German tradition of the Rechsstaat and the country's postwar commitment to constitutional propriety. What this tale reveals is not merely that German-Turkish relations are at a delicate point, but that institutional legacies are often the result of the historic interplay of internal and external forces. The British experience, in which institutions are the product of organic growth and the reconciliation of domestic interests, even when we import foreign monarchs, is atypical.

In many countries, the dominant factor in institutional design is importation, either through executive fiat or conquest, while in others it is the reaction and resistance to foreign imports that is crucial. This is particularly notable in the case of the Brics (Brazil, Russia, India, China and South Africa), a group of countries whose varied institutional histories were blended (and blanded) for the consumption of international investors during the 00s, but whose differences have once more become matters of concern for the global economy since 2010, though even now the pessimistic view still tends to accentuate the similarities: "A common factor for all Brics countries as they struggle economically is institutional weakness, in particular a lack (or in some cases, a total absence) of democratic accountability, transparency in public life, and independent media scrutiny of official behaviour" (this assessment appears perverse considering Brazil's current turmoil).

The history of graft in Brazil cannot be understood without reference to the continuing power of landowners, descendants of the original Portuguese colonialists, who were major beneficiaries of the commodities boom of the 90s and 00s. Their historic dominance of society long-hampered the growth of a native middle class that wasn't dependent on their patronage. When that independent middle class started to emerge in the 1990s, facilitated in no small part by Lula's compromise with neoliberalism, there was a predictable turn against establishment corruption. Though the current protests (and those before the 2014 World Cup) are directed at the governing Workers Party, the salience of graft in the debate actually reflects the declining power of the landowning elite as the economy develops and diversifies. The problem is that the institutions of the Brazilian state are still geared to colonial extraction and influence-peddling, largely because of the lasting influence of that elite and its institutional embedding during the military dictatorship of 1964-85.

Before the early 70s, the economy of the Soviet Union was growing at rates comparable to the West. The ensuing "era of stagnation" is variously attributed to the flaws of central planning, gerontocracy, and bad choices in computer architecture. The more straightforward explanation is that the economy turned away from a potentially "inclusive" path towards a more "extractive" one, in the terminology used by Acemoglu and Robinson in Why Nations Fail, as a result of the combination of rising oil prices and over-capacity in heavy industry. This in turn reflected an institutional bias towards war-preparedness, which was the paranoid (if understandable) legacy of the 1940s. The shock-treatment of the Yeltsin years abandoned this (Putin's national revival is militarily cheapskate) and imported the institutions of extractive capitalism as the quickest route to solvency (and the transformation of the nomenklatura into oligarchs). Russia's problem since Peter the Great has been a tendency to import institutions (the revolution was a prime example) that don't fit together well, leaving gaps that encourage corruption and instability.

India continues to suffer from the legacy of the Raj. We Brits forget that the colonial government of India was wholly unlike its UK equivalent, despite the shared ceremonial features, having repurposed institutional forms established by the East India Company, many of which had been adapted from earlier Mughal forms, particularly in respect of land tenure and agricultural production. This is how "a tiny sliver of British soldiers and administrators somehow managed to govern a subcontinent populated by roughly 250 million subjects" (i.e. they subcontracted to local elites). While there was considerable reform once direct rule was established after the rebellion of 1857, there was also much continuity, as there would be after 1947. Imported "national" institutions, such as the civil service, the railways and cricket, which remain popular with BBC documentary-makers keen to show the positive side of the British legacy, obscure the enormous social and cultural fragmentation of the Indian state.

China is often read in terms of the traditional motifs of chaos versus order: the mandate of heaven, the rule of the emperor, the fear of dissent (Michael Wood's recent BBC documentary series was a decent survey of its history but too reliant on these motifs). The story of repeated invasion, destruction and absorption (actually no worse than the history of many European countries) tends to downplay the institutional resilience of China, outside the tropes of culture and Confucianism, instead implying a decadence and other-worldliness that was originally theorised as part of the justification for the incursion of Western powers in the nineteenth century (the British characterisation of the Chinese as debauched opium-addicts was particularly ironic). The chief institution in Chinese society has always been the extended family and its setting within the wider clan or lineage group, and the overlap of this with economic units. In institutional terms, China is one of the most robust nations on the planet, but this has little to do with the state apparatus.

In South Africa, the symbolism of the Truth and Reconciliation Committee encouraged a changing of the guard with insufficient attention to institutional reform. Much of the corruption visible today is the continuation of practices established during the latter years of minority rule, often ironically stimulated by Western sanctions. Apartheid was always presented internationally as a perversion of an otherwise "civilised" polity based on the British model. This was a consequence of the institutional continuity between the old Cape Colony and the Republic of South Africa. Consequently, there was insufficient appetite to reform the state and legal system beyond making it "colour-blind". While this continuity has provided stability (despite the high profile of social violence, political violence has been relatively rare), it has also allowed the preservation of essentially colonial institutions, a point made by the original Rhodes Must Fall movement.

There are many institutional similarities between South America and Southern Africa. Brazil and South Africa remain essentially colonial states with society divided along racial lines and the lack of significant land reform a running sore. Old elites retain extensive power and influence, while official politics places an increasing emphasis on the "new middle class" as the arbiters of democracy. Russia struggles to escape its history as the world's institutional laboratory (much of Putin's attraction domestically was a promise to stop the experiments), while the Chinese state, having failed to conquer the institutional base of society during the Cultural Revolution, is gradually producing an increasingly fractious ancien regime. India is a cohesive nation only insofar as it hangs on to antiquated British institutions and the shared bogeyman of a nuclear Pakistan. The eclipse of the Congress Party by the BJP suggests that the tensions arising from variable economic growth are becoming acute.

States that transition to democracy initially suffer institutional weakness because of the legacy of pre-democratic institutions. Even if a new broom approach is adopted, the "remnants" of the previous regime still exert considerable influence, and attempts to sweep away the old order in its entirety are often counter-productive, as in Iraq after the fall of Saddam. The idea that the introduction of the "free market" will accelerate institutional development, like the idea that it will naturally spawn democratic practice, is misguided. The problem of the commercial firm as an institution is that the law is considered secondary to business norms, even in established democracies (CSR is no substitute for civics). This is why a company like Mossack Fonseca is not a pariah, why UK-based banks can shrug off convictions for money-laundering, and why whistleblowers are routinely treated as traitors.

Germany will no doubt repeal its law of lese majesté in time, and will pat itself on the back both for its constitutional diligence and cultural progress. The evolution of the Brics is less certain. The national institutions of India and China are more fragile than their postwar politics implies, though this is less surprising when viewed in the context of a history of division. Brazil and South Africa will shrug off their colonial legacies eventually, but it is hard to predict the manner in which this will happen and what the outcomes will be. Russia is currently indulging a nostalgia for popular institutional forms of the past, notably the "little father" in the Kremlin and the "elite" army, but this looks like an indulgent distraction from an institutionalised kleptocracy. What we can say with certainty is that the western homogenisation of the Brics as an investment portfolio is a delusion that can be safely consigned to the dustbin of history.

Wednesday, 13 April 2016

The Filth and the Fury

The Guardian has got its knickers in a twist over the Interwebs. Being a newspaper, it cannot resist the temptation to invoke biblical parallels from the pulpit: "In the beginning was the web. A playful, creative and open space, where anyone could connect, and every assumption, every hierarchy, could be challenged. ... but along with online camaraderie, the vituperative modes of interaction took hold: bullying, shaming and intimidation". From Eden despoiled we segue to original sin: "For some, it is simply human nature, the inescapably nasty and brutish ways of the world finding electronic expression. Others ... point to problems with the rules of engagement, with some suggesting that the freedom to invent a new identity is, like Plato’s ring of Gyges, taken as a freedom to slip free of all morality". You can see where this is going: freedom (like everything) has a price, rights entail responsibilities, and can we have your home address for marketing purposes?

You'll also note the chronological shift from the legends of ancient Israel to the philosophy of ancient Greece, which reminds us that history is progressive: "Physical chastisement of women at home was once unexceptional, racist name-calling 'a bit of fun', and bottom-pinching at work an everyday occurrence, something to be endured, because it was not going to change. Slowly but surely, though, time was called on such shoulder-shrugging indifference, and the world changed". You don't have to subscribe to the optimism of Steven Pinker in The Better Angels of our Nature to recognise that in aggregate we live in a more tolerant and considerate world, which means that offensive social media ought to be welcomed on the principle that sticks and stones are better than broken bones. But liberals are not libertarians. Freedom is conditional and easily corrupted by the persistence of atavistic evil: "much of this new online abuse works to reinforce ancient prejudices". The work of progress is never done.

The media obsession with "hyper-terrorism" is being used by authoritarians to advance mass surveillance and the conditional suspension of rights. Likewise, the reported rise in antisemitism and misogyny on the left is being used by liberals to differentiate themselves and fill the policy vacuum caused by the redundancy of Third Way politics. The right have occupied the fiscally-conservative / socially-liberal space, while the "new new" left have revived social democracy. Centrists are left with the narrow terrain of identity politics in which ontological security has given way to full-blown paranoia: trolls to the left of me, trolls to the right. However tragic terrorism may be for an individual, or however horrible online abuse may be for its target, our current hysteria is disproportionate and obscures the real agenda: "Are there changes to the law that could ensure better protection and policing of this shared space? What responsibility lies with platforms like Facebook; and then, what responsibility lies with publishers such as the Guardian?" This is not just a plea to restore the social gatekeeper role of newspapers but an insistence that businesses are central to policing social rules. Neoliberalism isn't dead yet.

Humanity is becoming more tolerant and considerate in large part because of increased communication, but this process is messy. All new media witness initial abuse, simply because opportunity initially exceeds learned self-control (when I got my first cassette tape recorder in the late-70s, I'm pretty sure my test recording went something like "fuck, shit, bollocks, cunt"). This is followed by the gradual imposition of new norms of behaviour. The media can be thought of as a spotlight (or window, a la Overton) that reveals subjects and language deemed acceptable and appropriate to public discourse. Social media has expanded the area of illumination, but it has not created attitudes that previously didn't exist. The Guardian initiative is part of the process of formalising the boundaries of this new area, and as such it is following tradition in justifying censorship through the avoidance of damage. Where once we would ban seditious pamphlets for fear of public disorder and the destruction of property, now we privilege the mental health and right to be heard of the victimised lesbian columnist while marginalising the mental distress and limited voice of the angy white male troll.

Even those who welcome the horizontal potential of new media are susceptible to this moralism. Thus Paul Mason shies away from censorship but advocates education, which is just a progressive form of discrimination (i.e. reject that, embrace this): "Wherever the internet is not censored it is awash with anger, stereotypes and prejudice. ... ultimately what defeats genocidal racism is solidarity backed by logic, education and struggle. The left’s most effective weapon against antisemitism in the mid-20th century was the ability to trace the evils of the world to their true root cause: injustice, privilege and national oppression generated by an economic model designed to make the rich richer". This is still censorship because it constructs a hierarchy of value: antisemitism is not a legitimate way of understanding and negotiating the world while materialism and class struggle is. I might agree, but the point is that free speech entails the freedom to be wrong.

Mason's concern is ultimately one of seriousness: a fear that the masses are too easily distracted and misled to address what really matters. At root this is an old religious prejudice, filtered through the Enlightenment, that suspects the mob of a predilection for disorder and vice: "a culture that sees offensive speech as a source of amusement and the ability to publish racist insults as a human right". Even when the criticism is directed at those who profit from this - the modern equivalent of the moneylenders in the temple - the implicit criticism is of the weakness of the people. Thus Peter Preston: "So the bleak charge is that, for all its bright promise and sundry achievements, the net we have and the net we’ll get swamp tolerance, obliterate thinking time, fill minds with instant gratification and hatred. They play a role in undermining traditional party structures. They let demagogues loose. And they do it in a manufactured quest for clicks and cash" (just as an aside, how did this grammar-mangler ever get to edit a newspaper?)

Despite the oft-repeated claims, the Internet is not awash with hate-speech and profanity. Most people's Facebook timelines are dominated by the mundane and the silly. There are more cat videos than Daesh snuff movies because there are more cat-lovers in the world than terrorists, there are probably more Downfall parodies than genuine Nazis, and what has multiplied most are adverts, which is why the unit cost of advertising has fallen. Up till the late-80s, it was routine to hear misogynistic, racist and homophobic remarks in casual conversation. Our sensitivity is quite recent. If you went in to a public bar, a typical topic of conversation would be that cunt they've got at right-back. The coverage of football by newspapers, whether broadsheet or tabloid, was narrow and unimaginative, and only distinguished from the bar in its avoidance of swearing. The growth of football fanzines was driven by a desire to broaden and improve discussion in all dimensions. This included the denigration of various people, but taking the piss out of Ken Bates for his Thatcherite conceits was actually a step up on simply dismissing a right-back out of hand.

It has become convenient for journalists to claim that the decline in trust in institutions, notably newspapers and TV news, but also in politics as a chief subject of "respectable" media, reflects the impact of the Internet, despite ample evidence that declining trust in institutions is a long-term trend that starts in the 1970s and reflects the neoliberal shift from collectivism to individualism: "The beginning of political and economic liberalism is distrust" (in the sense of a wariness about state intervention). This points to a division in the meaning of "trust" between social relations (respect and authority) and a market signal (trustworthiness as a commodity). The problem for traditional media is that structural changes - the proliferation of channels, free content and the amplification of social media - have diluted the former and made the latter more clamorous. That's a problem for them but it doesn't mean that the Internet is eroding democracy. If anywhere, the finger of blame should be pointed towards neoliberalism.

Racist, homophobic and misogynistic trolling is clearly reactionary, reflecting changes in the workplace and society that make groups that once enjoyed relative privilege, such as working and middle-class white men, defensive and resentful. But this means that it marks a defeat, not a triumph. Indeed, the highpoint of trolling may well have already passed. In this light it is worth considering porn. The normalisation of hardcore pornography (i.e. images of acts that are themselves legal) by the Internet has not led to the collapse of society, essentially because it reinforced an existing trend towards more liberal attitudes to sex that arose from wider social changes. The point is not that trolling will be normalised and even more prevalent, but that baiting someone over their race or gender will eventually become as passé as being censorious about their legal sexual interests. This won't happen overnight, because gender and race prejudice are hardwired into our socio-economic system, but it will happen in time.

The recently-reported story of John Whittingdale's relationship with a woman who worked as a prostitute is illuminating in this regard. Formerly as chair of the Commons select committee on the media and now as Secretary of State for Culture, Media and Sport, Whittingdale has been consistently supportive of the press and reluctant to implement the full recommendations of the Leveson inquiry. The decision by four papers to spike a story that was otherwise catnip (Norman Lamont got it in the neck just for having a dominatrix as a tenant) looks like a supportive gesture towards an ally. This highlights the discrimination of the press - willing to attack perceived enemies while indulging their friends - which is the real political issue. What was incidentally revealing was the lack of comment about Whittingdale's unashamed use of, indicating the degree to which "hook-up" apps have become normalised. We've come a long way from the swimming pool at Cliveden.

Friday, 8 April 2016

Who Owns What?

One aspect of the Panama Papers that has received little attention so far is the impact that secrecy jurisdictions have on our understanding of the national accounts. By this I mean our "balance of payments", i.e. the flows of money between us and the rest of the world. Traditionally, the focus has been on the trade balance - the money we make through exports versus the amount we spend on imports - which acts as a proxy for the health of UK Plc (a less daft metaphor than the equivalence of government spending with a household). Since the 1960s, we have been used to the tale of declining manufacturing competitiveness offset by increased "invisible earnings" on services. What has come to the fore in recent years has been the flows of investment income - i.e. earnings on foreign assets owned by UK citizens versus payments to foreigners arising from their ownership of assets in the UK (which count as liabilities in the national accounts).

The ONS recently explained the worsening balance of payments in terms of these relative investment positions: "The current account of the balance of payments declined to a record deficit of 5.2% of GDP in 2015, largely as a result of a fall in earnings on UK foreign direct investment (FDI) assets abroad relative to overseas FDI assets in the UK. The exposure of the UK to changes in commodity prices – in particular the oil price – and weaker overseas earnings of some the UK’s largest multinational companies help to explain this recent fall". In other words, the global recession has reduced the returns on our investments in Australian mines and Gulf oilfields more than it has reduced returns on UK assets owned by foreigners. This has led some commentators to see the issue as cyclical, suggesting that it will right itself in time. Yet the ONS's own data (from 2012 - see fig. 4) shows that the UK has a peculiar profile, closer to the economic periphery of the EU than the core (i.e. more dependent on inward investment), which suggests there are stuctural factors in play.

There are three things to note here. First, if we are dependent on high yields abroad to maintain a healthy balance of payments then we face a problem as markets like China regress to the mean in terms of growth rates. While some economists believe that Africa can provide the next spurt of global growth, there has to be a question mark over the idea that high-yield emerging markets are an established and thus reliable feature of the global economy, particularly if they are based on extractive industries and base commodities. History suggests that such markets are episodic and volatile. You'll make high returns for a while but then there will be a crash and you may have to wait years before the next high-yield cycle begins. Narrower investment yield spreads, like low interest rates and over-subscribed government bonds, may be the new normal.

If we don't find new high-yield opportunities abroad, we must either reduce the amount of FDI liabilities relative to UK GDP or reduce the value of their earnings (and increase the value of our foreign earnings) by devaluing Sterling. However, while devaluation might boost exports and improve the balance of payments (though it noticeably didn't do so between 2008-13), it would certainly make UK assets cheaper for foreigners to acquire, so it could simply exacerbate matters. The issue with reducing FDI in the UK as a percentage of GDP is less about becoming unattractive to foreign investors and more about directing domestic capital to domestic opportunities - i.e. we want both types of investment to increase but for the latter to do so at a faster rate than the former. In other words, we really need Hinkley C (or an alternative investment in our energy supply) to be funded by UK citizens, whether via the market or nationalisation, rather than French and Chinese citizens. Many in France appear to share this view.

Second, despite the ONS focus on commodities, it is clear that poor earnings are also a feature of other sectors geared to developed markets, such as communications, and more generally of investments in the EU. Regardless of Brexit and its impact on trade, the UK needs a European economic stimulus to revive receipts but there appears to be little likelihood of this happening in the near future. It is also worth noting that receipts and payments since the 1990s have been dominated by earnings on financial sector assets, including derivatives and foreign exchange holdings as well as bank equity. While the fallout of the 2008 crash reduced these across the board (though they're still close to half the total), the impact has been marginally greater on assets than liabilities, reflecting the relatively better performance of UK property (i.e. more foreign buyers plus more UK citizens repatriating money) and the bailout and ongoing support via QE of UK banks (i.e. another byproduct of "too big to fail").

Third, the relatively better performance of FDI in the UK is clearly not attributable to the largely foreign-owned steel industry. In fact, the difference in performance between assets and liabilities is not to be found within the manufacturing sector, except insofar as it affects multinationals who are doing better at home than abroad. According to the ONS, recent increased returns on UK liabilities reflect an uptick in foreign investment in the wholesale and retail sector since 2013 (think Amazon warehouses), which may in turn reflect foreign capital attracted to an economy that has once more relapsed to a dependence on the drug of consumer-led growth. This higher rate of investment could well ease off once other countries return to better growth, but by then there will have been a step up in earnings that won't have been offset by UK investment abroad. We'll be playing catch-up.

Understanding the UK's balance of payments is difficult because it requires accurate knowledge of who owns what: whether UK assets are owned by UK citizens or foreign nationals and how much UK citizens own in other countries. The problem, which David Cameron's private affairs have shone a light on, is that beneficial ownership of assets is precisely what secrecy jurisdictions exist to obscure. This is where the metaphor of UK Plc breaks down: it's like a company publishing its annual accounts with the balance sheet left intentionally blank. It is quite possible that the web of offshore funds and trusts gives us a misleading impression of the true balance of payments. For example, a UK property that produces a rental income may be owned by a Panamanian company (so it's a liability) whose shares are owned by an offshore trust registered in the British Virgin Islands whose beneficiaries are Brits (so it's really an asset).

An irony is that the free movement of capital since the 80s, which has done so much to boost the value of Sterling by using the City as a conduit for global flows, may now be contributing to the risk of a sudden devaluation through its negative impact on the balance of payments. A further irony is that offshore funds denominated in foreign currencies, or Sterling funds that hedge exchange rate movements, may be among the prime beneficiaries of a devaluation. Should a devaluation be anticipated (as happened in 1992), fear might prompt a capital flight by foreign investors in UK property. Even if the underlying conditions are favourable to holding UK assets long-term (e.g. the government's determination to constrain housing supply and minimise capital gains and inheritance tax), the short-term might suggest otherwise. The final irony is that these flighty foreigners may actually be more "us" than Russian oligarchs or Malaysian speculators.