Four Reasons why the Starmer Government’s ‘Modern Industrial Strategy’ Will Fail

The Labour government has recently published a Green Paper called Invest 2035: The UK’s Modern Industrial Strategy which sets out its plan for an industrial strategy. This is the first attempt at formulating an industrial strategy for the country since then Business Secretary Kwasi Kwarteng decided in 2021 that industrial strategy was incompatible with his ‘Britannia unchained’ libertarianism. We now all know how Kwarteng’s and PM Truss’s attempt to turn the fantasy of Institute for Economic Affairs (IEA) sponsored economic libertarianism into reality turned out (see my account of that fateful week). As such, a return to industrial policy making is welcomed. Sadly, if the Green Paper is the blueprint for how the government is trying to do that, then it is clear already now that its strategy will fail. There are at least four reasons for that.

Growth fetishism

The first reason why the government is setting itself up for failure is its growth fetishism. “Growth is the number one mission of this government” reads the first sentence of Chancellor Rachael Reeves’ foreword to the green paper on the ‘Modern Industrial Strategy.’ That short little sentence is worrying in several respects: Firstly, it indicates that the new Labour government’s economic approach remains deeply rooted in 20th century thinking – considering any kind of economic growth to be good and implicitly relying on ‘trickledown economics.’ Secondly, the narrow focus on growth as the one metric that determines the new industrial strategy betrays and reinforces a shocking lack of vision and sense of urgency regarding the need to make the UK economy contribute to climate change and biodiversity loss mitigation. Indeed, it is telling that the government’s ‘Modern Industrial Strategy’ does not contain much reference to the Green New Deal that Keir Starmer promised in his 10 pledges before the election. Instead of a transition to an ecologically sustainable economy, what we are promised now is ‘growth, growth, growth.’

Fetishising growth as a goal in itself leads the government to proposing an industrial strategy that selects the sectors to be targeted with its industrial strategy on the dependent variable (namely growth potential), while completely ignore – despite claims to the contrary – that economic sectors interact with each other. Indeed, the most basic and fundamental flaw in the government’s proposed industrial strategy is the way in which it seeks to identify which sectors should be targeted by government intervention. The green paper explains that eight sectors have been chosen based on a combination of factors that are meant to capture ‘current strengths’ and ‘emerging strengths’ including forecast growth, future importance of the sector, and ‘the UK’s global position now and in the future.’ Based primarily on these sectors’ past performance (output growth, productivity, comparative advantage) they are labelled growth-driving sectors. The plan is to provide a stable policy environment that “businesses need to invest in the high growth sectors that will drive our growth mission” and to “channel support to 8 growth-driving sectors – those in which the UK excels today and will propel us tomorrow.”

The proposed ‘strategy’ is hence to help various sectors grow by looking at them in isolation and without any particular sense of urgency to move the UK economy to an ecologically sustainable model. As such, the proposed strategy is ‘upside down’ in the sense that it puts growth on top of the priority list, rather than seeing it as a byproduct of an urgently needed fundamental transformation of our economic system.

Implicitly, the fetishism of growth is linked to an underlying flawed understanding of how economic growth links to our country’s prosperity. Here, the government’s strategy suggests that any type of growth in any type of economic activity will do, because economic growth will then trickle down to the rest of the population – i.e. a rising tide will lift all boats. This is, of course, the industrial policy paradigm of the 1980s-2010s often referred to as ‘Washington Consensus,’ which has failed so miserably and caused – or aggravated – many of the environmental, political, and economic problems we are now facing. The International Monetary Fund itself now acknowledges that. Yet, the UK government still seems to base its industrial strategy on this thinking. Therefore, while “growth, growth, growth” may have been a good slogan for the General Election campaign, it is a very poor guide for industrial strategy.

Ignoring sector interactions

A second reason why the industrial strategy driven by the sole metric of ‘growth’ will fail is the fact that interlinkages among economic sectors are not being considered. The Green Paper does refer to positive and negative ‘spillover effects’ among economic sectors, but it is not clear where that insight was taken into account when drafting the industrial strategy. Since the industrial strategy starts from growth as the only relevant desired outcome – rather than from a vision of a sustainable economic model the UK should move towards – it ignores how sectors may interact to contribute to the desired outcome. Seeking to simply boost growth in individual sectors will lead to a situation where policy measures taken to boost growth in one sector may very well prevent growth in others.

The most important example where this is like to happen is regarding financial services, which is one of the eight sectors the government will target with its industrial policy to promote growth. It is increasingly becoming clear that the way the government will try and achieve that is through de-regulation. Chancellor Rachel Reeves made that clear – most recently when stating that regulations introduced after the Global Financial Crisis were excessive.

It is relatively easy to generate growth in financial services through deregulation. Contrary to the economists’ trope of ‘scarcity’, there is an excess of financial capital in the world economy looking for a ‘yield uplift.’ If a financial centre like London makes speculative activities easier by reducing regulation and oversight, more capital will flow to our shores, boosting growth in the cities of London and Edinburgh.

But of course, the (very recent and very ancient) history teaches us that this strategy literally invariably leads to financial crisis. Of course, the Labour government will argue that ‘this time is different,’ but 800 years of experience suggest that it never is (see Carmen Reinhart and Kenneth Rogoff’s work on this). The only time where financial liberalisation does not lead to a financial crisis is where prudential regulation follows suit (see my own work on this). Here, the government’s promise to be ‘unreservedly pro-business’ is bad news, because such an attitude tends to lead to light-touch oversight over private market actors.

The right kind of finance

Besides the risks a narrow-minded growth strategy holds in terms of laying the ground for the next financial crisis, growing the financial sector as a goal in itself is almost certainly bad news for some of the other sectors the government wants to see grow. Most importantly perhaps advanced manufacturing.

Political economists have for a long time rejected the argument that boosting the financial sector means more capital is available for productive enterprises to tap into. There is a clear difference between financial capital that flows into speculative activities – which is what the City of London mostly does – and financial capital that supports productive enterprise. The sort of growth of financial services the government seems to have in mind, most likely will bloat the former without increasing the latter.

LSE Professor Susan Strange’s work (e.g. in her books Mad Money and Casino Capitalism) has hinted at the negative effects on the UK economy of an overreliance on financial services for a long time – and indeed predicted the financial crisis. Her warnings were not heeded by politicians, arguably due to politicians’ short-term thinking (i.e. in terms of the next general election, not the next financial crisis) and the lobbying power of finance in the UK.

For manufacturing firms, the type of financial activities that dominate the City of London will not provide the type of investment that is needed to grow a manufacturing business. The City of London has always been more focused on speculation and international trade finance rather than industrial investment. This has been made worse by the ‘Big Bang’ deregulation push in the 1980s and financial innovation of the 1990s, which has meant most of financial activity is now speculative rather than financing any productive activities – which Ian Toporowski calls ‘the end of finance.’

In other words, just like growth is not equal growth (some types of economic growth are not actually socially desirable or beneficial – e.g. a car crash increases GDP), so not any type of finance is “good” finance. What manufacturers and other productive sectors need is “patient capital” i.e. investors who are in it for the long howl, who allow firms to innovate, develop good and desirable products, and pay decent salaries while doing that. Speculative investment – through private equity for instance – makes investment in long-term projects – e.g. innovation and R&D -impossible, because the impatient shareholders want a quick and high return on their investment.

Ten years ago, then Lib Dem Business Secretary Vince Cable understood that when he launched the British Business Bank – a state-owned bank meant to provide loans to UK SMEs to fill the gap in financing UK companies were facing despite having one of the largest financial centres at their doorstep. The new Labour government on the other hand seems oblivious of these subtleties and thinks deregulating the city of London (and that of Edinburgh) will boost availability of finance and hence benefit everyone. Instead, what a new round of deregulation will lead to is further ‘financialisation’ of the UK economy, which means quick financial returns – not decent jobs, clean production, or innovation – will be the top priority of UK firms.

Wither Voluntarism: Being anti-business to be pro-business

A third reason why the government’s industrial strategy will fail is that it naïvely relies on business voluntarism to contribute to achieving the government’s stated goals. Indeed, the government does not tire to state that it is ‘unreservedly pro-business.’ Yet, decades of research on industrial policies around the world shows that very often to be pro-business in the long run, government’s need to be somewhat ‘anti-business’ in the short run.

Indeed, where governments impose ‘beneficial constraints’ on firms, they manage to make companies invest in workers’ skills, productivity enhancing technology, and R&D, and innovation. Without state-imposed constraints, companies may choose the ‘low road’ to competitiveness, i.e. competing on low prices, low quality, using low wage and low skilled workers. Where states impose limits to the extent to which such low road strategies are permissible, companies invest in quality and productivity making them and their workers more productive and more competitive. Businesses may not like it (due to greed and/or short termism of top management teams) – but the overall economic outcome for themselves, there employers, and the country as a whole.

The goal of a sustainable high-skill, high-wage economy can only be achieved with strong state imposing a regulatory framework that rewards firms that invest in quality, safety, and skills and punishes firms that seek to pursue a ‘low-road’ business model based on bad working conditions, low wages, low quality and safety standards. While this may prevent certain firms/investors from investing in the UK, firms that are willing to adopt a ‘high road’ approach will greatly benefit from these constraints that keep low-road competitors out of the market.

Trade – the elephant in the room

A fourth reason why the government’s strategy will fail is that it is still not honest about the impact of Brexit and the exit from the European Single Market (SM) on the UK economy. Indeed, while attracting investment to the UK is the government’s key objective, it seeks to do so through deregulation rather than by considering the impact of losing access to the EU SM on the attractiveness of the UK as a place to produce.

Indeed, there is very little mention of the elephant in the room in the Green Paper – namely the fact that the UK has lost access to the EU’s Single Market. Instead, there is the habitual talk about ‘market-opening trade deals’ and ‘international partnerships’ that is reminiscent of the previous Brexiter Tory governments’ rhetoric. But the single most important barrier to investment in the UK, namely Brexit is not explicitly being considered.

The government asks in its consultation questions ‘Which international markets do you see as the greatest opportunity for the growth-driving sectors […]?’ Basic logic and decades of research (in particular the gravity model of trade) provide a clear answer here: it is the EU.

Reducing the barrier to investment that Brexit imposed would lead to increased attractiveness of any sector of the UK economy. The OBR has estimated the impact of Brexit on business investment in the UK has been estimated as high as 16% below what it would have been without Brexit. Therefore, much more cost-effective way of stimulating investment than deregulation and government subsidies would be to seriously address the trading relationship with the EU and make sure the UK gets as close to Single Market membership as it can. This seems impossible not only due to Starmer’s ‘red lines,’ but also due to the deregulatory approach to the economy. For regulatory reform in the UK to be generating investment, it necessarily needs to align with EU regulation in some form or shape. Here a pro-active alignment with EU rules should be given serious consideration, e.g. in the area of sanitary and phytosanitary rules. This would reduce costs for businesses dramatically and avoid further decline in UK exports to EU countries especially from UK SMEs.

There is also a geopolitical reason why the Brexit trade barriers should be the government’s main target to stimulate trade and growth. Indeed, improving trade links with EU countries, seems particularly important if the government also wants to deliver on its “commitment to upholding the international rules-based system,” because most other major markets – China, India and possibly the USA under Trump – are increasingly undermining the rules-based system. The focus should therefore be on strengthening our trading relationships with those countries that share our values of liberal democracy and rules-based world order. That will then also facilitate foreign policy stances that do not compromise liberal democracy and the rules-based world order due to our dependence on autocracies. To be sure, within the EU too, illiberal authoritarian tendencies are growing increasingly stronger. Still, compared to countries like China and India, liberal democracy is still stronger in Europe.

The positives: Industrial council

All that said, there are also positives in the Green Paper. Thus, there is a proposal to establish an Industrial Strategy Council (ISC), which will be ‘a statutory, independent, and evidence-led industrial’ body ‘reporting to the Business and Trade Secretary and the Chancellor of the Exchequer.’ It ‘will be responsible for informing and monitoring both the development and delivery of the industrial strategy over the long term, ensuring that policy interventions are informed by a broad and high-quality evidence base.’

To some this will sound like a technocratisation of economic policy making – akin to the establishment of central bank independence (CBI) during the 1990s, which is often considered as a key problem of government’s who have lost key policy leavers in the area of monetary policy.

Yet, from my perspective, technocratic policy making in specialised areas is not a problem per se. in the case of central banks, the problem is not so much de facto policymaking by unelected experts – rather than elected politicians – but the fact that their policy-making is based on outdated and deeply flawed monetary theories. That does not have to be the case, as the BoE’s monetary committee could also be composed of a broader range of experts with more up-to-date ideas. Regardless, in the case of industrial strategy, the establishment of the ISC seems like a very good initiative to reduce the erratic industrial strategy making of the past decades.

Indeed, such an Industrial Strategy Council could resemble a semi-autonomous representative body that have proven successful in several East-Asian cases in implementing successful industrial strategies. A large empirical literature on the “Developmental State” shows that the most successful attempts of delivering industrial strategies in the interest of the nation (as opposed to the interest of the politicians and businesspeople involved) were based on what is called ‘embedded autonomy’ of state authorities responsible for industrial policies (e.g. Evans, 1995). Embedded autonomy implies that civil servants have regular exchanges and close ties with businesses to understand their needs. At the same time, they need to be sufficiently autonomous from both politicians and businesses to not be captured by either group’s particular interests and focus on delivering the strategy in the public interest instead. The proposed ISC does seem to contain elements of autonomy from politicians, which is commendable.

At the same time, developmental states work when the state is the senior partner and manages to discipline businesses by making it adhere to policy goals through regulation and/or direct or indirect control over credit flows, not those where the state was ‘pro-business’ and hoping businesses would play ball. Therefore, it will be key that the ISC also remains sufficiently autonomous from – while being embedded in – the business community. Lessons from Japan, South Korea, and Taiwan’s experience with consultative fora, meritocratic public authorities, and successful government strategies to discipline businesses may be useful here.

Putting the financial genie back in the bottle

In short then, the Green Paper is a worrying piece in the sense that it betrays the complete absence of any vision for the future of the UK’s economic model and instead focuses on the same old short-term goals and flawed means that have caused the problems we have to deal with in the first place. Indeed, if Sir Keir Starmer and Rachael Reeves had three wishes it would be ‘growth, growth, growth’. The most worrying bit of the outlined strategy is that it will undo some of the safeguards against excessive financial speculation that have been put in place after the Global Financial Crisis of 2007 and following. This spells disaster in the medium turn, as another financial crisis seem inevitable.

What the government should focus on instead is putting the genie of financialisation back into the bottle and provide other economic sectors with more oxygen to grow. Instead, despite all the talk about ‘making hard choices,’ the government seems to choose the seemingly simple way of trying to ignite the UK economy by lighting a straw fire in the financial sector. That may well work for a while. Deregulating the financial sector will generate an inflow of excess capital from around the world which will spur localised growth in the UK’s financial centres. That will increase employment in these areas, but also increase house prices and rents, without producing any positive spillover effects for other sectors, but rather competing with them for talent while driving up the exchange rate at the expense of exporters who are already suffering because of Brexit.

Putting the financial genie back in the bottle may not be a realistic political goal to hope for. Once the financial sector has been unleashed, a self-reinforcing political cycle sets in because tremendously wealthy financial services firms acquire more political clout that allows them to push back on state attempts to re-regulate. The financial crisis of 2007/8 may have been an opportunity to break that vicious cycle, but it was a missed one. Clearly Labour has no intention of correcting that mistake. We may be too far down the path of financialisation to reign in the power of finance through political action and thus reset the UK’s economic model. Only a major crisis – bigger than the one of 2007 and following – may allow to reestablish an equilibrium between financial speculation and finance as a service to productive activities.

Ultimately, it may very well be that the two biggest risks facing humanity in the 2020s – the impending environmental catastrophe and the increasing geopolitical tensions – may turn out to be a blessing in disguise. Indeed, the above-mentioned developmental state literature considers the state’s capacity to ‘discipline business’ and make it adhere to a public good-driven industrial strategy tends to work best when there are strong external threats facing the country. Richard Doner and colleagues call this a situation of ‘systemic vulnerability’. Such vulnerability creates a sense of urgency, enhances public-spiritedness, and makes it easier to align the interests of all stakeholders needed for successful delivery of an industrial strategy. This was the case in South Korea and Taiwan for instance with the threat of invasion from North Korea and China respectively. In such contexts of perceived vulnerability, the state may have strong popular support to regulate businesses and businesses may have the incentives and normative disposition to rein in their short-term self-interest. The geopolitical threats stemming from increasingly aggressive authoritarian regimes around the world but especially climate change are sources of systemic vulnerability like we have never seen before in human history. As such, they may provide the government with what it needs to be a lot bolder on the fundamental changes the UK economic model requires than what the Green Paper suggests it is currently willing to do. Systemic vulnerability is, however, only a precondition for successful industrial strategy, not a guarantee that the government will pursue the right kind of policies. Here, the Starmer government’s complete lack of vision is the country’s worst enemy.

Love your enemies? How Turkey’s ‘managed pluralism’ in media ownership enabled Erdogan’s electoral success

Erdoğan’s recent economic record does not look great. From record-level inflation (50% according to the official figures), to a youth unemployment rate of 20%, to the recent fall-out from the earthquake response that revealed the scale of corruption and mismanagement in the construction industry that the Erdoğan regime is entangled in, there did not seem much for Erdoğan to base his re-election campaign on. 

 Yet, he continues to garner the popular support of around half of the Turkish electorate, winning the May 29, 2023 presidential election run off with an estimated 52.14% of the votes.  Even accounting for alleged – and quite likely – fraud and vote rigging that is a remarkable achievement. How can we explain Erdoğan's enduring popularity amongst the significant segments of the voter public who are surely impacted by the current economic and social crises?

 One part of the answer is that Erdogan managed to galvanise supporters with messaging about his ‘great achievements’ in science and tech. But this message may have been a lot less effective had it not been for another underlying transformation he has orchestrated over the past 20 years, namely the transformation of the Turkish media system.

One key insight from a recent research project on populism that uses the social network analysis (SNA) technique is that contrary to what we might expect from historical experience with totalitarian regimes, modern-day right-wing authoritarian leaders do not strive for a complete Gleichschaltung of the media. Rather, the analysis of media ownership hints at the fact that the regime tolerates some dissenting voices, whilst making sure the government’s voice is disproportionately heard and oppositional voices are marginalised.

This effect happens when the ownership network shows centre-periphery structure of media ownership, which suggests that messages emanating from the government-controlled centre of the network are ‘louder’ compared to voices emanating from the periphery where oppositional voices are increasingly located. The figure below graphically represents the changing media ownership network structures in Turkey and indicates such core periphery structures.

Turkish media ownership network 2010 and 2020

Erdoğan's media strategy consisted of orchestrating transfers of ownership of established media outlets from old media-elites to the new media elites that have clientelist relationship with Erdoğan's regime. Whilst not abolishing the private media market, the new structure erodes competition between media groups and among journalists. Almost all big players in the media market are comprised of pro-Erdoğan firms. Such a market provides ample opportunities for Erdoğan's truth regime to be told and retold over and over through different outlets and arguably through different styles adapted to the audience of each outlet all of which serve for Erdoğanism and its truth regime.

Turkuvaz Medya Group illustrates the strategy of creating new media owners. Turkuvaz Medya Group  is one of the biggest pro-Erdoğan media conglomerates, , owned by Kalyon Holdings. It, possess 60 media outlets including the popular television channels such as ATV and A Haber, and popular dailies such as Sabah. According to recent research, these outlets were not only amongst the most popular news resources for Erdoğan supporters, but they were also amongst the most propagandistic ones serving Erdoğanism during 2018 Presidential election in which Erdoğan won once again the majority of the votes. Kalyon entered the media market by taking over the major media outlets in the country in 2013, when Erdoğan had accelerated his project of redesign of the media market through ownership changes.

Yet, not all oppositional media outlet are brought under control by owners close to Erdoğan. This strategy of ‘managed pluralism’ in the sphere of the media is in line with what scholars of modern authoritarianism have found in the electoral sphere: Modern autocrats do not seek to completely stomp out any opposition. Rather, they seem to be willing to tolerate some opposition, leading to a so-called competitive authoritarianism.

There is a reason for this relative tolerance of dissent. Modern-day right-wing populist rhetoric is based on the ‘us versus them’ discourse, which by necessity requires an enemy. Therefore, opposing voices are not completely silenced, but the ownership of media companies is used to make sure they remain marginal. This makes the populist ‘us versus them’ discourse more effective.

Indeed, media outlets close to the Erdoğan regime constantly disseminate the polarising narrative that Erdoğan's supporters are presented as the real, pure, good Muslims and patriotic Turks and all oppositional groups – including journalists – are represented as enemy, terrorists, and infidels. The co-existence of pro-Erdoğan media outlets and oppositional ones in the media market, helps give this narrative substance. Indeed, contrary to historical cases of totalitarian regimes, modern-day right-wing populists’ ‘competitive authoritarianism’ and the related ‘us versus them’ strategy makes opposition and dissent useful – indeed important – for regime maintenance. When the mediated narrative is organised to create a war-like friend and enemy situation, the destabilising and unpopular issues such as inflation, unemployment or corruption and mismanagement may become much less important.

Erdoğan may not ‘love’ his enemies, but he most definitely needs them to stay in power. In network terms, echo chambers that spread the regimes message far and wide and increase the resonance of the official voice, while dissent is confined to the periphery of the network, is a better tool to square popular support and control than an outright elimination of dissent.

The EU-UK Trade Deal: How the British Government Got Tricked into Thinking it Can “Have its Cake and Eat it”

Ahead of the vote in the UK Parliament, Prime Minister Johnson confidently praised the new UK-EU Trade and Cooperation Agreement (TCA) for allowing the UK to have its cake and eat it. The reason why the PM thinks this is that the deal does indeed establish the principle of continuing duty- and quota-free export of goods between the UK and the EU even after the end of the transition period on December 31st, 2020 11pm UK time. At the same time, the UK is not subject to the (direct) jurisdiction of the European Court of Justice (ECJ) – an important red-line in the UK government’s negotiation brief. So, in principle the Deal guarantees continuing tariff-free access to the common market, while delivering on the promise for the UK to be able to deviate from EU regulation. This would indeed seem like a major victory for the UK government – delivering both access to the common market and the end of jurisdiction of the ECJ in Britain.

One will immediately wonder: Why did the EU accept to give the UK such a preferential trade deal, which – if PM Johnson is right – allows the UK access to the common market like before without having to subject to EU legislation? The answer is that of course the EU did not do such a thing! Indeed, if this were the case, the TCA may very well encourage other member states to consider whether they could have a better deal outside the EU, undermining the cohesion of the remaining EU member states further.  Rather, what looks at the surface like the best of both worlds for the UK, turns out – upon closer inspection – to be a very cunning solution for the EU to avoid a no-deal Brexit with new tariffs between the common market and the UK without undermining the integrity of the common market. This was possible thanks to three different mechanisms and the very special situation in which the two markets are.

The Starting Point: 40+ years of regulatory alignment

The first thing to note is that the TCA - contrary to most trade agreements in the world – was not about reducing trade barriers but about avoiding the erecting of new ones. Indeed, the starting point was two markets that have been following very largely the same rules and regulations for the past forty-seven years. There is therefore a very far-reaching alignment between the two regulatory regimes. Brexit will potentially put an end to this, but for now the two regulatory regimes are equivalent. This allowed the EU to use the following trick to let the British government think (or pretend) it could have its cake while also eating it: The principle of continuing tariff- and quota-free access to the single market is conditional on the continuing alignment of UK rules on EU standards in practice. The TCA contains three mechanisms that will guarantee that regulatory divergence from EU standards will result in cutting off UK goods from the common market and thus prevent the UK undermining EU standards.

Level Playing Field Provisions: A new regime of enforcement of social and environmental standards

The first mechanism to keep the UK regulatory regime aligned with EU standards are the so-called level playing field (LPF) provisions (Title XI of the TCA) concerning social and environmental standards. While the TCA allows the UK in principle to diverge from EU regulation, problems will emerge if the UK decides to start deviating from EU regulations in practice. The LPF provisions introduces an innovative enforcement mechanism of social and environmental standards, which goes far beyond any other trade agreement the EU currently has with other countries. Article 9.4 entitled ‘Rebalancing’ gives either party the right to use ‘rebalancing measures’ if trade is materially impacted by significant deviance of the other party from labour, environmental, and climate protection standards. In other words, were the UK to decide to use its newfound freedom and significantly undercut the current standards in these areas, it would face the threat of the EU imposing rebalancing tariffs on its goods.

To be sure, the party brining the case would have to provide evidence of a material impact on trade from such divergence, which has proven a high barrier in other TAs. Yet, while the provisions may not become widely used in practice, they will hover over both parties as a Sword of Damocles that strongly discourages divergence from the current common standards.

Product Quality and Standards: Non-tariff trade barriers

The second mechanism to incentivise close alignment of the two regulatory regimes is through the regime of quality and health certification for exports. Indeed, while trade in goods between the UK and the EU remains duty- and quota free, there is – contrary to the PM’s false statements – a whole host of new non-tariff trade barriers in the form of customs declarations, export health certificates (EHCs), rule of origin checks, conformity check etc. which will be imposed on UK goods going to the Continent. These checks create another strong incentive for the UK to respect EU standards not only in the areas falling under the LPF provisions (Labour, environment, and state subsidies), but also in terms of quality and health standards. Any attempt to deviate from EU standards, while allowed in principle, will potentially be punished by a loss of access for British exporters to the common market.

The Elephant in the Room: Financial Services

Finally, the TCA is focused on goods and only contains minimal provisions on services. Here a third mechanism encouraging regulatory alignment kicks in, namely the so-called ‘equivalence’ system that will govern financial services – at least until an agreement on services is concluded. This essentially means that both sides will decide unilaterally whether the other sides financial regulations can be deemed equivalent to one’s own standards and market access can be granted on that basis. The decision is still outstanding on the EU’s assessment of UK financial service providers. It is likely that access will be granted, because, –   as noted above – due to over forty years of membership, the two regulatory regimes are currently aligned. However, any future departure of the UK from EU standards in financial services may very well be punished with the loss (or threat of loss) of access to the common market for UK financial service providers. Given the importance of financial services for the City of London and hence the UK economy and given the insecurity this second Damocles Sword creates, it is likely that the UK Parliament will think twice before deviating from EU regulations. This limits the extent to which the UK can reasonably be expected to engage in regulatory competition with the EU over financial services.

As a result of the triple safety-net built into the TCA (LPF provisions, export health certification, equivalence system for services), the situation the UK and the EU find themselves in after Brexit is perhaps best described as a mutual hostage situation: the deal creates a regime where any deviance from regulatory alignment can be punished by the other side with the imposition of “rebalancing tariffs” or cutting the other side off its market by removing the acknowledgement of ‘equivalence.’ Therefore, while the UK has taken back control over its laws and regulations, exercising that control by deviating from EU standards will come at the cost of being cut off from the common market. The TCA therefore establishes a conditionality regime for duty- and quota free trade.

Dispute resolution: Indirect ECJ jurisdiction

While the TCA only delivers partially on the economic promise of frictionless trade with the EU, it also falls short in terms of ‘sovereignty.’ The fact that the ECJ is not mentioned in the TCA as ultimate enforcement authority is somewhat surprising, given that the EU increasingly insists on this in discussions with other trade partners such as Switzerland. So, why was the EU willing to drop this important claim?

Again, a cunning new dispute resolution architecture provided the solution: The TCA establishes a new ‘Partnership Council’ composed of representatives of the EU Commission and the UK Government. It is this committee which will oversee the implementation, application and interpretation of the TCA – including the settlement of disputes in some cases.

It is this device that allowed it the EU to concede on explicitly mentioning the ECJ as final arbiter of disputes under the agreement and giving the UK the impression it is cutting itself lose from the influence of EU regulation. Indeed, while the EU Parliament and the UK Parliament only have a right to be informed about the Council’s deliberations (most likely because the UK side would have rejected any deal mentioning the EU Parliament) and the ECJ Is not mentioned, the EU representatives on this committee will of course always be bound by the decisions of the EU Parliament and the interpretation of EU law by the ECJ. The EU representatives on the Partnership Council have no authority to alter EU legislation or jurisprudence, which means its decisions need to be in line with EU law. In other words, all the committee does is interposing an intermediary between the EU institutions and the British side, without removing the EU legislation as the ultimate backstop for any decisions taken.

Ironically, ‘taking back control’ over our laws was hence bought at the price of establishing a new body who meets behind closed doors, uses arbitration tribunals – rather than the court system – to settle trade disputes, and does not grant the UK Parliament any influence or control.

 Whether or not the British government was indeed tricked into signing this deal; and the extent to which this was indeed a conscious cunning strategy by the EU to make the UK believe it could have its cake and eat it, is of course impossible to tell. But to people familiar with trade negotiations and agreements all this comes as no surprise. The claim of the Brexit campaign and the Johnson Government to be able to deliver on the double promise of ‘taking back control’ while continuing frictionless trade with the common market always seemed like an impossible conundrum to solve. Especially in relationship with the EU, market accesses will always have to be bought at the price of regulatory alignment. The EU common market is large and attractive enough for the EU to be able to insist on that. That’s not different for the UK.  The Brexit promise of “taking back control” can hence only be realised at the cost of losing access to the common market.

So, ultimately, Brexit has delivered the theoretical possibility to deviate from EU regulations. The TCA makes sure that the incentives to do so in practice are massively stacked against the British side.

Repurposing the Corporation to Save Capitalism from Itself? Social Science for the Real World @ SASE 2020

A virtual event @ SASE 2020

Monday, July 20th — 11am-12pm EST / 4pm-5pm BST / 5pm-6pm CET

The current pandemic is expected to have a major impact on economies around the world for years to come. In times of crises, economic growth, employment levels, and firm survival tend to become the top priority for politicians and business leaders alike. Other objectives – such as social and environmental sustainability – fall into the background. Indeed, corporate expenditures related to social and environmental initiatives are often considered the first costs that can be cut.

At the same time, the current crisis comes at a moment when companies face increasing societal pressures to become more socially and environmentally responsible. From the Black Lives Matter and ‘Climate Strike’ movements, to the Extinction Rebellion protests, to high-profile academic and civil society projects seeking to develop new theoretical foundations which redefine corporate purpose beyond shareholder value maximisation (see here, here, and here), societal pressures on companies are arguably stronger now than ever before.

Many of these movements see Covid-19 not just as another crisis, but rather a direct result of an unsustainable economic model, and debate has raged over the question whether the processes of global capitalism can be blamed for the quick spread of the virus and the inability of countries to react to it. In this context, various societal actors are seeking to make sure that the post-Covid-19 rebound will be used as an opportunity for a ‘green recovery’ and a ‘Green New Deal’ that will fundamentally change the dominant economic model.

Companies adopting ‘low road strategies’ that focus on producing at low cost to be able to sell at prices that are affordable for financially squeezed customers may certainly benefit from the crisis. Nevertheless, there are signs that many other companies are willing to use the crisis as an impetus to undertake ambitious reforms towards more sustainable business models. Thus, Danone’s shareholders recently voted to turn the company into an ‘Entreprise à Mission,’ thus enshrining in its articles of incorporation a corporate purpose that goes beyond shareholder value. According to its CEO Danone’s shareholders have thus ‘toppled a statue of Milton Friedman.’

The tensions between economic necessities in the context of the post-crisis recovery and public pressures on companies to do more to reconcile them with a broader range of stakeholder interests and goals can be expected to become more prominent still in the years to come. Indeed, given the corrosive impact that the post-2008 Global Financial Crisis phase of austerity has had on public support for the current economic and political order, it may not be an exaggeration to suggest that repurposing the corporation and moving away from a singular focus on shareholder wealth may become a vital question for the future of modern capitalism and democracy.

This year’s Social Sciences for the Real World (SS4RW) session brings together academics and practitioners who deal with the question of the purpose of the corporation in their daily work and will discuss the crucial question whether “repurposing the corporation to save capitalism from itself?” is feasible and desirable.

We seek to bring together – albeit virtually – a panel of academics and interested members of the public to engage in a constructive debate about this crucial issue, and about how social scientists and people in the “real world” perceive them and what they can learn from each other.

Repurposing the Corporation to Save Capitalism from itself?

Speakers: 

Erik Breen (International Integrating Reporting Council)

Isabelle Ferreras (Universite Catholique de Louvain)

Rosl Veltmeijer-Smits (Triodos Bank NV)

Jeroen Veldman (Nyenrode)

Chairs: Imran Chowdhury (Wheaton College), Anna Skarpelis (Harvard University)

We would like to encourage participants to send us ahead of the session their general questions on the topic or specific points they would like to see speakers address. This will allow us to get a sense of what may be of most interest to the audience. Please e-mail  them to G.Schnyder@lboro.ac.uk with ‘SS4RW question’ in the subject header.

To participate in this Zoom event, please sign up here

Voiceless in Westminster

With another UK snap General Election looming in less than a fortnight, it becomes almost impossible to escape the promises and pledges various political parties make in their manifestos, newspapers, the morning radio show, or the evening telly programme. Having lived in this country for nearly 13 years, British politics still leaves me perplex.

As an undergrad student in political science in the late 1990s, the ‘Westminster model’ was one of many political systems we had to learn about from Arend Lijphart’s book Patterns of Democracy. One of the oldest democratic models in the World, it has brought political stability to the United Kingdom and other former British colonies for centuries – so we were told.

Great was my astonishment when I discovered the realities of the Westminster model after I had permanently moved to Britain in 2007. I remember the surprise I felt watching for the first time the debates in the House of Commons. Indeed, the very architecture of that House itself shocked me: Two sets of green benches menacingly facing each other with the table and despatch boxes in the middle and the seat of the speaker – throne-like – at the far end of the room. The very architecture of the House only allows for one thing: confrontation. Indeed, the constant sneering, ridiculing, laughing at the political ‘opponent’ has left a lasting and very troubling impression on me. The lack of respect for one’s political opponent displayed in the House of Commons hardly tallied with my idea of a venerable and dignified parliamentary system of government that – as a naive foreigner – I thought firmly rooted in British gentlemanlike manners.

How could any reasonable law or policy be agreed on by a Parliament divided by a structural adversarialism and antagonism, where the minority party (called “the Opposition”) by definition has to attack and undermine anything the governing party proposes? How could important issues be solved given the lack of cooperation across the benches?
The answer, of course, is that the Westminster model normally does not require any cooperation, negotiation, or agreement across party lines. The model is based on an astonishing concentration of power in the governing party’s hands – and more precisely in the PM and his/her cabinet –, which makes any compromising unnecessary (except for the rare occasions of a coalition or a minority government (“hung parliament”). The party who gets a majority of seats in the House of Commons gets a blank check and essentially does whatever it pleases to do. The late Lord Hailsham  - former Lord Chancellor and Conservative cabinet minister – quite rightly called the Westminster Model an “elective dictatorship.”

Disproportional system of voting

What I always found even more disturbing than the extraordinary concentration of power in the cabinet, is the fact that this power is based on a very thin link to popular support.

The alternative designation of the Westminster model as ‘majoritarian model’ may suggest that whoever gathers a majority of voters around their manifesto gets to form the government. In reality, however, the first-past-the post voting system with single-member constituencies leads to “manufactured majorities” (Lijphart’s term) that emerge from an artificial amplification of the votes of the winner in each constituency. Indeed, the majoritarian electoral system implies that each constituency only gests to elect one MP and whoever wins a simple majority of votes wins the seat, while the votes of those who voted for other candidates essentially disappear into thin air.

Therefore, somewhat paradoxically, the ‘majoritarian model’ makes the virtually unrestrained rule of a small elite possible. Consider, for example, the 2015 General Election – the last regular General Election that was not dominated by the single issue of Brexit: The joint vote share of Labour and Conservatives was 67%, which – however – translated into 84% of the seats (562 out of 650). The Conservatives won 330 seats – and thus the right to form the government – by winning just 36.9% of the vote share. To put this into context: The UK population in 2015 was estimated at 65.11m, 44.5m of whom constituted the electorate, 66.20% of whom registered and turned out to vote. This means that less than 17% of the UK population got to decide who would form the next government.

Indeed, the winner-takes-it-all single-member constituency system implies a massive distortion of the popular will: if you voted conservative in the 2015 election, your party would get a seat in Parliament for every 33,105 conservative votes cast (vote share divided by number of seats won). If you voted labour, you would get a seat for every 47,088 people who vote labour. If you voted Green, on the other hand, together with your fellow 1,788,879 Green voters you would also get just one seat!

The electoral system also dramatically limits the voters choice: Only two parties have a realistic chance of ever achieving a majority of seats in the House of Commons; often pushing many people to choose the lesser of two evils rather than the party that is actually closest to their preferences. Moreover, once a party has won a majority of seats, control by the electorate over policies ceases. This is a major issue in a system that requires parties to be broad catch-all-parties that have various wings representing at times very different political orientations. Once in power, the winning Party decides who gets to be PM without any popular say: in 2015, the voters elected the Conservatives lead by David Cameron who became PM for a second time. Since then the PM has changed twice without any prior popular vote (although Theresa May – who had become PM following Cameron’s resignation after the lost Brexit referendum – did call a snap election in 2017 that – while leaving her 5 seats short of a majority in parliament – allowed her to form a new government by entering a “confidence and supply agreement” with the Democratic Unionist Party that cost the tax paper £1bn). Rather than by popular election, the PM changes simply as a result of party-internal personnel changes.

Boris Johnson too became PM not following a General Election, but following a leadership contest inside the governing Conservative party. As such, a vote by members of the Conservative party, not of the people of Britain decided who became PM. 66% of the Conservative party members who voted in the contest supported Johnson. This corresponds with 92,153 people, i.e. 0.14% of the 2019 UK population of 67.53m! Let me put this figure into words: Zero point one four percent of the population of this country got to decide who would lead the country at one of its arguably most crucial moments in peacetime history!

(all the stats and figures are from here and here)

Keep calm and carry on voting?

Even more shocking to me than the distorted electoral system that allows a well-organised political organisation without any obvious anchoring in and backing by broader society to capture the government is the equanimity with which my fellow Brits seem to accept this state of affairs. This in spite of the fact that most Brits are staunch believers in democracy. Indeed, many a remain voter in the 2016 Brexit referendum will tell you that they are in favour of exciting the EU now because “the will of the people” has to be respected.

Such statements are not shaken by the fact that an advisory referendum decision taken with a simple majority – representing 23% of the population – can hardly be seen to represent the ‘will of the people.’ Furthermore, the belief in the “majority decision” is unaffected even by the most obvious violations of due democratic process in the run up to the taking of that decision. There can be little doubt that the various falsehoods and proven illegalities around the Brexit referendum campaign would have led to the result being voided by courts were it not for the fact that as a legally non-binding procedure the referendum result is purely political and does not full under the jurisdiction of the courts.

A similar blindness among British citizens to abuse of power and disregard for due democratic procedure became obvious when the PM was found guilty by the country’s most senior judges to have lied to the Queen about the reasons for proroguing Parliament earlier this year, or when allegations emerged that the Conservatives may have tried to bribe members of the Brexit Party to not run in certain constituencies.

Whether proven or just allegations, in a time of heightened political tensions and high stakes, one might have expected each one of these events to lead to an uproar in a country that prides itself with its democratic tradition and respect for the Rule of Law. Yet, neither the General Election campaign nor voter intentions seem affected in any way whatsoever by these revelations. One explanation for this may lie in the wide-spread cynicism and the radical ‘end justifies the means’ thinking that have become characteristic of our times. The only other explanation for British voters’ turning a blind eye on politicians’ trampling democratic institutions underfoot, is that the staunch deference to the “will of the majority” may in actual fact hide a historically induced acceptance of the rule of a small unaccountable elite over the many.

Another source of perplexity is the relative silence and powerlessness of business in the current situation. While the trade unions are well in control of parts of the labour party, the same cannot be said of the employer associations – in particular the Confederation of British Industry (CBI) – in the Tory party. The Conservatives are very largely a party of rentiers and financiers not of industrialists. The PM himself expressed this state of affairs very clearly – and in his usual crude way – when answering a question about the interests of business in the Brexit process by saying “F**k business!” Business may support the Conservatives on grounds of a preference for lower taxes and deregulation, but the conservatives do not properly represent any productive business interests. But just like the general population, the two-party system may not leave employer associations any real alternative – especially in times when the labour party is captured by the far-left – which leads to an almost unconditional support in spite of policies that go against the preferences of a considerable part of the CBI membership.

Speechless and voiceless

I became a British citizen in December 2015. One of the reasons for applying for the British passport was the fact that after nearly 10 years of living (and paying taxes) in the country, I finally wanted to be part of the political community and “have a say” in political matters. Four years on, I feel as disenfranchised as before. Participating in elections feels futile and indeed almost like legitimating a deeply unfair and broken political system where the majority of the population (e.g. 83% of the population who did not vote Conservative in the 2015 election) remains voiceless and unrepresented. Rather than a ‘representative democracy,’ Britain should rather be seen as a ‘delegative democracy’ (as Guillermo O’Donnell calls it – see Lijphart, 2012: 13).  Election day does not mean sending your representative to Westminster (unless you happen to support one of two major parties and you happen to live in a constituency where this party happens to stand a reasonable chance to win a majority). For me, election day means abandoning your political rights for up to five years by legitimising whoever acquires a majority of seats in the House of Commons to do whatever they want without any possibility to systematically control their actions while in government.

Some of the things I describe in this post have at times left me speechless. I may still go to the polling station and vote in the upcoming election – simply out of a feeling of civic duty if nothing else. However, I know already that as a resident of Islington North – Jeremy Corbyn’s constituency – there is no chance that any of my preferred candidates will win a seat in Parliament. Therefore, whatever happens on December 12th – conservative majority or hung parliament – what is certain is that – like the majority of the people in this country – I will remain voiceless in Westminster.

Comments on the Stolypin Club's Growth Strategy for Russia

Earlier this year, the Russian President had asked several high-ranking public officials and advisers to develop competing economic plans for the next legislature after the elections in March 2018. The Western financial and economic press – especially the FT - has covered this so-called ‘beauty contest’ between three main reform strategies: The first one elaborated by the prime minister Dmitry Medvedev, the second one by former finance minister Alexei Kudrin, and the third – and in my view most interesting one – by the Stolypin Club headed by the Presidential Commissioner for Entrepreneurs’ Rights Boris Titov. (see here, here, and here).

At the occasion of a visit of the Faculty of Governance and Politics (Факультет управления и политики) at the State Institute for International Relations MGIMO in April this year, I had the opportunity to engage with the proposal elaborated by the Stolypin Club, headed by Boris Yurievich Titov. My – selective – comments on the Titov/Stolypin strategy have now been published in Forbes Russia: http://www.forbes.ru/biznes/351425-uroven-zhizni-vazhnee-vvp.

The article is in Russian, but here is the original (somewhat longer) text in English:

Current problems and reform strategy: The right kind of strategy for the right kind of growth

The “Growth Strategy” report elaborated by the team of the Presidential Commissioner for Entrepreneurs’ Rights – Boris Yurievich Titov –  provides a very comprehensive and astute analysis of Russia’s current economic situation and problems. In particular, Russia’s heavy reliance on natural resource exports (‘resource trap’) and the main solution to the problem to diversify the Russian economy and create high-quality jobs are very relevant. Here, the document also outlines an interesting and comprehensive reform strategy that aims to develop particular sectors with high-value added activities, great potential for exports of complex products, and that are able to generate high quality – and hence well-paid – jobs for skilled workers.

Historically and in comparative perspective, this seems indeed like the most promising and sustainable growth strategy. Indeed, growth for growth’s sake will not achieve the very ambitious goals set out in the document, namely to guarantee a “dignified, long, and interesting life of every single citizen” (p.51) through increased living standards. The document rightly points to the importance of a broad view of national wealth including ecological factors (p.7). These considerations seem crucial to achieve the aim of improving living standards and not just increasing per capita GDP. In order to achieve this goal, the strategy developed in the report aims at promoting a specific type of growth – export-led, but in high-value added sectors – and not just any kind of growth. Indeed, economic growth can be achieved in different ways – especially in a resource rich country – and it can in fact even lead to masking the real economic problems rather than helping to overcome them. Thus, jobless growth will not address Russia’s current issues. Ecologically disastrous growth is self-defeating in the medium and long-run and in contradiction with objectives about living standards; excessive primary resource-export fueled growth is bad for other sectors (‘Dutch disease) and will increase dependency on international markets. The key question that the new growth strategy for Russia needs to address is hence how to get the right kind of growth (i.e. in high-value-added, relatively knowledge- and skill-intensive sectors,) that is sustainable in the long run.

Here, a first important insight of the report is that such ‘high quality’ growth can only be achieved through a comprehensive and complex reform strategy. The document acknowledges this in the ‘basic principles’ of the reform strategy on page 14, which seem very relevant and important. In particular, the first one of these principles ‘Consistency & Complexity’ hints at a crucial insight: none of these reforms can succeed in isolation; but they need to be adopted and implemented as part and parcel of a package of reforms. P.14 states: “None of comprehensive decisions might become the ‘key link’ by itself, all decisions should be applied in complex.”

This statement is compatible with a key insight from the academic field of Comparative Institutional Analysis (CIA) of national business systems, which stresses the importance of ‘institutional complementarities’ among different spheres of an economic system for such a system to be successful. In other words, since successful economic activity relies on more than one input factor, policy changes will always require acting simultaneously on more than one institutional sphere. Thus, in order to stimulate growth of high-tech start-up companies, it is not sufficient – albeit necessary – to provide financial capital through the promotion of venture capital markets; rather, such firms will also require highly-skilled workers, technology input, and managerial skills for their leadership. Therefore, measures to stimulate financial capital flowing into this sector can only be expected to lead to the desired growth push if in parallel there are reforms in the spheres of education and training, entrepreneurial/managerial skills provision, and research and development among others.

This insight has two implications for the growth strategy outlined in this document: firstly, it might be important to more systematically think about the interactions between the measures taken in different spheres, and which complementarities will be required for the desired growth effect in manufacturing to take place. Here, the experience from other countries such as the Visegrad countries or Sweden – which very successfully shifted from a focus on low-tech manufacturing to high-tech industries during the 1990s - could provide valuable further insights. Secondly, in practical terms, complementarities suggest that the reformers will have to focus on coordinating reforms across different institutional spheres (e.g. education & training, corporate finance, research and development, labour markets etc.) in particular where different ministries and authorities are concerned. The acknowledgement of complexity, which I believe constitutes an acknowledgment of the need to reform various institutional spheres in parallel, is crucial and one element that reforms in other countries have often not gotten right.

Implementation: Legitimacy of reforms and reformers

The document also acknowledges that the implementation of the strategy hinges crucially on the ‘support and efforts of every social group’ (p.51), which hints at the question of legitimacy of the reforms and the reformers. Indeed, it is an open question how much appetite for reforms there is in the Russian population. The document states that real disposable household income has dropped by 13% between 2013 and 2016, which clearly shows a need for action. However, GDP per capita in Russia currently is at around $8,5000; There are international studies that argue, that as long as GDP per capita does not fall to around $6,000, the population’s appetite for radical reforms will be very limited. If this estimate is correct, this would suggest that it may currently still be difficult to garner enough popular support for radical reforms in Russia and indeed to convince the relevant authorities that such a reform strategy is sensible. The appetite for reform among the Russian people and authorities can also be expected to fluctuate with the oil price and the associated rents from hydrocarbon exports – a common phenomenon in countries affected by the ‘resource curse’.

Here, one further consideration that the growth strategy may need to take into consideration is which elements of the current (natural resource-dominated) Russian model constitute in themselves obstacles to successful reforms. Thus, while the reports rightly points to the importance of a modern infrastructure to providing sustainable economic growth (p.2), infrastructure spending in itself is part of the problem of the current model in as far as the Government may rely on large infrastructure projects (mega-projects) to create jobs and growth for growth’s sake. Infrastructure development will only help to achieve the goals set out in the document, if it is of the type that promotes entrepreneurial and productive activity. In this sense, the decrease of expenses on articles stimulating economic growth in the 2017-9 budget (p.5) is not necessarily bad news where they concern infrastructure investments that do not directly reply to any real public- or private sector demand for such infrastructure.

Similarly, the report envisages a continuation of state subsidies for consumption to help poorer Russians and to stimulate certain sectors (p.29). While it is obviously important to consider collateral measures, which absorb the shock of the reforms on potential losers from the changes, subsidised consumption may slow down the implementation of the new strategy. Indeed, subsidised consumption may stimulate Russian production in the short run, but may in the long run reduce firms’ incentives to upgrade into higher value-added activities. It may thus hamper the development of internationally competitive products that can become drivers of export-led growth. Here a balance will have to be found between supporting parts of the population without at the same time creating roadblocks to reform.

Judicial and bureaucratic reform

The report rightly points to judicial reform as one key area in need of reform. The role of institutions and the Rule of Law would indeed seem like a key area of concern in the establishment of a successful economic model in particular if one of the key goals is to stimulate international joint ventures and technology transfer into Russia (‘doors opened inward’ p.40). Here, a related, but still distinct aspect is that the state bureaucracy may need to be reformed as well. Indeed, research on various successful latecomers to the world economy, such as Japan and – more recently – Brazil, shows that one key element of successful industrialisation and economic growth is the existence of an ‘embedded but autonomous’ state bureaucracy that is governed by technocratic and meritocratic principles, rather than by political loyalties or by too narrow ties with businesses. The existence of a bureaucracy and of civil servants that are both relatively independent from politics and not captured by business interests is key to implement successful policies. This could be an additional consideration to be addressed under question 4 (pp.46ff).

The reform of the financial system

The document underscores the crucial problem for Russian firms to access sources of external finance and notably credit. It outlines several promising pathways in which financial capital can be stimulated. The reform of the banking system seems like an important priority here, and the central bank could indeed play a crucial role here. Similarly, the proposal to establish a ‘Bad Bank’ to deal with non-performing loans as a step towards moving away from revoking bank licenses seems equally promising.

However, recent experiences in Western countries has shown that stimulating investment will only lead to beneficial outcomes if the demand for investment can be generated in the ‘right’ sectors of the economy. Flooding the market with money (e.g. through quantitative easing, QE) will not lead to sustainable growth in itself. It needs to be combined with accompanying measures of stimulating entrepreneurial activity rather than provide ‘cheap money’ to speculators.

Here, the use of the Bank for Development and Foreign Economic Affairs (VEB) and similar development institutes does seem like a potentially more targeted measure to stimulate specific areas of the economy. Indeed, several very successful cases of national development banks exist (e.g. Brazil’s BNDES, Germany’s KfW) and even the UK has recently established (in 2014) its own development bank (the British Business Bank) – modelled after the successful German KfW – to stimulate economic activity. Strengthening the role of the VEB and development institutes is hence a very sensible reform proposal. But again, I would like to stress that the reform of corporate finance needs to be considered in parallel to other institutional spheres in view of achieving the overall reform goals. Given that the stated goal is to promote the manufacturing and the SME sectors the reformers will need to make sure that other input factors – such as skilled labour – are available too, which may require additional reforms (e.g. of the educational system). Moreover, different types of production and industries require different types of finance: while physical capital-intensive production often requires patient-, long-term capital (e.g. through long-term bank loans), knowledge-intensive – but physical capital poor – start-up companies will require investors who are ready to provide funds without collaterals (venture capitalists). One important element of a successful growth strategy will hence be to not just stimulate the size of capital markets and the credit volume, but also to make sure the right type of finance is available depending on different sectors’ needs.

Economic Openness and Dependence

A successful growth strategy necessarily requires a successful integration of the economy in question in the international economy. The two-stage plan for an open Russian economy is very sensible and mirrors to some extent successful historical cases of industrialisation. Thus, the selective liberalization using ‘smart tariff principles’ outlined under the ‘doors open inward’ stage, have proven successful in various cases, e.g. the Newly Industrialised Economies (NIEs) of East Asia.

Similarly, the initial focus on sectors where Russia can build on its traditional strengths (MIC, agro industry, IT) is both reasonable and realistic. Of course, even during this first stage, the focus of the industrial policy should be on the highest value-added activities possible in each one of these industries. As an example, in the field of agriculture, focusing on organic- rather than conventional production may confer the Russian agriculture a genuine competitive advantage in particular if – in the mid-term – exports towards the EU and other high-income countries are considered once again.

One question that would merit further thought in relation to economic openness is the role that foreign capital should play in the new industrial policy either in the form of inwards FDI or portfolio investment. Several post-socialist countries have successfully re-industrialised their economies after the fall of socialism based on an industrial strategy attracting foreign FDI in relatively complex manufacturing goods (Hungary, Poland, and other Visegrad countries in particular). Others have focused more on (financial) services (e.g. the Baltic states). Both strategies have proven very successful for a period of time and have allowed these countries to catch up to some extent with Western living standards, but both have also more recently shown that the dependence on foreign capital, technology, and know-how, comes with certain risks for the countries in question. The stimulation of domestic consumption should hence not be neglected.

In sum, however, the Growth Strategy of the Presidential Commissioner for Entrepreneurs’ Rights is a promising policy proposal that distinguishes itself from other proposals by the comprehensive analysis of the problems facing the Russian economy; and the acknowledgement that the task is formidable and will require courage and circumspection to be successful.

Foreignness: A Vice not a Crime in Brexit Britain

The British press has recently been full of worrying Brexit-related stories of foreigners who are threatened with deportation in spite of clearly having built their lives in Britain. These stories tell of citizens of EU- and other countries who had their application for permanent residency rejected and were advised - in a now famous turn of phrase - to 'make preparations to leave' the country. What is shocking about these stories is that the rejections do not only concern recent arrivals to the country, but in several cases people who have lived here for decades, built their lives here, and have clearly become well-integrated and active – dare I say ‘useful’? – members of British society. It is not enough to be a Professor at a prestigious University, paying taxes, educating British students, being married to a British women and father of British kids; not enough to be a wife and mother who has lived her with a British husband for more than two decades, raised two British kids, and never had – for all we know – any troubles with the law; not enough, either, to be a granny of British children to have earned the right to stay in the country. The latest case in point is the one of Stojan Jankovic, a shop worker in Kentish Town – a shop where I do my grocery shopping quite regularly –, who has lived in the UK for 26 years, but was arrested after a routine visit to the immigration reporting centre, and is now detained in the Dorset immigration removal centre facing deportation within two weeks (read his story here).

One way of understanding this seemingly unreasonably harsh treatment of foreigners by the British government is by referring to a distinction Hannah Arendt made in her book on the Origins of Totalitarianism. Talking about the cases of Jews and homosexuals in 19th century Europe, she explains that a shift had taken place sometime during the century from seeing these groups of people as guilty of some kind of crime, toward seeing them as being afflicted with some inherent vice. The difference is this: A crime is consciously committed by someone. It is a choice to become criminal or not. A vice, on the other hand, is beyond the individual’s control. It is something that emanates from the person's nature and is transmitted at birth. At first glance, this may seem like a more lenient view of a person’s socially unacceptable traits, because the person is not blamed for ‘choosing’ to be what they are. However, Arendt explains in her usual brilliant way, that this makes matters worse for the groups concerned. Thus, while the 18th and early 19th century Jews could do away with their Judaism by converting to Christianity and become an assimilated and (more or less) accepted member of society. By the late 19th century “Judaism” had become “Jewishness.” Rather than a religious choice, it now was considered a fundamental, inherent trait of an individual that could not be erased by religious conversion. Thus, the rejection of Judaism (or homosexuality) stopped being a politico-legal issue and became a social one, detached from any legal considerations.

Foreignness in Brexit Britain seems to have undergone a similar shift from being considered as a 'crime' to a 'vice'. Foreigners used to commit the crime of foreignness by living in this country, but refusing to accept certain basic values, to become a ‘useful’ part of society by working and paying taxes, and hence by refusing to be integrated. Yet, once integrated into society, you were absolved of the crime of foreignness. The stories that are littering the British press at the moment clearly show that we have moved away from such an understanding of foreignness. The wrath of the Brexiteers does not only strike those who are not willing to be integrated into British society. The wrath of Brexiteers and their government hits anyone who wasn't born in this country (or even whose parents weren't born in this country). This implies a shift from foreignness as a crime towards foreignness as a vice: It is not enough to integrate into British society, accept and play by its rules, contribute to its economy and culture. The vice of foreignness stick to you whatever your behaviours. Just like ‘Jewishness’ in 19th century Europe, it is a stain passed on at birth. You cannot rid yourself of that stain. It is a question that is beyond the political and the legal. No degree of assimilation, no legal procedure of naturalisation will absolve you from the sin of foreignness. Stojan Jankovics’s desperate statement – made in an interview with the Camden New Journal from his cell in Dorset – illustrates this perfectly: “I see myself as completely assimilated. I don’t know what more I can do in that respect. This is my neighbourhood, my culture.”

The really worrying bit, however, is that it is precisely in this shift from crime to vice that Hannah Arendt locates the seed of the extreme antisemitism of the 20th century, which ultimately would lead to Auschwitz. Indeed, as personal characteristics such as religion or sexual orientation come to be considered like vices rather than crimes, the treatment of these issues changes: A crime can be punished by the state based on individual responsibility for committing an unlawful act. A vice, on the other hand cannot be punished, because it is linked to behaviours that the individual cannot control and for which they therefore cannot be held responsible. Vices cannot be punished. The only remedy against vices is to eradicate them together with their bearer. Therefore, it is the shift from 'crime' to 'vice' that ultimately explains how vile, but relatively inoffensive, 19th century antisemitism degenerated into 20th genocide.

What is interesting is the explanation that Arendt gives for why this shift took place in the 19th century. Based on the Dreyfus affair in France during the 3rd Republic, she argues that in late 19th century France, 'social factors' increasingly penetrated the political and the legal. As long as we are in the realm of the politico-legal, even the harshest law recognises that the 'crime' is perpetrated by a responsible individual. When the political gets colonised by social factors, the same despised behaviours come to be seen as the result of inherent and essential attributes of a given group in society. This essentialisation happens according to Arendt in phases where society 'decays into cliques.' The decay of society into cliques leads to 'us-versus-them' dynamics – be it among social classes, ethnical groups, races, or any other groups.

One could argue, Britain has recently experience a similar decay of society into cliques. Already in 1987 PM Thatcher declared in an interview that there was ‘no such thing as society.’ Ever since, British society seems to have disintegrated, while tensions between various groups have increased. While one fault line was the labour versus capital cleavage, the decline of organised labour since the 1970s and the defection of the working classes from left-wing parties and ideologies made this opposition increasingly irrelevant. The main tensions shifted for a short while from capital versus labour to ‘haves’ – the 'out of touch' elite of the 2010 General Election – versus the ‘have nots’ (not all of whom are in work!). Yet, in more recent years the decay of society has taken an increasingly nationalistic turn and pitched Brits versus foreigners. The resurgent “underclass” nationalism – for want of a better term – constitutes a welcome diversion for parts of the elite from other cleavages. Yet, the decay of society also affects the elite itself. As Glenn Morgan recently noted in an excellent symposium on Brexit published in Socio-Economic Review, the very fact that Brexit is happening may in itself be the result of the elite underestimating its fragmentation: 

"Cameron mistakenly believed there was still a sufficiently cohesive elite which would support him and which would help him persuade the public in the referendum. But in spite of the fact that that elite had benefited so much from the policies of the last 30 years, it lacked an interest in or a capacity for playing such a role. Instead the opportunity arose for the foxes in the elite to mobilize popular concerns about immigration, austerity and alienation from the political class and to focus them on Brexit as a solution without actually spelling out what that meant in practice."

Morgan’s analysis of the Brexit referendum frighteningly reminds one of the colonisation of the political by the social as Arendt described it referring to the period of the rise of imperialism, racism, fascism, and ultimately Nazism and Stalinist communism since the late 19th century. When the social takes over the political, the political elite is no longer able to temper and moderate the – at times unreasonable – demands and desires of the people. Certain elements within the elite – what Morgan calls “the foxes” Farage, Johnson, etc. – may exploit this situation for personal career advancement.

In a first instance, the latter phenomenon may seemingly lead to rallying different groups of a decaying society around national feelings, which Arendt also observed in 19th century Europe and described as consisting 'primarily in a complete whitewash of one's own people and a sweeping condemnation of all others' (p.129). In spite of all the anti-elitism’, Brexit does seem to move the country into that direction. No one in the North of England, no one in the deindustrialised areas of Wales, no one in east Kent puts the blame for their current economic struggles on the British “Non-doms”, who live and work in London, but are considered to live abroad for tax purposes; or on the British business man, who bankrupts a 90-year old British company, loses most of its pension money, and then goes sailing on his luxury yacht; or on the bankers who caused the financial crisis. Rather, Brits now point their fingers at the Poles, the Romanians, and the Bulgarians who mainly came to this country to make a living by building our houses, cleaning our toilets, making our coffee, and fixing our drains.

Yet, the current unity of the pro-Brexit haves and have notes around nationalist feelings may be short-lived. Morgan points out that

‘[e]lites can lose control of societies because their disagreements spill out into the wider society. These moments when the splits become visible are often the first sign of the weakening of an existing order because they awaken other social actors from taking for granted their subordination and instead encourage them to act on the political stage.’

To be sure, we are still miles away from the radicalisation that the shift from 'crime' to 'vice' has caused in 19th and early 20th century Europe. But clearly, all the ingredients are there and some signs are very worrying indeed. That in itself should be reason enough to take the slow decay of British – and possibly other European – societies seriously and revolt against the treatment of foreignness as a vice.

Saving Capitalism…with Corporate Governance Reforms?

On November 29, 2016, the UK Government published a Green Paper on Corporate Governance Reform, which sets out a series of options aimed at strengthening – once again – the UK corporate governance framework.

This is nothing fundamentally surprising, since the regulatory frameworks for corporate governance have resembled permanent construction sites in most Western countries since the 1990s. Indeed, corporate governance regulation seems to be subject to cycles of reforms and crises: Regulatory reforms are undertaken to address certain perceived pressing problems. New scandals or crises then still take place, which then in turn causes regulators to reform the framework again. In the UK, this process started with the famous Cadbury Report of 1992. Since then, various versions of the UK Corporate Governance Code have aimed at ‘improving’ the code-based UK corporate governance regulatory system.

The nature of the perceived pressing problems has change over time, of course. In the 1980s and 1990s, corporate governance reforms mainly focused on aligning top executives’ interests with those of shareholders in order to reduce the perceived managerial risk aversion that was held responsible for relatively sluggish rates of return for investors (see for the academic rationale behind this thinking the important article by Amihud and Lev 1981). The purpose of corporate governance reforms was hence to improve corporate performance (measure as the creation of shareholder value).
After the financial crisis of 2008, the focus shifted towards corporate governance structures that would guarantee appropriate ‘risk management’ rather than encouraging managerial risk-taking.

The new Government Green Paper, now, zeros in on two key issues, which have gained increased prominence over the past years. Namely, the appropriateness of executive pay – not just in relation with firm performance, but increasingly also compared to worker pay – and the question of the influence of other stakeholders than shareholders on corporate decision-making.

The Green Paper can hence be seen as the continuation of a well-known pattern of permanent CG reform. What is surprising about the new CG reform, however, is the much more challenging task that the Government hopes corporate governance regulations can achieve, namely: saving free-market capitalism from itself!

Indeed, the introductory letter to the Green Paper by the Prime Minister contains the following rather astounding passage:

But for people to retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public. For many ordinary working people – who work hard and have paid into the system all their lives - it’s not always clear that business is playing by the same rules as they are. And when individual businesses lose the confidence of the public, faith in the business community as a whole diminishes – to the detriment of all. It is clear that in recent years, the behaviour of a limited few has damaged the reputation of the many. It is clear that something has to change.

What has to change – so the PM’s argument seems to run – is corporate governance regulations. Corporate governance has hence moved from a relatively limited affair concerning managers and shareholders alone – as posited by the still dominant agency theory of corporate governance – to a much more fundamental element, crucial to the legitimacy of the capitalist system.

Corporate governance reform thus seems to be a crucial instrument for the May Government to achieve its ambition – stated  in the opening sentence of the PM’s introduction to the Green Paper – to “[…] build an economy that works for everyone, not just the privileged few.”

This statement (which – incidentally – is remarkably close to the title of Robert Reich’s most recent book) and the above quoted paragraph on faith in capitalism are remarkable, because they seem to constitute an acknowledgement that the current economic model in place in the UK is on the verge of a major crisis in the form of a public backlash against ‘free markets’ and capitalism in general. That a right-wing government would acknowledge such a crisis situation is remarkable.

The problem is, however, that the body of the Green Paper then focuses mainly on rather timid proposals in the area of executive pay and of stakeholder influence over corporate decision-making. Some of these proposals may certainly constitute an improvement on the current situation, e.g. in terms of stakeholder interests. However, they clearly fall short of what would be needed to achieve the Government’s more fundamental goal of restoring trust in the existing capitalist system. This is the argument we make in a response to the government consultation on the Green Paper that I wrote together with my colleagues Dionysia Katelouzou from the Dickson Poon School of Law and Aditi Gupta from the KCL School of Management & Business. We argue that if the Government is serious about its very ambitious goal for Corporate Governance reform, it will need to adopt reform proposals that have more teeth than what is currently being proposed. The full response can be found on SSRN.

The Second Eclipse of Reason and the Coming of the Age of Anger

I’ve just finished reading a brilliant, but very scary political fiction comic book entitled ‘La Présidente,’ which tells the story of Marine Le Pen’s first 100 days in office as president of France after next year’s presidential elections (in French). Co-written by the historian François Durpaire and the author Farid Boudjellal, the book is based on the actual programme of the Front National (FN) and traces the first moves of the new president – such as organising a referendum on France’s exit from the Euro zone – and their impact on the French economy and society. Needless to say that from a progressive and from a liberal-democratic perspective, the outcome of an FN-presidency – as outlined in the FN’s real-world party manifesto – will be worrying to say the least. The authors predict a massive increase in state surveillance of its citizens, the suppression of media freedom, state harassment and persecution of political opponents and dissenters. Worse still, the authors predict that an FN government might undermine the very foundations of France as a democratic regime, opening the floodgates for neo-fascist movements to take control.

To be sure, this is ‘politics fiction,’ but good one, based on a careful analysis of the FN’s actual manifesto. Many people may still consider this panicky scare mongering. But several recent examples show how quickly relatively successful and seemingly stable democracies’ can descend into authoritarianism following the election of politicians who openly despise liberal-democratic values. This should worry even the most optimistic amongst us. While Hungary and Russia’s route from certainly not perfect, but still fairly well-functioning democracies to proper autocracies may be explained away with the specific post-socialist context, the destruction of the Turkish democracy in just a few years should set off alarm bells. These examples show what populist, nationalistic, and identitarian demagogues can do to a functioning democracy...In a few hours for now, we will know whether a majority of US voters will decided to take the gamble of electing their own demagogue who has proven more than once that he does not respect even the most fundamental values of a functioning democracy (e.g. by threatening to throw his adversary in prison and refusing to confirm that he will accept the election result even if he loses). This should give us pause to reflect on how we ended up in this situation. Twenty-five years ago, after the fall of communism, there was a wide-spread Western complacency about the ‘end of history’ and the sentiment that the liberal-democratic and capitalist model had won the day. Now, we live in a world where the world economy is in crisis, and where in many established democracies, the parties that record the largest increases in electoral shares are the ones that run on distinctly authoritarian, anti-democratic, anti-liberal, and xenophobic platform. And these parties and movements have introduced in the political debate an increasingly spiteful, vicious, and angry tone in many Western countries. So, what has happened?

The rise of right-wing populism since the 1970s or 1980s is obviously too complex a phenomenon to be attributed to a single, or even a small number of explanatory factors. What does seem clear, however, is that at a general level, the situation that we are faced with today has something to do with an increasingly unbridled anger among large parts of the population. Anger has arguably always played a crucial role in politics. David Ost – based on Carl Schmitt’s political theory – argued that political parties in any democratic polity are forced to constantly mobilise emotions to attract and maintain support in the population. Anger is the prime emotion that allows parties to do that. According to Ost, this is because in capitalist societies there is a structural source of anger, which is related to the frustrations generated by the socio-economic inequalities on which any capitalist system relies by its very nature (Ost calls this ‘economic anger’). Channeling popular anger and transforming it into political support is ones of the key functions of political parties. Or in Ost’s words (2004: 241): " There are a myriad possible explanations for outcomes we do not like, and a myriad possible targets to blame. The role of political leaders is to solve this problem for citizens by giving them an Other: someone to blame, someone or something to be angry at." Ost’s view is based on Carl Schmitt, but also resonates with Michel Foucault’s reformulation of Carl von Clausewitz’s take on wars. The latter had famously argued that war is the continuation of politics with other means. Foucault, in his lecture ‘Society Must Be Defended’ had put Clausewitz from his head onto his feet by arguing that rather politics was the continuation of the Hobbesian war of all against all with other means. In other words, violence and anger are the very reason why we have politics. From this perspective, rather than organisations that aggregate interests and preferences – as the standard political science literature defines the key function of political parties – parties are organisation that channel and contain violence and allow citizens to focus their anger on particular targets in exchange for political support.

In the era of capitalism, for a long time, Western party systems were structured around socio-economic class divides. Socialist and social-democrats targeted capitalists or laissez-faire markets as their enemy of choice around which their supporters could rally. Bourgeois centre-right parties, on the other hand proposed subversive left-wingers, communists, trade unionists, at times – and increasingly with the decline of the labour movement – civil servants as their enemies of choice to attract and maintain support from certain classes of the population. By and large, these cleavages that were based on anger against ‘the Other’, resulted in an equilibrium of violence, where anger and even hate was present, but largely contained and only symbolically acted out in the course of democratic and parliamentary politics. This situation of political stability is hence characterised by what Ost (2004: 230) calls ‘congealed anger’.

Something has changed however…It would seem that populists have increasingly managed to ‘defrost’ congealed popular anger. Populists are not afraid of unleashing popular anger in much less institutionally constrained ways then most parties were comfortable with until a few decades ago. Indeed, the democratic institutions themselves have recently become the target of their anger. “Anti-establishment” parties who propose their voters to hate the state, the government, its bureaucracy, and its civil servants seduce the masses much more easily than left-of-centre parties who continue to propose the socialist class narrative of workers against capitalists, or the rich against the poor. Thus, the socio-economic divide has been replaced by a different one, which increasingly takes identitarian forms: the ‘us vs. them’ is now one that’s based on nationality and ethnicity rather than socio-economic status. The argument that it is the capitalists (or maybe the bankers) who are the “enemy of the people” has remained surprisingly ineffective as a tool of political mobilization after the global financial crisis and the anger it entailed due to economic hardship and austerity policies. Except for some rather limited examples (such as the short-lived and ineffectual ‘Occupy movement’ and Podemos in Spain who has gained some political traction), the traditional anti-capitalist narrative seems to have lost its traction with ‘the people’. Instead, nationalistic, anti-immigrant, islamophobic, anti-Semite and even racist narratives seem to work best in countries with a largely white, Christian voting population.

While anger is according to Schmitt, Foucault, and Ost nothing exceptional in politics, what is different in the current period seems to be the sheer level of anger, the fact that politicians cynically steer up such emotions to gain power, but also seem to lose control over the effects that such hate mongering may have. In Britain, the killing of Jo Cox in bright daylight as well as the beating to death of Polish immigrants may still be isolated cases, but they are significant. Attacks on black churches in the USA, on immigrant homes in Germany, Sweden and elsewhere are others. The question then is, what has changed in the past two or three decades that have led to ‘de-congeal’ the anger that was fairly successfully contained by democratic institutions in the Western world for most of the post-war period?

Here, I think one possible explanation has to do with a fundamental ideational change, which I would call the ‘Second Eclipse of Reason’ and once again, I’m going to blame economic theory and libertarianism for it. The first ‘Eclipse of Reason’ was described by Horkheimer as the replacement of substantive reason with purely instrumental reason. That is to say, human societies used to be based on substantively defined notions of what is reasonable and what isn’t. Substantive rationality are indeed ideologies that are based on a specific understanding of good and bad and of right and wrong. Yet, Horkheimer argues that with the industrial revolution and the rise of capitalism, capitalist societies have increasingly shifted towards a purely instrumental, means-end type of reason or rationality: reasonable is to choose the means that allow you to achieve your goals independently of what these goals are. This relativist definition of reason  - where no judgement of the reasonableness of the ends themselves is made – is the one that defines the liberal view of the world that has come to characterise neo-classical economics and economic libertarianism as promoted by the Chicago School. The former type of substantive reason, in contrast, is identified with – and often times derided by libertarians for – its moralistic nature (see in particular Judge Posner’s scathing attack on “academic moralists”).

According to Horkheimer, in modern, capitalist ‘mass societies’ ‘instrumental rationality’ was the only game in town. However, I would argue that this type of rationality contains the seed of its own downfall. Economic and political liberalism and ‘instrumental rationality’ are based on the key premises that different definitions of the ‘good life’ are incommensurate. We cannot impose on others our ‘life projects.’ Each and every individual should pursue autonomously their own preferred goals in life (as long as they do not impinge on other individuals’ freedom). The only thing that can be assessed objectively, however, is whether people pursue their preferences in a rational way, i.e. whether the means are employed in a way that allow the individual to achieve their goal, whatever that goal may be.  This relativism almost necessarily leads to the rejection of any substantive values and norms, because they cannot be assessed ‘objectively.’ This is what leads liberals to reject the common good as a valid objective for a society to pursue and stresses individual values instead. It is also in the name of such a conception that fundamental societal values on which human societies are built – such as ‘social justice’ and solidarity – have increasingly been challenged.

While this liberal or libertarian stance will not shock anyone these days, it becomes dangerous when pushed one step further: If rational calculation of ends and means becomes the only acceptable basis on which to judge people’s actions and they are being taught that traditional values such as solidarity are relative, then slowly people may start to apply that same relativist reasoning not just to the goals and values that other individuals choose to pursue, but also to the meta-values on which the liberal system itself is based and which needs to be protected from the relativism that the system preaches for ‘lower level’ values. Rationality is such a fundamental meta-value of the liberal construct. Value relativism – if taken to an extreme – can be turn against the seemingly ‘value-neutral’ means-end rationality, because ultimately rationality is a value in its own right. Rationality or reason can come to be perceived as only one among other choices, which each individual is free to accept or reject as they see fit. Arguably, increasing numbers of people have started choosing to indeed reject not just substantive rationality (which is what libertarians such as Posner would want) but also instrumental rationality (which they clearly were not planning). This unexpected turn is what I would call the Second Eclipse of Reason. It designates the replacement of one type of rationality not by another one, but by pure and raw emotions.

The Second Eclipse of Reason is key to Donald Trump presidential campaign. Not only does he take pride in undermining substantively rational values – such as paying taxes (by stating that not paying federal income is smart not immoral) – and moral norms (by claiming that "I could stand in the middle of 5th Avenue and shoot somebody and I wouldn't lose voters."). But also he challenges at a much more fundamental level the idea that reason and rationality have anything to do with politics. It does not matter whether his statements are true or not, as long as people ‘feel’ they are right (see the very illuminating analysis of this phenomenon at the GOP Convention by John Oliver). You don’t need reasonable arguments to justify your political choices; your feelings and emotions are sufficient. For instance, the feeling that immigrants are the problem while ignoring the facts that suggest that they are actually contributing to the national economy more than they cost has become a perfectly acceptable attitude.

Rationality is not a highly rated value among large swaths of the population at the moment – hence also the populists hatred of ‘experts’. They may have knowledge. But my feelings about things are as valid as anyone else’s ‘knowledge’ about them. The only argument you need to justify political attitudes and choices is your anger. Reason, ‘truth’, rationality do not matter any longer…only anger does. Humanity is regressing back to its terrible twos…The German language has already coined a new term for this type of citizen: Wutbürger (“anger citizen”): The citizen driven by anger and hatred rather than by rational or reasonable reflection.

Again, it is important to note the role that the Chicago School-inspired economic theories, which have influenced generations of political and economic elites, think tanks, and opinion leaders, and thus the population at large, has played in this evolution. To some extent, the Second Eclipse of Reason is the result of the very forces that the proponents of instrumental rationality and value relativism have unleashed in their crusade against substantive reason and morality. While a certain level of liberal relativism is crucial to a free society, pushed to the extreme – as the Chicago School and its derivatives has done – moral relativism turns into an uncontrollable self-destructing, centrifugal force in a democratic society.

What is left once society has rid itself of the last supposedly objective standard of judgement – instrumental rationality? What is left is for people to simply give into their hedonistic impulses without regards for the long-term consequences of their actions or attitudes. Often these impulses are dominated by anger and the worse the economic situation gets, the more cause for ‘economic anger’ there is. This is what has driven not just Le Pen’s rise in France, but also Donald Trump’s campaign in the US. We may therefore truly face the prospect of entering the Age of Anger.

Whether Trump is declared the winner of the election in a few hours time or not, the really scary thing is that the anger he has fed on and that he has actively contributed to fan, will not just go away even if candidate Trump might. Others may replace him and feed on that anger. History tells us that the anger of the masses and the social tensions that it creates are not easily contained once they have been aroused. Rather, they spiral out of control in a cycle of what René Girard has called ‘mimetic violence,’ which ultimately discharges itself in an episode of mass violence in which a scapegoat is made to pay for all the ills afflicting society. Whoever wins the election in the US tonight and whoever becomes president of France next year, the really scary thing is that it might already be too late to get the evil genie of anger back into the bottle…

Brexit, Stupidity, and Hilarity in Politics: The Frustrations of the Post-Fact Society

At a recent academic conference that I attended, a ‘Pop-Up Salon’ on the UK’s decision to leave the EU (or ‘Brexit’ for short) was spontaneously organized following the announcement of the shock result. To get discussions going, the main organiser showed a couple of video clips where some ‘leave’ voters explained why they voted for Brexit. One of them crudely stated something along the lines (I’m quoting from memory): ‘I don’t mind EU immigrants, but I voted ‘leave’ to stop Muslims from coming to this country.’ The people in the audience laughed sarcastically. Another, evidently working-class, ‘leave’ voter just said contemptuously: ‘Look, the EU just spent X millions on art!’ Again, the audience laughed scornfully.

Following this opening, one of the participants in the Pop-Up Salon stepped up to the microphone and voiced his anger at the academics in the room. He argued that us – academics – laughing at Brexit voters was precisely the core of the problem: The elite had lost touch with ‘reality’, i.e. the worries of the ‘man in the street’.

I was surprised at his anger and it made me think. I asked myself, why did I laugh at the Brexiters’ arguments? Is it a bad thing to laugh at political opponents’ arguments? In this post I’ll take these two questions in turn.

So, why did I laugh at the Brexiters’ arguments? Put quite simply, I laughed because I found these – and many other pro-leave – arguments stupid. Stupid, because some of them even challenge the very basic rules of logic and the laws of causality (e.g. how does leaving the EU affect Muslim immigration to the UK?) and because others reveal a stunning level of ignorance about the EU for someone who takes the liberty of having an opinion on the matter.

However, I think the reason for the speaker’s anger was that he found it unacceptable that a group of privileged academics make fun of underprivileged working-class people who were not as lucky as we had been to enjoy higher education. That may be a fair point. It is certainly true that the level of education is partly determined by the socio-economic status of the family one is born into (as Bourdieu already told us) rather than merit. That is especially true in the UK where it is to an important extent socio-economic status not merit that determines the quality of education one gets (see here).

The problem, however, is that the level of argumentation around the EU referendum did not have much to do with lack of education, but rather with stupidity that resulted from deliberate obscurantism, conscious anti-intellectualism, and stubborn ignorance of even the most basic facts about the EU, which affected both working-class voters and rich, highly-educated politicians. This willful obscurantism has come to shape what one commentator has called the ‘post-fact world’. Obscurantism is inexcusable and worthy of derision whatever the socio-economic status of the person making the argument. Therefore, rather than an expression of elitism, laughing at such arguments reveals a frustration with a decline in the political discourse in Western democracies due to the rise of populist politics.

As an academic, writing about other people’s stupidity is a very risky business. Not only are we by definition under the suspicion of arrogance and superiority, but also it is easy to overestimate one’s own intellectual capabilities. Indeed, the psychological phenomenon of the ‘double curse of incompetence’[1] tells us that what leads us to make bad judgments or decisions (i.e. to being incompetent or stupid) is the lack of the same skills that are required to realize that we are indeed stupid. So, one should never be too sure of one’s own judgments.
Also, there is a temptation to attribute to ‘stupidity’ any divergence of opinion with our own: If someone disagrees with me, it must be because they are stupid. Yet, I am not arguing that all pro-leave arguments are stupid. And not everyone who voted leave did so because they are ignorant. The question of EU membership is as complex as the impact that the EU has on various aspects of economic, social, and cultural life in its member states. Some of these effects are ‘progressive’, some are ‘conservative’, many are ‘market-creating’, many others ‘market-restraining.’ Depending on where one stands politically, there may be very good reasons to be critical of the EU and to support leaving it (e.g. here).

However, the impression one gets is that such reasoned and well-informed arguments were not the ones that decided the outcome of the referendum. Therefore, and in spite of all these caveats, I think that stupidity – as a fact of political life, not as an insult – is an important factor in any explanation of the outcome of the EU Referendum. Some brave commentators have indeed convincingly made precisely this point (see here and here). I think it is important beyond the case of the EU Referendum in the UK and may be an important element in democratic politics that any democratic society ignores at its own peril.

But let us first define what we are talking about. The Oxford dictionary defines ‘stupid’ as ‘having or showing a great lack of intelligence or common sense’ (see here). ‘Intelligence’ is in turn defined as the ‘ability to acquire and apply knowledge and skills’. Similarly, ‘ignorant’ – which is the term Ilya Somin uses in his book on political ignorance – is defined as ‘lacking knowledge or awareness in general. Uneducated or unsophisticated’ (see here). Finally, ‘incompetent’ – another term often associated with stupidity – is defined as ‘not having or showing the necessary skills to do something successfully’ (see here).

Some of these definitions are problematic. Thus, ‘common sense’ is a highly problematic and unclear concept. Therefore, I think stupidity should be more narrowly defined as a lack of knowledge, and/or the inability – or unwillingness – to express a knowledgeable and logically coherent argument. The important, thing is not to confound stupidity with lack of education. While the latter can be the cause of the former and while the OED definition of ‘ignorant’ does mention ‘uneducated’ as a synonym, this needs to be understood in a broad sense, not an institutional one. That is to say, you do not have to hold a higher degree to make ‘intelligent’ arguments, and holding a PhD does not prevent you from making very stupid ones. ‘Uneducated’ here can only be understood as not having invested the time and effort to become informed about a specific topic rather than not having attended university.

Defined in this way, stupidity is not necessarily related to socio-economic status. Indeed, the main reason, why I think advancing stupidity, as an explanation for the Brexit outcome should not be interpreted as an anti-democratic elitist argument, is that political ignorance and incompetence is not limited to the median voter. In actual fact, the most worrying aspect of the EU Referendum and its aftermath is the level of ignorance and incompetence among the political elite, be they advocates of leave or remain.

It starts with the main architect of the disaster – no, not Johnson, Farage, Gove, or Fox – but David Cameron. The level of incompetence in handling the referendum beggars believe.[2] Cameron promised an ‘in-out’ referendum in the midst of a the contested 2014 general election campaign in the most irresponsible fashion. This was partly to fend-off increasing pressure from Eurosceptic backbenchers in his own Conservative Party, partly to cut the grass under the feet of the leader of the thriving UKIP – Nigel Farage. Some have argued that Cameron proposed the referendum quite possibly also in the expectation that the Conservatives would not win an overall majority in the election and could hence count on their coalition partner – the Liberal Democrats – to block the referendum plans without the conservatives losing face (see here). This plan – if there was one – backfired when the Tories did win the election, arguably at least in part thanks to votes retained or regained from UKIP due to the referendum promise. So, the referendum became inevitable. While this strategic miscalculation may be excusable – albeit irresponsible – the way in which the referendum was organized is not. In countries that have experience with popular referenda, any politician knows how delicate a matter such votes are and how much they are influenced by subtle factors that often do not have much to do with the substance of the matter at hand. Therefore, certain safeguards are built into any referendum procedure and the timing of popular votes is carefully chosen.
Switzerland is certainly the prime example of a representative democracy with direct democratic elements. In Switzerland, any vote on a topic with significant implications – such as an amendment or the constitution or the conclusion of international treaties of unlimited duration – are subject to an extra safeguard, i.e. it has to obtain the ‘double majority’ of the overall voting population and the ‘Cantons’. This guarantees that important changes are not made on a whim and that the rights of (geographical) minorities are protected against the ‘tyranny of the majority’.
Outside of popular referenda, literally any democratic country in the world knows similar safeguards against rushed and uninformed decisions that might have far-reaching consequences for a country. Most often such safeguards concern constitutional amendments, which are often subject to qualified majority requirements in the parliament.

It may be the absence of a written constitution and the resulting lack of expertise of British politicians with constitutional law matters, or the ‘winner-takes-it-all’ mentality of Westminster politicians that explains that no such precautions were taken in the EU Referendum. As a result, a small minority of 51.9% of the voting population could decide their own fate together with that of the other 48.1%....let alone those who could not vote and future generations!
Similarly, the timing of the vote was reckless: it was held at the end of June, in the middle of the European Football Championship (an event that can reinforce nationalistic sentiments), after University’s had broken up for the summer and major events such as the Glastonbury festival were taking place (one factor contributing to the very low turnout among young voters who were in their very large majority in favour of ‘remain’?)[3]. These may all seem like minor issues, but popular referenda, especially if they are on highly emotional issues such as immigration, often turn on very emotional rather than rational voting behaviours. In such contexts, seemingly minor factors may actually have an important impact on the outcome. Even if each one of these factors may not have actually decided the vote, the fact that the government did not consider them is a sign of a worrying level of incompetence or at least a massive overestimation by the government of its own credibility with the median voter…which is a form of ignorance too.

The second – even more striking – example of stupidity in relation with the EU Referendum is the utter incompetence of the ‘leave side’ when it came to formulating a plan for the case that they would win the vote. Before the referendum, ‘Vote Leave’ advocates alternatively invoked the Norwegian example or the Swiss one, as a model to follow in case of a Brexit. Norway is part of the European Economic Area (EEA), which implies far-reaching obligations to implement EU legislation with very little say in its formulation. Switzerland’s arrangement with the EU is based on a complex set of over 100 bilateral agreements that are currently facing their worst crisis since 1992, because Swiss voters decided in 2009 to limit the free movement of people. None of this was seriously discussed in the campaign. Other than these superficial references to other countries’ arrangements, the Vote Leave campaign’s ‘roadmap’ for the Brexit only mentioned individual policy decisions – such as abolition VAT on certain products – but no overall strategy for what a politically realistic arrangement with the EU might look like. The aim was simply stated as trying to "get a good deal in the national interest".

While this incompetence may simply be attributed to political opportunism, I think a more plausible explanation is sheer incompetence of the political elite. This in turn may be explained by the fact that it seems to be enough to be what Jürgen Habermas has called a ‘player type’ (Spielertyp) a la Cameron and Johnson (here in German), or - in slightly cruder terms – a ‘worldclass bullshitter’ to become a successful politician. Partly, the politicians’ incompetence may also be the result of the above-mentioned ‘double curse of incompetence,’ which Bertrand Russell so astutely summarised: “The fundamental cause of the trouble is that in the modern world the stupid are cocksure while the intelligent are full of doubt.”[4]

Now, is it bad to laugh at other people’s (stupid) arguments? it is for enthusiasts of (unlimited) democracy, who seem to consider that anyone’s opinion – however objectively flawed and uniformed – is valid. Referring to voters’ stupidity is treated as a taboo. Yet, stupidity is an important factor that plaid a major role democratic decision-making (see Ilya Somin’s above-mentioned book). Ignoring stupidity is dangerous. To quote once again Bertrand Russell, commenting in May 1933 on the rise of fascism in Germany:  “What has happened? What has happened is quite simple. Those elements of the population which are both brutal and stupid (and these two qualities usually go together) have combined against the rest.” I find myself often reminded of that quote when reading about populist parties and politicians around the world these days.

As laudable as the intention not to vilify working class leave voters and take their concerns seriously may be, there can be no excuses for the level of ignorance of even the most basic facts that many of the arguments made around the EU referendum reveal. A functioning democracy – especially when direct democratic elements are introduced – requires a certain level of intellectual sophistication from anyone who wishes to participate. The privilege of being able to express one’s opinion in a democracy comes with the responsibility to at least try and inform oneself about the issues at hand. Many citizens have failed the nation by making a historical decision about the future of the country while relying on sources of information of questionable quality and on pseudo-facts that had been openly exposed as fabrications, misinformation, and indeed lies. Social background is no excuse for ignorance. That’s where it seems to me that ‘the man in the street’ – rather than the intellectual elite – has proven to be out of touch with reality. The sources of information one chooses to use may be as much a cause of ignorance than a lack of education. Evidence from the US, for instance, shows that the type of media citizens use as source of information may affect their level of knowledge or ignorance. Thus, one study shows that people who watch Fox News regularly know less than people who do not watch any news at all. Put crudely: to make an informed decision about whether EU membership is beneficial or disadvantageous for the UK (or oneself), it may simply not be enough to read The Sun and watch ‘Corrie.’ Jürgen Habermas recently commented on the British EU referendum arguing that the ‘infrastructure without which public politics cannot work has eroded’ (here in German). The media are an important part of this infrastructure, but have lead in the UK a trend towards what Germans call Volksverdummung (stupidification of the people).

Therefore, rather than being caused by socio-economically induced inferior intellectual capacities, political incompetence seems to be the result of intellectual laziness and deliberate obscurantism. Nothing expresses this attitude better than Gove’s statement that ‘people have had enough of experts’. Indeed, they have: established scientific facts are simply ignored, the opinions of experts derided or dismissed as propaganda. This applies not just to climate change and other scientific topics, but also to expert opinions on the economy and politics. In this context, ridiculing obscurantist opinions seems like a legitimate answer to me in order to point out how ‘out of touch’ with reality they are.

To be sure, some thinkers do consider hilarity in politics to be a very dangerous weapon. In his book about the ‘Eclipse of Reason’ Max Horkheimer describes the ‘mimetic impulse’ as a human tendency to identify with one’s own group (nation, race, etc.) and rally against ‘outsiders’. This mimetic impulse often takes the form of ridiculing ‘the other.’ He describes the ‘laughter of crowds’ as ‘the hilarity of madness’; the negation of reason and triumph of repressed natural urges. Interestingly, he cites Victor Hugo’s example of the British House of Lords as his main example and sees the British Parliament as a place ‘in which laughter triumphs over truth.’ (p.82) Laughing at your political opponents may hence be part of British political culture, which other political cultures may not share. In the comments section of the BBC News web page one could recently read very contrasting views on the debating style in the British Parliament. A US citizen commented: “This is such a welcome change from the US legislature. Love the collegiality, the willingness to listen, and the sense of humour.” A German national, on the other hand, commented that ‘British Parliament is hilarious. The speaker has to yell to be heard, everybody interrupts each other – such an immature, bad-mannered assembly.’ (see here)

Whether hilarity in politics is a good or a bad thing may remain an open question and ultimately boil down to taste. Still, a recently coined bon mot states that ‘we used to laugh at comedians and listen to politicians. Now we laugh at politicians and listen to comedians.’ This may hint at the fact that humor, hilarity, and ridicule have become important weapons to combat the ongoing shift towards an obscurantist post-fact world. Laughing at stupid arguments may indeed be an important way to expose the marked decline in the political culture in Western countries that increasingly drift into populist politics of fear and hatred.

[1] Dunning, D. et al. 2003. “Why People Fail to Recognize Their Own Incompetence,” Current Directions in Psychological Science, 12(3): 83-7.

[2] The incompetence of politicians is not limited to the right of the political spectrum of course, but discussing the incompetence within the labour party and its leadership for instance would probably take another blog post or two.

[3] There has been some controversy around the actual turnout among voters of 18 to 24 years of age: http://www.theguardian.com/politics/2016/jul/09/young-people-referendum-turnout-brexit-twice-as-high?CMP=Share_AndroidApp_Add_to_Facebook

[4] Russell, B. “The Triumph of Stupidity" "Mortals and Others: Bertrand Russell's American Essays, 1931-1935" volume 2, p.28

Fat Cat Tuesday: Adam Smith vs The High Pay Centre

Today is ‘Fat Cat Tuesday’. That is the name given by the UK High Pay Centre (HPC) – a think-tank focusing on issues of corporate governance and executive pay in the UK – to the day of the year when the average CEO of the FTSE 100 companies has earned as much as the rest of the UK population will earn all year. In 2016 that is the case already on the first Tuesday of the year! Indeed, the High Pay Centre has calculated that the average hourly wage of the average FTSE100 CEO is £1,260 while the median average yearly salary in the UK is £27,645. Assuming that CEOs start working on Monday 4th of January 2016 and work a 12 hour day, by Tuesday afternoon they will have earned more than the £27,645 median annual pay (see here).

This simple and admittedly rather coarse measure illustrates in a very effective way an important aspect of income inequality in the UK, which is closely related to the strong increase in top CEOs' salaries over the past decades. The average pay of the chief executives of the FTSE 100 companies has more than quadrupled between 1998 and 2011 from roughly £1m to £4.2m. [1]

Yet, the HPC’s idea of Fat Cat Tuesday is also heavily criticised. Some strongly worded reactions in the comments section of the HPC’s own web page are damning, accusing the HPC of ‘blatant statistical manipulation’, because the calculation compares the median average national annual wage to the mean average CEO wage.
This is hardly a convincing criticism of the methodology though. The difference between the median annual wage and the average annual wage in Britain in 2014 was, according to the ONS, £5,247. So, comparing the mean average CEO wage with the mean average national wage essentially means that Fact Cat Tuesday will be reached 4.16 hours later than if we used the median wage. So, at best, it implies that we should be talking about a Fat Cat Wednesday. The fundamental point that the HPC is making clearly remains valid.

However, more serious voices too criticises the HPC’s newly crafted ‘commemoration day’. The Adam Smith Institute (ASI) – a libertarian think tank based in London – condemns the HPC in no uncertain terms. In a press release, its Executive Director Sam Bowman derides the HPC analysis as ‘pub economics’.

It is worth quoting the ASI’s press release in full here:

‘Commenting on the High Pay Centre’s promotion of ‘Fat Cat Tuesday’, Executive Director of the Adam Smith Institute, Sam Bowman, said:

Despite consistent attacks on chief executive pay, the High Pay Centre has never told us how much they think CEOs are actually worth. Their complaints are the hand-waving of pub economics, not serious analysis – “Surely you don’t think executives can be this valuable to firms?”, or “Surely you don’t think executives are more important now than they were forty years ago?”.

None of these complaints are valid unless the High Pay Centre thinks it has a better way of estimating the value of executives to firms than those firms themselves. Can the High Pay Centre tell us how much CEOs are worth? If not, how can they say that they are overpaid?

Chief executives can be worth quite a lot to firms, as is shown by huge moves in company share prices when good CEOs are hired, or bad CEOs are fired. Steve Jobs can make a firm; Steve Ballmer can break a firm. The High Pay Commission’s complaints only make sense if you assume firms don’t actually care about making money – which is to say, they don’t make sense at all.’

This is an interesting statement, which unfortunately does not live up to their self-declared standards of ‘serious analysis’ either.

To be sure, it is indeed a very important and difficult question to know what exactly is ‘excessive’ CEO pay, or – in the words of the ASI – ‘how much is a CEO worth?’ This question should be discussed and would certainly merit more attention in the academic literature too. Nevertheless, the tautological argument that if ‘the firms’ are ready to pay their CEO as much as they do, it shows that they are actually worth as much, is incredibly naïve.

However, the argument that if firms are ready to pay such salaries they are justified is actually very wide-spread and influential among academics and practitioners alike. Indeed, it may be the dominant argument in the debate about executive pay. The probably most influential academic working on executive pay, Kevin J. Murphy, very much defends this point of view. This is not very surprising as Murphy was one of Gary Becker’s PhD students at Chicago and hence firmly rooted in the Chicago School of Economics, which in turn is closely associated with the efficient market hypothesis (EMH). Indeed, the argument that salaries are justified because firms are ready to pay them is – albeit implicitly – based on the belief that executive pay-levels are the result of a market equilibrium in the market for managerial talent. We could call this the efficient labour market explanation of executive pay.
This argument raises all sorts of fundamental questions about the validity of the efficient market assumption in general, and of the liquidity and efficiency of labour markets for highly specialised roles in particular.

More interestingly, however, is the other implicit argument made by the ASI, which consists in saying that firms somehow know how to estimate the ‘value’ of their CEO. This is interesting in several respects.

Thus, the fact that the statement refers to ‘firms’ in general shows that the ASI – in typical neo-classical fashion – treats the firm as a ‘black box’. On this account, it is the firm that estimates the CEO’s worth and that decides about the appropriate pay level. This, however, obscures the fact that firms are not unitary actors, but are composed of various parties or ‘stakeholders’ with various – at times conflicting – preferences. The simplistic neoclassical view of the firm also completely neglects the process by which executive pay is determined within the firm. Indeed, nowadays it is generally the case that executive pay is determined by the remuneration committee, which is a sub-committee of the board of directors. The UK corporate governance code (D.2.1) requires that the members of this committee be independent non-executive directors. The CEO should not be member of the committee. Nevertheless, a second influential theory of executive pay in the corporate governance literature argues that in spite of such provisions, executive have a great deal of influence over the determination of their own pay. This could be termed the ‘managerial power thesis’ of executive pay and is most commonly associated with the work of Lucian Bebchuk– a very influential Harvard Law professor and staunch advocate of minority shareholder interests. In a widely-cited paper with Jesse Fried, Bebchuk discusses a number of reasons why it is likely that boards of directors – even with a remuneration committees composed of independent directors – is likely to design pay packages for top executives that are overly generous and not related to performance. Their explanation essentially is that non-executive board members have more reasons to please the CEO than distant and anonymous minority shareholders.

But even if directors and the members of the remuneration committee were sensitive to what shareholders want in terms of executive pay, it is by no means certain that increasing shareholder influence would lead to curbing executive pay. Indeed, different countries – including the UK – have recently introduced so called ‘say on pay’ rules, which give shareholders a right to vote during the Annual General Meeting (AGM) on executive remuneration packages. This was expected to lead to more scrutiny of executive pay and to a slowing down of CEO pay increases. Yet, anecdotal evidence and first empirical studies a couple of years after the introduction of these rules in the UK indicate that – despite some incidents of shareholder discontent – executive pay has continued rising essentially unhampered. That is puzzling from the mainstream view of corporate governance, which sees the conflict between managers and shareholders essentially as a zero sum game. One explanation for this puzzle is that shareholders do not really care how much managers are paid as long as they get their share of the profits. Indeed, it is an open empirical question at whose expenses managers have increased their salaries in recent years. More left-leaning academics have made the hypothesis that – rather than clashing over salaries – CEOs and other top executives form a coalition with shareholders and extract value from the company at the expenses of middle managers and shop-floor workers (see generally Krier 2005 who speaks of a ‘speculative coalition’, or a ‘speculative management teams’ composed of top managers and aggressive activist shareholders). This could be a counter argument to the ASI’s claim that executive salaries cannot be excessive if firms care about making money. Well, they certainly do want to make money, but the relevant question here is who actually gets the money that they are making. It is perfectly plausible that CEOs may be able to ‘buy’ pay levels above the minimum competitive equilibrium wage by essentially ‘bribing’ shareholders into accepting such levels in exchange for increasing pay-outs via dividends and share buybacks. That way, both shareholders and managers benefit, at the expense of other parties, e.g. employees, investment in future growth opportunities, and R&D activities.

In any case, the ‘managerial power thesis’ as well as the ‘speculative management team’ thesis suggests that the efficient executive labour market hypothesis, which by assumption implies that the salaries that are being paid constitute a competitive equilibrium, may be false.

Still, the thesis that the ever-increasing executive salaries are somehow a result of an increasingly competitive global market place for managers is omnipresent in the practitioner discourse (cf. the popular saying ‘If you pay peanuts, you get monkeys’). But even this seemingly very compelling and intuitive argument may be false. The argument would suggest that the more money you offer, the better the person you will be able to recruit will be. That’s a bold argument that fits in well with the neoclassical ‘homo oeconomicus’ theory of human motivation that sees money as the only motivator. It fundamentally contradicts more classical theories of motivation in organisational theory, which show that money is certainly part of what motivates people, but by no means the only factor (cf. Maslow’s pyramid of needs, Herzberg’s two-factor theory, and various process theories of motivation).
To use the ASI’s own example of former Apple CEO Steve Jobs and former Microsoft CEO Steven Ballmer: The ASI implies that Jobs was a good CEO, while Ballmer was not. Following their reasoning we would expect Jobs to have had a (much) higher salary than Ballmer. Yet, Jobs famously was one of a handful of CEOs who only had a symbolic yearly fixed salary of $1 and was not paid any bonuses in most years of his tenure at Apple between 1997 and 2011. Conversely, Ballmer – the ‘bad CEO’ in ASI’s example – took home around $1.3m every year (see here). In comparative terms, that is not a massive salary for the CEO of Microsoft and it is clear that Jobs received other services and perks from Apple in lieu of a salary (e.g. Apple would cover his annual travel expenses of around a quarter of a million USD). Nevertheless, even this crude comparison does not seem to support the view that the level of the salary directly reflects the quality of the CEO.

When Ballmer left Microsoft, he was replaced by Satya Nadella who was awarded $84m in his first year at the helm of the technology company. A massive increase over the Ballmer’s pay, which was justified by the chairman John Thompson with the usual argument that the company wanted to “attract and motivate a world-class CEO”.
In his second year, this ‘world class CEO’ had managed to half the net income of the company from $22.1bn to $12.2bn. His base salary still continued to increase compared to his predecessor (who had earned around $600,000 in base salary), to $918,917 in 2014, and $1.2m in 2015. He also still received 120 per cent of his target bonus ($4.3m) for 2015 in spite of the rather disastrous income figures (see here).
Many more examples could be added that show that the case for a close and direct link between the level of pay and the quality of the CEO is weak to say the least.

To be sure pay packages are complex things and in particular the contribution of a CEO to the company’s performance (good or bad) is extremely difficult to isolate from other factors that affect the business (such as the global market environment and pure chance) in any given year. Nevertheless, the empirical evidence and the various theories mentioned above clearly show that the Adam Smith Institute’s simplistic arguments are hardly any better than ‘pub economics’.

[1] Pickard, J., Groom, B, Masters, B. ‘Cable plans binding votes on executive pay’, Financial Times, June 20, 2012.

The ‘Battle over Women’…and over the Hungarian Economy

It happens quite often that celebrities are asked questions in interviews that lead them to comment on things that are clearly outside of their area of expertise. The result can be quite disastrous. As a common example, footballers sometimes reveal worrying world views when venturing into the area of politics. A famous example is the former Bayern Munich midfielder Mehmet Scholl who once declared that his life motto was ‘lynch the greens, as long as there are still trees’.
It is much rarer, however, that such gaffes make international headlines and affect a country’s politics and the economy. This is, however, what has happened last week when the Hungarian pop singer Akos Kovacs gave an interview to Echo TV. In the interview Kovacs stated that women should aim “to belong to someone, to bear children for someone, to be a mother”, rather than seeking equal pay to men in the work place.

In reaction to these remarks, the Hungarian subsidiary of Deutsche Telekom – Magyar Telekom – immediately cancelled its sponsoring contract with the singer, declaring that Kovacs' remarks were not "compatible with our beliefs and value system."

This move triggered, in turn, what Bloomberg has called the ‘Battle over Women’. Indeed, the reaction by the Hungarian government must have come as a shock to Deutsche Telekom. Prime Minister Victor Orbán had a spokesperson accuse the German company of a "dictatorship of opinion". The government turned Kovacs into the victim, referring to his right to free speech: "We consider it unacceptable that today in Hungary, anyone can be discriminated against in such a way because of their opinion or view". As a result, Orbán’s government ordered ministries to cancel their Magyar Telekom subscriptions. Given the importance of state contracts in the Hungarian telecommunications market, this constitutes a major blow to Magyar Telekom, which was reflected in a temporary 3% drop in the share price following the government’s announcement.

Beyond this particular case, this episode is interesting in what it reveals about the nature of the Orbán regime and indeed possibly other post-socialist Eastern European countries. In several of these countries, including Hungary, the state has recently taken back a considerable part of the control over the economy that it had lost to ‘oligarchs’ during the first decade after the fall of communism. This phenomenon has been labeled the ‘return of state capitalism’ (cf. the special report in The Economist). Several Eastern European countries have elected governments over the past decades that increasingly deviate from the liberal-democratic reform agenda that was imposed on them by international financial institutions and Western partners after the fall of communism.
While these reforms have led in some cases to stunning results and impressive catch-up growth and industrialization (e.g. in Poland, Estonia and others), it has also led to a large number of losers from this development who grew increasingly dissatisfied with the pro-Western reform path. Indeed, according to certain surveys, a sizeable number of Eastern Europeans started to consider that they had been better off under communism than under the new capitalist-democratic system (Orenstein 2012). As disillusion with capitalism-cum-democracy increased, support for more nationalist and authoritarian parties grew. Orbán’s Fidesz party is one example of this. Putin’s United Russia is another one, which often served Orbán as model to follow. As a result, one can arguably speak of an ‘authoritarian turn’ in several Eastern European countries following the neo-liberal phase of the 1990s and early 2000s. This situation has led to a redefinition of the role of the state in the economy and has created a new situation for companies to deal with in such countries.

Together with my former PhD student Dorottya Sallai, University of Greenwich, we have carried out research into this phenomenon. We tried to find out two things: Firstly, how exactly does the emerging authoritarian state in Hungary ‘take the power back’ from the economic elite? Secondly, what type of ‘coping mechanisms’ do companies use to deal with this new situation?

There has not been much research into how companies deal with authoritarian regimes; notably because management and business studies (MBS) are not very well equipped with conceptual tools for analyzing the political context. Indeed, the underlying concept of the state in MBS is rather simplistic; often simply oscillating between two views: Firstly, a libertarian view that sees the state as a parasitic evil that should be limited to an absolute minimum (the so-called ‘grabbing hand’ or ‘predatory state’ model – Shleifer & Vishny 1997). Secondly, a more benign – but also rarer – view that sees the state as a potentially useful actor in fostering economic growth and promote business activities through targeted, but non-predatory intervention, such as providing investment capital for certain industries (the ‘helping hand-‘ or developmental state model).
In our study, we show that neither of these caricatured views is particularly useful to capture the complex transformation of the state in Eastern Europe since the end of the socialist state. Indeed, we draw on various fields, including political science, anthropology, and post-soviet studies, to develop a more fine-grained analysis of what type of state is emerging in Orbàn’s Hungary. We follow Wedel (2003) in calling this type of state a ‘clan state’, whose main characteristic is the complete blurring of the boundaries between the economy and the political sphere. In the ‘clan state’ the state’s interests are identical to the interests of the group of people who are in power, and this group essentially uses the state in an instrumental way to consolidate their power and enrich themselves. The group resembles a ‘clan’ rather than an actual political party, although the clan structure may not be based on family ties.

The ‘Akosgate’ scandal illustrates very well, how the behaviour of the state is transformed under the ‘clan state’. There are at least three striking features: Firstly, a seemingly minor disagreement between a private individual – although a well-known one – and a foreign company is turned into an affair of state. This hints at the high level of politicization of the economy and society in Hungary.

Secondly, the links between the individual in question and the governmental party are rather obscure, but still clearly very close. Kovacs is indeed well-known for his support for Orbán’s Fidesz party. Moreover, his statement about women’s role in society is remarkably close to a statement made by a high-profile Fidesz politician a week earlier. Indeed, the speaker of parliament, Laszlo Kover, reportedly stated that "[w]e would like it if our daughters considered it the highest degree of self-fulfilment to give birth to grandchildren." This hints at the ideological proximity of the singer with members of the governmental clan, which certainly explains the government’s stern reaction.

Thirdly, the government unflinchingly uses its power to punish a foreign company for behavior that is deemed inappropriate, regardless of the signal that this sends to the international investor community. This is one of the most striking features of the ‘clan state’, which very much contrast with how worried governments in other countries usually are when interfering with foreign MNCs even if the reasons were less controversial than in the present case.

These three elements are characteristic of the clan state in the sense that they show the blurring of private and public interests via personal ties among the country’s elite. The case also illustrates the means that the Orbán government uses to intimidate businesses, both foreign and domestic. Indeed, our study shows that handing out or withdrawing government contracts is one of the key means of pressure the government has in hand against the economic elite. Other such means that emerge from our interviews are the use of taxation or specific laws to squeeze out companies from a given industry to create a temporary state monopoly that can then be re-privatised to people close to the clan; and the practice of forced buy outs (FBOs) which are essentially a form of expropriation of companies through members of the clan under the threat of state intervention.

Our study then investigates how companies react when faced with a state that uses such means to wrestle power back from the economic elite. We have carried out approximately fifty interviews with CEOs in various companies active in Hungary and with other well-informed actors. Our main finding in this respect is that, contrary to existing studies, companies in Hungary do not try to cope with autocracy by adapting a specific organisational structure that ‘immunises’ the company from expropriation, as the large and opaque business groups in Indonesia do for instance. Neither do foreign MNCs completely exit the Hungarian market, which is an obvious and commonly observed coping mechanism. Rather, they tend to follow one of two strategies: Either they give in to the political pressures and ‘play the game’ (i.e. they try and keep clan members happy by engaging in corruption and other illicit activities), or they adopt a strategy, which we term ‘dormancy’. This latter strategy is interesting, because it has not been described in the extant literature. By dormancy we essentially mean that the companies put forward-looking investments on hold and simply try to maintain a presence in the country, while staying below the government’s ‘radar’. Companies that choose this strategy seem to simply focus on survival, but refuse to play the game dictated by the government. We speculate, however, that the dormancy strategy will only work in the short- to medium-term and is indeed based on the assumption that the Orbán regime will eventually give way to a more business friendly regime. Time will tell whether this assumption is indeed correct.

The paper is available on SSRN (The references cited in this post can be found in the paper).

Of ‘Gutmenschen’, the First ‘Openly A**hole President’, and the Moral Decline of the West

The current refugee crisis in Europe has led to a great deal of political discussions, journalistic commentary, and public debate. The quality of comments varies greatly; the low end of the scale can certainly be found among the online commentaries on various newspaper and media webpages. Nevertheless, I found very interesting one type of remarks made in the comments section of German-speaking online media webpages: Many commentators virulently attack people who advocate a lenient stance on immigration in the current crisis by referring to them as Gutmenschen or Weltverbesserer. Gutmensch is a contraction of ‘guter Mensch’, i.e. a ‘good person’, a ‘good human being’. While its origin is disputed, the term has become increasingly used in German since the mid-1980s. [1] Weltverbesserer, on the other hand, literally means ‘world improver’. Like the English ‘do-gooder’ neither of these terms are compliments though, but are used as insults. While online comments sections certainly rather capture the most extreme opinions in a society, a similar scornful and derisive attitude towards ‘good people’ and ‘world improvers’ is omnipresent in political discourses of many political parties in various Western countries. Indeed, to some extent this discourse has become very normal, but when one comes to think of it, the fact that being a ‘good person’ has become a bad thing and trying to ‘improve’ the world is worthy of derision does seem like a rather strange phenomenon.

In a related development, Comedy Central’s Daily Show recently declared – in its trademark blunt and provocative fashion – that Donald Trump, if elected, would be the USA’s first ‘openly a**hole president’ (audio is available here at 10’15”; in some countries with video here). Now, some might find this statement crass, but I think there is a kernel of truth to it: Certain politicians do not seem to deem necessary to respect standards of politeness, common decency, and political correctness anymore (which, I suppose, is what Jon Steward would consider – among other things – to distinguish an a**hole from another person, but I could not find a formal definition of the term).
Some politicians draw political capital from this newly-gained freedom, by making increasingly blunt and extreme statements that appeal to certain parts of the electorate. Partly, this trend – which is by no means limited to the USA – has been driven by the resurgence of far-right parties in many countries, which little by little have pushed back the limits of what it is acceptable to say out loud. This trend started on the fringes of the political spectrum, but has now also start entering the political mainstream. Political correctness – if taken to extreme – clearly is not without its problems (notably in terms of freedom of thought and speech); Yet, it does impose to some extend on powerful actors in society what Jon Elster called in a different context the ‘civilising force of hypocrisy’.[2] This civilising force is in rapid decline now; and politics in the Western world have become less civilised as a result.
One striking and very worrying, but not even the most extreme, example of this trend is the fact that increasing numbers of parties and governments in Europe openly consider to leave the European Convention on Human Rights (ECHR), arguably a core achievement of European civilisation after the Second World War. Now, influential political actors in Europe, including the new conservative government in the UK and the largest party in Switzerland – a country that often prides itself with her long humanitarian tradition – raise the possibility of leaving the ECHR in the name of the superiority of national sovereignty over human rights. Another example is the idea to reintroduce the death penalty in European countries. Surely, such announcements would have been met with disbelieve and astonishment as recently as 20 years ago. Today, however, while being criticised by certain actors, such moves do not seem to surprise or shock that many people.

So, what has happened that being a ‘good person’ has become a bad thing, while being an ‘openly a**hole’ politician increasingly seems to become a viable political strategy in election campaigns?

Well, I would argue that it has to do with a general moral decline in the Western world.
That’s a statement that does not go down well with most people. Indeed, resorting to moral arguments is usually perceived to be a sign of lack of realism, idealistic preaching, and/or a sense of moral superiority. Richard Posner’s attacks on moral legal philosophers like Ronald Dworkin illustrates this trend (see e.g. Posner 1997). Any suggestion that a human society is not to one big ‘chicken game’ or ‘prisoners dilemma’, played by perfectly selfish and rational actors is considered an attempt by moralists to impose their values and norms on other people. The mere suggestion that humans may behave ‘morally’, i.e. follow social norms that impose duties, is considered the first step towards attempting to restrict their individual liberty. A free, rational actor is not bound by norms and duties, but is purely determined by selfish utility maximisation. Such maximising behaviour is – so the argument runs –the natural behaviour for any human being in any situation that life has to offer. Gary Becker’s famous piece on how marriage is the result of rational choices about maximising one’s utility is probably one of the most extreme examples (Becker 1974). This view of man – the homo oeconomicus view – started to gain traction after the Second World War in Economics departments in certain universities and most importantly at the University of Chicago (see my related blog post). By the 1980s or 1990s the homo oeconomicus model of man had become dominant among economists and had spread into other fields of the social sciences and into public discourse. From that point onwards, to be taken seriously, any analysis and explanation of human behaviour in any area of life had to be based on the fundamental assumption of selfishness and utility maximisation. Arguing that a social phenomenon could be explained by non-selfish, non-maximising, moral behaviour was at best derided as a flawed analysis that confuses ‘enlightened selfishness’ (the capacity to restrain one’s selfishness in the short-run to increase the ‘pay off’ in the long-run) with moral behaviour, at worst it was considered outright lunacy.

An interesting example of the rejection of ‘morals’ as explanatory category of human behaviour is a paper on the Enron accounting scandal written by the law professor John C. Coffee from Columbia University (Coffee 2003). The paper starts off by virulently arguing against an interpretation of the scandal as a result of a decline in ‘business morality’ among the US business elite. Instead, what happened at Enron (i.e. an accounting fraud at unprecedented levels) should be explained – according to Coffee – by the ‘incentives’ that actors had. Managers, auditors, investment analysts, board members of Enron, all had rational, economic reasons to behave in the way they did, because the ‘incentive structure’ in place meant that behaving in the way maximised their individual utility.

I think this argument is wrong, and Enron – like many other scandals that followed it, including the recent Global Financial Crisis – had indeed everything to do with a moral decline. Coffee might be right that the actors he singles out as being responsible for the Enron scandal – namely what he calls the ‘gatekeepers’ such as auditors and analysts – only acted following their economic incentives. Yet, I will show below that the very fact that economic incentives is all that these actors cared about is precisely the result of a moral decline.

There are two reasons why the explanation based on the notion of moral decline is more convincing then Coffee’s ‘incentives story’: Firstly, the concept of moral decline becomes increasingly plausible based on recent scientific advances in fields such as psychology, sociology, and behavioural economics. Secondly, the notion of ‘moral decline’ allows us to understand the commonalities behind seemingly distinct phenomena such as corporate scandals, the terms of the debate in the current refugee crisis, and election campaigns across the Western world.

Regarding the first point, new empirical research in the areas of sociology, psychology, and even (behavioural) economics points towards the fact that the model of homo oeconomicus, on which Posner’s, Becker’s, Oliver Williamson’s (see below), and many other Chicago-based Nobel Prize Winners’ worldview is based, is wrong….Or at least, it is too limited to capture human nature in its full complexity. Indeed, while people do in certain situations behave in selfish, utility-maximising fashion (and are hence ‘rational’ in an economic sense), they are also capable of altruism and of behaviour that follows a logic of appropriateness (‘do the right thing!’). Moreover, people often act based on interiorised and taken-for-granted ‘rules’ or ‘scripts’ that are not questioned regarding the costs and benefits attached to them. Therefore, rather than being one-dimensional ‘utility maximisers’, people follow a variety of ‘logics of action’, which – moreover – are in complex ways related to emotions.
One of the most sophisticated theories explaining how human behaviour is shaped by a variety of goals comes from the Dutch sociologist Siegwart Lindenberg who developed a theory that conceives of human behaviour as being determined by three competing ‘goals’: norms, material gains, and emotions. According to this theory, rather than being alternative ways of explaining the world, morals and utility-maximisation are two competing but not mutually exclusive sources of human motivation[3].
Bruno Frey’s economic motivation crowding theory confirms this view and provides a nice illustration of this competition between normative (moral) goals and gain goals: The example he gives is that of a parent asking their children to mow the lawn. In all likelihood the kids will do this without resistance, for instance because they feel obliged to obey the parent, because they take pride in being in charge of this task, or because they like the activity as such. Now, if the parent decided one day to pay them for mowing the loan, Frey argues, it would virtually be impossible to get them to do it for free ever again. That’s what he calls the ‘crowding out’ of normative motives or of intrinsic motivation by monetary, extrinsic incentives. It provides a good illustration of how one ‘logic of action’ (doing something out of a feeling of obligation or pleasure) can be displaced by another one (doing it for the money).

This phenomenon is, in my view, the scientific equivalent to what every-day language describes as a ‘moral decline’: people’s behaviours are increasingly guided by an opportunistic, gain-orientated logic and less and less by moral considerations. From this perspective, Coffee’s above-mentioned point that Enron (and similar corporate scandals) was all about incentives – if correct –can itself be seen as the result of a moral decline: What caused the Enron scandal (and Lehman Brothers, RBS, etc. etc.), is precisely a historical change that pushed economic actors to increasingly focus on selfishness and economic utility maximisation and to abandon norms of self-restraint.

The question then becomes, what triggered this moral decline in the first place? Here, Wolfgang Streeck’s analysis of capitalism as a historical phenomenon is useful to consider.
According to Streeck selfish utility maximisation is the behaviour that is both assumed and encourage by core capitalist institutions. Indeed, capitalism is – according to Streeck – a system that legitimises greed (if everyone maximises their own material gain, the common good will be enhanced as a by-product of a multitude of selfish efforts) and institutionalises cynicism (the smart person acts in bad faith and tries to take advantage of rules and of other people). This is reflected in economic theory, which teaches us that people are necessarily behaving in ‘bad faith’, i.e. they will see such rules as a hindrance to their utility maximisation and hence as obstacles to be overcome rather than as morally binding prescriptions to be obeyed (Streeck 2011: 143/4).
The strongest formulation of this ‘bad faith model of man’ is probably captured in Oliver Williamson’s concept of ‘opportunism with guile’. ‘Opportunism with guile’ is defined as behaviours that consist in ‘lying, stealing, cheating, and calculated efforts to mislead, distort, disguise, obfuscate, or otherwise confuse’ (Williamson’s 1985: 47; quoted in Streeck 2011). In Williamson’s influential Transaction Costs Economics approach, these behaviours are not condemned, however, but considered the default behaviour of any human being. They are hence ‘normal’.
Therefore, Homo oeconomicus, as conceptualised by Williamson, Becker, and others, is the ‘ungovernable man’ who will always try and circumvent the laws that govern him/her in pursuit of his/her own goals (incidentally this rebellious nature of homo oeconomicus is also why Michel Foucault may have had a certain sympathy for this neo-liberal conception of human nature; Lagasnerie 2012, in French).
By declaring anti-social and illegal behaviour normal and natural, this model implies that disobeying the law is not morally condemnable. Crimes are either worth the while (the smart thing to do) or not (a stupid thing to do). The legislator’s task is to design incentive structures through fines and controls that make sure crimes are not worthwhile, not to change or ‘educate’ people by morally condemning certain actions (trying to change ‘human nature’ is both dangerous and futile).
Conversely, ‘sentimentality is not envisaged and is in fact frowned upon, not only as individual stupidity but also a source of a distorted allocation of resources' (Streeck 2011: 146). In this situation a ‘moral deficit’ arises (Streeck 2011: 146) and any argument referring to moral categories and making normative claims is ‘vulnerable to being denounced as an expression of the resentment of losers, or as outdated, unsophisticated, and indeed irrational and 'unscientific'’. According to Streeck (2011) capitalism is the only social order in the history of humanity that is based on such an asocial behavioural assumption. I don’t necessarily share Streeck's pessimistic view that institutionalised cynicism and moral deficits are inevitable features of any brand of capitalism, I certainly agree that they are hallmarks of the currently dominant form of capitalism.

The concept of moral decline is powerful, because it is consistent with recent advances in various fields of study and it allows us to explain a large variety of recent social phenomena. Thus, it explains both the hateful comments against ‘do-gooders’ and the fact that politicians do not have to care about political correctness anymore. We now live in a world where politeness, decency, and self-restraint are perceived as signs of weakness (winners are ‘wolves’, ‘predators’, ‘alpha males’, i.e. bullies), not as a liberating triumph of human reason over our more animalistic inclinations, as Immanuel Kant probably would have argued. The current paradigm reminds one more of Nietzsche’s world view, where the strong does care about social conventions and following norms is an attribute of the slave not the master.

The reason why this evolution is worrying is – at least – twofold: it leads – somewhat paradoxically – to a decline of individual liberty; and it increases intolerance and sectarianism.

1) The war against ‘morals’ is fought in the name of individual liberty and moral relativism (norms and values are incommensurable and none should hence impose their ‘morals’ on anyone else). Paradoxically this has led to a society that limits individual liberty in a much more fundamental and perfidious way than any previous social order. While previous social orders accepted a variety of legitimate logics of action, in the modern world only the rational utility maximising logic is considered legitimate. Anyone deviating from the norm of cost-benefit calculation is either old fashioned, hopelessly idealistic, or simply stupid. We are told that markets – that epitomise the economic logic – increase our individual liberty by increasing our ‘freedom of choice’. At the most fundamental level, however, we do not get to choose anymore at all. This most fundamental level is the choice of the rules and principles by which we want to be governed. The ability to make this fundamental choice of determining the guiding principles that govern our lives constitutes what Immanuel Kant called ‘moral autonomy’. The choices that our ‘brave new world’ provides us with, however, are not of this kind. The logic of action is given as rational utility maximisation. What we get to choose is how to maximise our individual utility, which products we buy, not whether we want to participate in the maximising game in the first place. In my view, this is the greatest decline in individual liberty Western societies have seen in a long time and leads to a situation where liberty – defined following Kant as living according to ones self-imposed principles – is seriously jeopardised.

2) The problem with this evolution, however,  is not just that it leaves us living in a completely cynical world – which cannot be a basis for individuals to live the ‘good life’ that liberals are striving for – but also that this cynical world leaves increasing numbers of people receptive to what could be called a ‘moral backlash’. People are increasingly seeking shelter in what could be called the last bastions of moralism. Unfortunately, these are not enlightened, civic moral institutions anymore, which are necessary for a democratic open society, but increasingly sectarian, exclusionary, and reactionary types of organisations that further undermine a free and democratic society. The most extreme examples in the Western world is the rise of Christian extremism in the US, whose morals are characterised by a large degree of intolerance towards the weakest parts of society (i.e. ethnical minorities, homosexuals, women seeking abortion, immigrants etc.); but arguably even the rise of Islamic extremism in the Middle East, Africa, and elsewhere is at least partly a product of this world.

Fortunately, the scientific advances mentioned above do suggest that the fatalistic view of human nature that economic theory will eventually be proven wrong and hence not dominate our societies forever. Indeed, it appears increasingly clearly that people are not invariably selfish and opportunistic, but become so if they are taught that it is acceptable, and indeed the normal way to behave. They can equally well be taught – or ‘nudged’ towards - pro-social behaviours. Selfishness is not an inevitably dominant trait of humans, but a part of human nature that we choose to act on or not. Therefore, what this world needs are more people who reject the purely instrumental rationality we are forced to choose, and embrace maybe not so much the irrational and sentimental, but the moral and take pride in trying to be Gutmenschen.

[1] Some argue that already the Nazis used it to attack people who disagreed with their policies and methods, while others dispute this. What is clear, however, is that the term only became commonly used in the 1980s and 1990s. An interesting article (in German) on the origin of the word is here.

[2] Jon Elster, “Arguing and Bargaining in Two Constituent Assemblies,” University of Pennsylvania Journal of Constitutional Law 2, no. 2 (2000).

[3] Siegwart Lindenberg, “ Utility and Morality,” Kyklos 36, no. 3 (August, 1983)

The Wisdom of Pop-Management Books

‘Pop management’ books – that is, non-scientific business books written by high-profile academics or (former) practitioners for managers or those who want to become one – are a very interesting literary genre. With catchy titles (‘Competing for the Future’, ‘Winning in Emerging Markets’, ‘Build to Last’, ‘In Search of Excellence’, ‘Good to Great’, ‘Guerilla Marketing’) and promising sub-titles (‘Successful Habits of Visionary Companies’, ‘Lessons from America’s Best-Run Companies’, ‘A Manifesto for Business Revolution’, and ‘Easy and Inexpensive Ways for Making Big Profits from Your Small Business’), they target travelling managers in airport shops and try to lure them into believing that there are some magical tricks to be learned that will make a business more successful…And it would seem that this marketing strategy works: many of these books are best sellers (‘The One Minute Manager’, for instance has sold over 7 million copies since it was first published in 1982!), Harvard Business Press – which specialises in this genre – is a thriving business, and more and more pop-management books come on the market every year.

However, such business books have also been criticised for a lack of scientific rigour and for promising things they cannot hold. An excellent critique of this literature is Phil Rosenzweig’s book ‘The Halo Effect…and eight other business delusions that deceive managers’, which – rather ironically – is very much written in the pop-management style. Rosenzweig shows for instance that many very successful business books commit one of the most basic cardinal sins in scientific research, i.e. sampling on the dependent variable. Books like ‘Build to Last’, or ‘In Search of Excellence’, essentially pick a number of successful companies and try to explain their success by looking at the characteristics of these companies and their top managers…Ignoring all the while the thousands of other companies out there which have similarly characteristics, but are not successful.

One fairly recent pop-management book is by Michael O’Malley and is called ‘The Wisdom of Bees. What the hive can teach business about leadership, efficiency and growth’ (or TWOB for short). Having been a hobby beekeeper at one stage myself, I was intrigued by the claim that business had something to learn from a bee colony. But unfortunately, like most pop management books, TWOB lacks rigour and is full of half-baked intuitions and flawed analogies….Indeed the main attraction of the book, but also its main flaw, is the use of a biological analogy, comparing a beehive to a human business organisation.

To be sure, biological analogies are not a bad thing as such. Indeed, there was some debate a while ago about what the elimination – or rather the deliberate omission – of biological analogies from Alfred Marshall’s work signified for the development of economics as a discipline. Some economists see in the omission of biology – notably Darwin’s evolutionary theory – from economics the beginning of neoclassical economics (Niman 1991, Foas 1994).

However, at the same time, the use of biological analogies in the social sciences are a tricky thing that often leads to the temptation to ‘naturalise’ the socially constructed and to cast an air of innateness and inevitability over acquired human behaviours. This temptation is clearly apparent in TWOB.

The book starts off with the observation that honeybee colonies are remarkably well organised and function smoothly, despite the complexity of the tasks at hand (finding a location for the hive, creating honeycombs out of wax, foraging for pollen and nectar, producing the honey, feeding larvae etc.). Bees have been around for millions of years, inhabit every continent except Antarctica, and are hence among the most successful animals on the planet. The author concludes that ‘[t]he honeybee has mastered a great society and it would be phylogenic hubris to think we have nothing to learn from them.’ (pp.7/8).

The reasons for the success of bees are quickly identified: motivated and committed workers, a self-sacrificing dedication to the hive, clear leadership from the Queen, yet decentralised decision making, meritocracy, and careful planning, among others (25 in total).

The problem with this ‘analysis’ is that the author searches for answers to inherently human problems in an insect society.  As much as I love anything that has six legs and wings (as opposed to eight legs and no wings, I should add!), insects are nothing like humans – or indeed any other mammal. Insects are fascinating and awe-inspiring animals when you look at them from up close and take the time to observe their behaviours. Nevertheless, in neurological terms, they are relatively simple creatures without a very complex nervous system. In fact, many entomologists consider that insects’ nervous system is too simple for them to actual experience anything akin to what we call 'pain' in humans and other mammals (see here). Similarly, complex social behaviours of social insects do not necessarily imply that these behaviours are the result of ‘consciousness’, ‘intention’, or even ‘thinking’ and ‘planning’ as the book suggests. Complex behaviours may very well be hardwired into their DNA. Nor do insects have a complex psychology anywhere comparable to humans. Therefore, concepts such as motivation and discipline; and behaviours such as opportunism, intrigue, and deception – referred to throughout the book – simply make very little sense in this context.
So, when the author writes ‘cooperation does not occur automatically in human and bee societies’ (p.31). I think he is mistaken. Cooperation among honeybees does not have to be achieved through disciplinary mechanisms, such as incentives, rewards, and punishments to avoid the possibility of opportunism. Cooperation is hardwired into the bees DNA. This undermines the whole purpose of the analogy, because motivation and reigning in opportunism are two key functions of human work organisations. Surely, there is not much we can learn from an ‘organisation’ that does not have to deal with these issues.

More broadly, the whole book is based on the fundamental mistake of ‘humanising’ bees. The author is certainly right that they are amazing creatures. But they are simply not human. Clearly the author seems to forget that at times. Thus, he writes: ‘Bees exhibit a worldview that we correspondingly would describe as fair, open-minded, and objective’ (p.114). Do bees really have a worldview? Do they use concepts like fairness and open-mindedness?

More strikingly still, referring to the bees’ role in pollinating plants, O’Malley writes: ‘Honey bees were practicing social responsibility long before it became fashionable’ (p.156). This is stretching the analogy beyond the threshold of pain. It clearly does not make any sense whatsoever to attribute to bees concerns such as ‘social responsibility’. Surely none of the positive effects bees have on their environment are intended or even conscious!

Bees are not human, do not behave like humans, and do not have the same needs as humans! They work weekends, take no holidays, have no hobbies, they don’t ask to be paid; they cannot feel any pain, and essentially work until they drop dead! They have no house to go home to and their ‘work’ – foraging for pollen, producing honey and wax etc. –, is not actually work, but simply their life. Indeed, bees do not produce honey to sell it, but to feed on it. Therefore, for a bee, the beehive is not a business.

Now, one might say that my criticism is a bit unfair. Isn’t it legitimate to pick certain practices of a bee colony and derive lessons for companies without buying into all aspects of the analogy? Well, the problem with this ‘pick and choose’ approach is that the successful functioning of the beehive can only be understood holistically. Different behaviours of honeybees taken individually cannot account for the success of beehives; only the complex interplay of the different behaviours can. The reason why the beehive works so well is that the different behaviours complement each other so well. So, drawing lessons by looking at one practice only while ignoring complementary ones may not work.

Consider for instance the claim that part of the beehive’s success is to show little tolerance to underperforming individuals and replace less productive old bees with younger more vigorous ones (lesson 3 ‘Let merit be your guide’, p.26). This is certainly the case. Yet, one reason why this works is that the colony does not have to pay for the old bees ‘retirement plans’ (e.g. food and shelter), as they simply die or are killed. That’s why getting rid of them reduces the hives ‘costs’ tremendously.
Similarly, the author praises the bees’ pragmatism when it comes to rid the hive of male bees (drones) who are not needed anymore and are now simply a burden on the hive. O’Malley sees in this behaviour, called the ‘massacre of the drones’, a laudable example of ‘swift action’ and meritocracy (who doesn’t contribute to the hive has to go) (pp.26/7). Sure, this behaviour contributes to the beehive’s success. But only because of its radicalism, which consists in the fact that the drones are killed and do hence not drain the hive’s resources any further (as a laid-off worker might do when obtaining a social package). Needless to say that applying such a radical solution consistently to a human organisation raises all sorts of ethical and social questions. Conversely, if the lesson to be drawn is not consistent with the actual practice, the question arises what is the point with the analogy?

In the absence of a systematic and holistic use of the analogy of the beehive, the lessons seem arbitrary at best and random at worst! Sometimes they are plainly contradictory: Thus, lesson 12 ‘preserve a positive attitude’ suggests that managers should supress any ‘[…] contagious negativity and cynicism’ (p.88) among the workforce. This implies essentially to impose one positive ‘corporate culture’ or one ‘discourse’ that is accepted by everyone. Lesson 13 ‘keep your balance’, on the other hand, suggests that managers should embrace diversity within the workforce, not impose conformity, and workers should be allowed to ‘use their brains independently’ (unless, I suppose, if they chose to use it for ‘negativity’ and ‘cynicism’).

Other lessons seem terribly far-fetched: Lesson 2 (‘keep energy levels up’) mentions very reasonable measures to reduce the risk of ‘burn out’ among the workforce; one of which is sabbaticals….How exactly the toiling life of a bee leads to the conclusion that their success has something to do with sabbaticals remains a mystery.

Finally, some lessons are open to all sorts of interpretations: O’Malley writes that the choice of a new site for the hive is ‘[…] a momentous life-or-death decision process that is entirely made by worker bees in the field, operating outside the control of a central authority’. This passage could very well be interpreted as suggesting that companies should be run by workers. I’m sure that is not what the author had in mind. But it illustrates the ‘whateverism’ inherent in the analysis. Every single type of behaviour of bees can be interpreted in various ways, especially because the analogy is not used systematically and holistically.

Indeed, based on the description of the functioning of the beehive in this book, I can think of at least two additional lessons that could be drawn for human society:

26. Only one female in the society should be allowed to reproduce, but all others are in charge of raising her offspring (That actually sounds remarkably like Plato’s republic).

27. Workers should have the power to get rid of a CEO if they consider his/her performance to be unsatisfactory and they should be allowed to reject an incoming CEO if they don’t like him/her (Bees oftentimes kill new queens that they don’t like).

To be sure, these additional lessons are absurd. However, the behaviours they refer to are as much part of the explanation why beehives work well as any other lesson that can be found in the book. My point is that there is no obvious criteria that tells us why certain aspects of the analogy should be applied to human organisations while others should not.

Readers may find this is a pedantic rant about a book that doesn’t take itself as seriously as I do. I think, however, the question of analogies and metaphors in the social sciences is an important issue, because they have more pernicious effects then people commonly realise. The problem with metaphors and analogies is this: The originators are often quite nuanced and acknowledge the imperfect fit with reality. Most of their readers, however, will take them much too literally.  Often, the metaphor is all that remains of the argument. The context in which it was used and the nuance and complexity of the underlying argument is lost. Rather than a tool to make complex phenomena easier to understand by relating them to the readers’ every day experience – which is the purpose of metaphors and analogies –, they become gross over-simplifications of complex social phenomena and therefore and obstacles to a proper understanding of the phenomena at hand.

Two important examples spring to mind: The first one is Adam Smith’s metaphor of the ‘invisible hand’ to illustrate how markets work. The second one is the analogy of a government’s finances to a private household (see on the latter example). Both images have become so common and widely-used that they are literally taken for granted by most people, in spite of the fact that both capture – at best – only part of the phenomenon that they are supposed to describe. These images are powerful rhetorical devices, but have also contributed to widespread fundamental misunderstandings about the functioning of markets or public finances with important consequences for economic policies. Therefore, careless metaphors and analogies should not be taken lightly and the idea that human society functions like an insect society needs to be nipped in the bud!

Neo-liberalism Is Dead!....and It’s NOT Good News.

There has recently been a great deal of debate around the question whether the Global Financial Crisis of 2008 was caused by neo-liberal policies and – if yes – whether neo-liberalism would survive the crisis (two books who deal with this topic are by Colin Crouch  and Vivien Schmidt and Mark Thatcher) .

A book by Serge Audier entitled ‘Néoliberalisme(s). Une archéologie intellectuelle’ [Neoliberalism(s). An intellectual archeology] (unfortunately not translated into English yet), suggests a surprising answer to this debate: namely, neo-liberalism has been dead for a very long time….and I would add: that’s not a good thing!

Audier’s book sets out to challenge four critical perspectives on neo-liberalism, which are widely adopted, but rarely questioned by critical academics:

1.     The first critical perspective sees neo-liberalism as a bellicose and militant ultra-liberalism that the bourgeoisie used to fight the rise of socialism and the labour movement, which threatened their dominance. This very popular neo-Marxist perspective is notably associated with David Harvey and Naomi Klein. For these authors, the quintessence of neo-liberalism is not so much the ‘shrinking of the state’, but rather the fusion of ‘big government’ with ‘big business’ and the use of the state apparatus to promote large corporations’ interests.

2.     The second perspective is the Foucauldian perspective. Michel Foucault and his disciples start from the analysis of Gary Becker’s theory of Human Capital and investigate the ‘anthropology’ underlying neo-liberalism. Foucault’s main argument is that neo-liberalism is distinct from classical liberalism by substituting a view of the homo oeconomicus as the ‘entrepreneurial man’ for the classical view of homo oeconomicus as the ‘man of exchange’. Therefore, neo-liberalism is based on the foundational regulatory principle of competition, not economic exchange or consumption.
Neo-Foucauldians such as Wendy Brown and Thomas Lemke draw –according to Audier uncritically – on this ‘entrepreneurial paradigm’ to criticise modern capitalism for its tendency to make the ‘competition’ the governing principle for all areas of life.

3.     The neo-Bourdieusian perspective is different from the Foucauldian one, because it focuses – on the one hand – more on the economic consequences of neo-liberalism (i.e. inequalities, precariousness of employment relations etc.) and - on the other hand – on the role that economics as an academic discipline plays in the transformation of capitalism. Pierre Bourdieu’s work – and the work of his disciples such as Frédéric Lebaron – sees neo-liberal (or neo-classical) economics as a key instrument allowing certain ‘class interests’ to become dominant. On this account, economists become the bearers and apostles of a certain ideology, which has been devised to maintain in place certain power structures in the capitalist society. This leads Bourdieusian sociologists to purport a hyper-rationalistic view of human history, where every event is part of a ‘plan’ (or indeed a conspiracy) orchestrated by a small, powerful elite to reproduce itself and maintain its grip on power. Neoliberalism is just one element of that plan.

4.     The fourth perspective criticises an alleged coalition between the radical left-wing movements of Mai 1968 and economically liberals. On this account, it is this coalition of left-wing anti-authority, individualist libertarians and right-wing economic liberals that is responsible for the unleashing of an amoral and immoral brand of capitalism since the 1970s. This perspective is linked to a conservative – some might say reactionary – interpretation of neo-liberalism and has notably been adopted by Nicholas Sarkozy in his election campaign in 2007. But even left-wing intellectuals, such as Eric Hobsbawm voiced similar criticisms of the individualist, anti-authority movement of 1968. On this account, the common factor uniting left-wing students with right-wing ‘speculators’ is hence the rejection of any authority (including the state), the extreme individualism and hedonism of these movements.

Based on a meticulous analysis of public speeches, minutes of meetings, personal correspondence, and the main writings of leading neo-liberals, Audier convincingly shows that all four critical perspectives are of very limited use to understand what neo-liberalism is and what role it played in the transformation of modern capitalism. All four interpretations tend towards post hoc rationalisation of a complex historical process and some of them frankly border on intellectual dishonesty, in that they apply a very selective reading to the history of neo-liberal thought. The evidence presented in the book, strongly suggests that neo-liberalism cannot be seen as a coherent anti-Keynesian conspiracy supported by big business. Rather, from its inception, neo-liberalism was a loose collection of ideas and theories, which were often instrumentalised for economic and political purposes, but which never formed a homogeneous set of ideas that was undisputed among its main proponents, as the more conspiratorial interpretations would make us believe.

More interestingly, however, for me, two key points emerge from Audier’s account: Firstly, neo-liberalism was a great idea; Secondly, it was dead by the early 1960s.

Why was it a great idea? What Audier’s analysis shows, is that the intention of most participants in the meeting that first established the neo-liberal project – the Colloque Lippmann held in Paris in 1938 – was not only – in fact, not even primarily – a staunch reaction against anything socialist, collectivist, or even Keynesian. Rather, neo-liberalism was born out of an acknowledgement that classical laissez faire liberalism and Manchester capitalism of the 19th century had failed. The neo-liberals of the first hour explicitly blamed classical liberalism’s indifference towards the social costs of liberal capitalism for the rise of socialism, communism, and fascism. Both Lippman’s famous book ‘The Good Society’ – which was the inspiration for the meeting in Paris – and the interventions during that meeting were as much concerned with averting the communist threat, as with discussing ways in which the classical liberalism’s blindness for the social costs of free markets could be overcome without compromising the fundamental principals of liberalism. It is telling that one of the names for the new liberalism that was discussed at the meeting alongside ‘neo-liberalism’ was ‘social liberalism’. So, the goal of the neo-liberals was to ‘renovate’ liberalism, take into account the social component more, and making it thus fit for the 20th century. All in all, a great idea!

Unfortunately, that is not how things turned out in the end. The history of the next forty years of the neo-liberal project is one of fierce personal, ideological, and theoretical battles among different schools of liberalism. Increasingly, neo-liberalism turned away from the aim of reforming liberalism, to adopting a much more apologetic view of 19th century liberalism and Manchester capitalism. As the memory of the failures of 19th century liberalism waned, the self-critical view of the early 20th-century neo-liberals evolved into an increasingly confident defence of capitalism and free markets against collectivism and the state.

One key element in this transformation of neo-liberalism was the role that Friedrich Hayek played within the Mont Pelerin Society (MPS) – the principal international organisation promoting neo-liberalism from 1947 onward. Hayek had always been reluctant to call himself a neo-liberal and preferred the terms ‘paleo-liberal’ or even ‘old Whig’ instead. For him, liberalism did not need to be reinvented, but rather should be rid of any pernicious collectivist influence that had corrupted it since the 18th century or so.

A second key element that ultimately made possible the victor of this apologetic view of liberalism over the ‘renovation project’ was the rise of the Chicago School of Economics since the late 1940s around the figures of Aaron Director, Milton Friedman, Edward Levi and others (with the support of Hayek who Director brought to Chicago in 1950).

The distinctiveness of the Chicago School and the break with the ‘renovation project’ can best be illustrated regarding its stance on the question of monopolies, which emerged during the mid 1950s: Both classical and neo-liberals considered monopolies – public and private – as a major threat to a free society and free markets. They held that ultimately monopolies would eliminate competition. The state needed hence to intervene to protect markets from monopolistic tendencies.
The Chicago School turned this view on its head by considering instead that competition would ultimately erode any monopoly. The result of this new analysis was a very benign – I am tempted to write ‘naive’ – view of monopolies, as they were seen as merely temporary phenomena that would naturally be eliminated by market forces. Anti-trust policy on the other hand was now seen as just another unnecessary and pernicious state intervention. From this moment on, the main focus of the Chicago School shifted from protecting the capitalist economy from itself (i.e. from its monopolistic tendencies) towards fighting any form of state intervention.

Robert van Horn describes this crucial episode in more detail than Audier. For van Horn this radical departure from earlier views on monopolies, constitutes the ‘birth hour of neo-liberalism’. However, I would argue that it actually constitutes the beginning of the end of neo-liberalism. The changed attitude towards monopolies certainly was a marked departure from classical liberal analysis of monopolies. However, somewhat paradoxically, it did move the Chicago School closer to classical liberalism in that a key insight of neo-liberalism was thrown overboard, i.e. that a functioning free enterprise system required the state to play a positive role in the economy. For Chicago, the solution to the problem of monopolies was not to guarantee a positive role for the state, but to limit the state. In other words, once again laissez faire had become the solution not the problem. In this sense, the rise of the Chicago School sounded the death knell of neo-liberalism in its original form.

Audier’s book shows in much lively detail how the MPS was the battleground on which the war of neo-liberal ideas was fought. From the beginning, Hayek was opposed to members of the MPS who adhered to an ordoliberal variety of neo-liberalism. With the growing size and influence of the American contingent, Hayek increasingly gained the upper hand in these – at times vicious and personal – struggles over the control of the MPS and its definition of liberalism. The key moment came in January 1962 when the former president of the society Willhelm Röpke decided to leave the MPS. Twenty or so German and Swiss ordoliberals, including Alexandre Rüstow followed him.
Audier calls this schism in the MPS the ‘dawn of the old neo-liberalism’. I would go further and argue that there was not much ‘neo’ left in the type of liberalism that became dominant from then onward, in the sense that the key goal of neo-liberalism as defined in 1938 – namely reforming liberalism to remedy some of its worst shortcomings – had disappeared from the agenda. Rather than seeking a ‘third way’ between socialism and classical liberalism that would combine the best of both worlds, the movement increasingly drifted into extremist ‘all-or-nothing’ arguments like the one most famously exposed by Hayek in the Road to Serfdom. On this view, the tiniest concession on questions of social justice and redistribution was seen as an inevitable slippery slope that could only have one outcome: the creation of a socialist regime akin to Stalin’s Soviet Russia.

In comparison to such uncompromising views that are now considered the base line of economic liberalism, the neo-liberalism of the Colloque Lippman seems like a very benign theory. Indeed, maybe the death of neo-liberalism in the early 1960s was a root cause of the current economic turmoil and more neo-liberalism may be a step into the right direction.
By that, I do not mean to support the view that the global financial crisis was the result of too much regulation and the solution would hence be to deregulate financial markets even further (see here for such an argument). I fundamentally disagree with that argument. What I mean instead is that it might be time for those who have been blindly trusting in markets, to put the ‘neo’ back into liberalism and acknowledge that markets are not self-healing, but require a strong state to protect markets from themselves and society from markets. While this would not constitute a radical change of the economic orthodoxy that many commentators hoped for after the Crisis of 2008, compared to the now dominant views, it would be a step in the right direction and may indeed be the best we can hope for…[1]

[1] With my colleague Mathias Siems, we made a quite similar argument about German ordoliberalism in a piece published in governance

Greed Is Bad. Envy Is Good!

We live in an amoral world, where arguments based on moral norms and values are often greeted with suspicion or derided as ‘quixotic idealism’, ‘irrational nostalgia’ and the like. However, two of the seven ‘deadly sins’ in Christian tradition have recently been extensively debated in public discussions about economic matters: greed (avaritia) and envy (invidia).

Most people probably associate the phrase ‘greed is good!’ with the character of Gordon Gekko from the 1987 movie ‘Wall Street’. It is also related, however, to one of the fundamental assumptions of economic liberalism. Indeed, it summarises – albeit in very crude fashion – the key argument of Bernard Mandeville’s 1714 book ‘The Fable of the Bees’ where he argued that ‘private vices’ will result in ‘public benefits’. Mandeville opposed the view that a society based on virtuous citizens could prosper economically. Rather, it was the self-seeking nature of human beings that ultimately constituted the basis for economic prosperity. His main example was the one of vanity – a private vice – in which he saw the main cause why the British fashion industry could flourish; providing employment and promoting economic growth in Britain.

Based on this analysis, economically liberal thinkers have ever since argued that the inherently ‘crooked’ nature of human beings does not constitute a problem for society, because the invisible hand of the market – if left to its own devices – will transform individual selfishness and even greed into beneficial economic and societal outcomes. After all, as Adam Smith pointed out, we do not rely on the bakers’ benevolence to get our daily bread, but on his regard for his own, economic interest.
Therefore, selfishness, profit seeking, and greed are not a problem, but both an inevitable fact of human nature and beneficial traits, because it is these features that ultimately drive entrepreneurial activity and economic growth. On this account, then, greed is good indeed!

This view has increasingly come under fire at least since the onset of the Global Financial Crisis that started sometime in 2007/2008. Many commentators have put the responsibility for the crisis squarely on bankers’ greed and their obliviousness of the risks associated with the strategies they pursued with a view to increase their bonuses and the value of stock option plans. This criticism has also spurred the debate about executive pay beyond the banking industry. In response to a public outcry about the seemingly ‘obscene’ levels of CEO pay in a time of unemployment and fiscal austerity, various countries have adopted measures to curb executive pay.
In parallel, the overall wealth and income distribution in Western societies has become a topic of public debate once again. This is notably because some people feel – rightly or wrongly – that in many countries the welfare cuts that affect the poorest in society, are not paralleled by a contribution of the rich to improve the country’s fiscal situation, e.g. through increased taxation at the top end of the income ladder, wealth-, or inheritance tax.

Envy – immoral, petty, and dangerous

Defenders of CEO compensation levels and of income and wealth inequalities put this sort of criticisms down to one of the worst private vices, i.e. ‘envy’. [1] Indeed, the phrase ‘politics of envy’ has made a remarkable comeback in recent years in particular in the media. It is often used to delegitimise left-wing attempts to capitalise on the wide-spread malaise about the level of executive pay and about inequalities.[2] The Daily Mail, in the run up to the UK general election of 2015, for instance, interpreted the Labour party’s proposal to increase the top income tax rate as resorting to the ‘politics of envy’ and to class hatred in a desperate attempt to displace the Tory government.
Reducing the unease with inequality to a question of envy in order to delegitimise polices that focus on issues of redistribution, equality or ‘social justice’ is obviously not new. In a book from 2001, the Spanish intellectual Gonzalo F. de la Mora talked about ‘Egalitarian Envy’ and castigated the left’s striving for social justice. Back in 1966, Helmut Schoeck  – an American sociologist of German origin – in a book called 'Envy: A Theory of Social Behaviour' explored the role envy played in human society. He concluded that left-wing movements – including Marxism, socialism, and the new left movements of the 1960s – had their roots in people’s inability to control their envy.

From this perspective, envy is a petty, irrational, and dangerous sentiment that has – at best – the potential to prevent others from excelling and society from progressing; At worst, it stirs up the masses, promotes class hatred, and threatens the stability of society. Clearly, many journalists, politicians, and certainly the economic elite would agree with this analysis. Greed is good, but envy is bad!

Here I want to turn this argument on its head and show that it might be the other way round. Envy, rather than being a dangerous, subversive sentiment that can be instrumentalised by communists and other revolutionaries to overthrow the capitalist society, may be an important mechanism that makes human societies more – not less - stable. There are two potentially beneficial aspects of envy that should be considered alongside its negative aspects.

Envy – greed’s evil twin or the flipside of the same coin?

With the first one, even economically liberally-minded people may agree, as it is essentially the flipside of the greed story: Friedrich Nietzsche in his 1880 tale ‘The Wanderer and his Shadow’ (‘Der Wanderer und sein Schatten’) spoke of ‘Envy and her noble sister’.

“The envious man”, he writes, “is susceptible to every sign of individual superiority to the common herd, and wishes to depress every one once more to the level—or raise himself to the superior plane.” (p.195).

Interestingly, therefore, Nietzsche sees two possible reactions to the feeling of envy: one is to try and hold back those who excel. The other one is to strive to become more like them. That’s what Nietzsche refers to as the ‘good and bad Eris’ (the Greek goddess of discord) respectively.
While envy can lead to socially harmful behaviours that block the progress of individual people and society as a whole, the positive side of envy is– according to Nietzsche - essential to modern society. It is by comparing yourself to others and desiring what they have that people become motivated to strive for personal advancement. So, envy may not be greed’s sisters, but it may at least be its cousin, rather than its (communist) evil twin.

Envy – an early warning system?

There is a second way, however, in which envy may have a beneficial role to play in human societies, which is probably not compatible with an economically liberal view of the world.

The French philosopher and comparative literature professor René Girard developed a human anthropology based on two basic mechanisms: First, ‘mimetic desire’ and, second, ‘the scapegoat mechanism’ (here is a good, very brief summary of his works).
In a nutshell, Girard argues that one of the basic traits of human nature is to imitate others. Indeed, this is the reason why humans are very good at learning. Imitating others implies also, however, that we become more similar to them and end up wanting the exact same things. Therefore, imitation and mimetism may lead to conflicts and tensions among people, which could lead to a situation where life in society degenerates into a war of all against all. That is where the ‘scapegoat effect’ comes in. Given the tensions that exist in any human society due to imitation and mimetism, a mechanism is needed to periodically reduce these tensions (‘clear the air’, so to speak). According to Girard, this mechanism is a cycle of mimetic violence that takes place when the struggle of all against all turns towards a specific victim (the scapegoat) that takes the blame for an undesirable situation. Society becomes united once again in its struggle against the victim that has been singled out; violence is discharged against it; and the order in the society restored. According to Girard this is in biblical terms how ‘Satan expels Satan’ (see his book I See Satan Fall Like Lightning).
This fundamental anthropological mechanism explains not only the nearly universal appeal of the story of the martyrdom of Jesus of Nazareth, but also the recurrent phenomenon of pogroms against minorities.

It does not seem too much of a stretch to argue that envy plays an important role in this process. My argument is of course not that cycles of mimetic violence are a good thing or that pogroms are a positive phenomenon. Rather, given the inevitable nature of mimetic desire, tensions, and the potential for mimetic violence, envy may be an important evolutionary mechanism that allows it a society to detect tensions and react to inequalities before they degenerate into a cycle of mimetic violence.

Economically liberals usually see inequalities – at least up to a point – not only as something natural, but also as an important motivator and reward mechanism in capitalist societies. Yet, one would be hard pressed to fundamentally disagree with the nowadays often-quoted observation by Aristotle that extreme levels of inequality may lead to the breakdown of a democratic society. To be sure we cannot directly apply Aristotle’s arguments to the context of the 21st century. Still, the general idea that while some inequality may be inevitable or even ’good’, there is certainly a level above which the effects of inequality are bad for both economic outcomes and social peace. This seems to be an increasingly widely-acknowledged fact. The global financial crisis of 2008 as sparked off a new debate about inequalities in Western capitalist societies. Piketty’s book ‘Capital in the 21st century’ played no small part in this development, but the topic was also picked up on by various social movements (e.g. the ‘We are the 99%' movement). But even, Forbes has recently asked whether inequality levels in the US may lead to a revolt.

Large inequalities can indeed have very negative effects on societies, and inequality is at least partly the result of greed. Greed – if left unchecked – is likely to lead to income distributions that are sub-optimal for a society in various ways. Poverty at the other end of the income distribution – and the host of social and health problems that go with it – is the most obvious example for such a negative effect; negative effects on demand for consumer products may be another one. If extreme levels of inequality are indeed bad, then envy may be good: Rather than envy being the cause of societal unrest and ‘revolt’ as the Daily Mail, Schoeck and others would have it, envy may simply be a symptom that points towards an unsustainable situation. It may be human nature’s evolutionary response to the fact that too much inequality may lead to the breakdown of society. Envy is a signal that indicates that potentially worse sentiments are festering in a society. In this way, large-scale envy allows it to spot the onset of a cycle of mimetic violence and may allow it to nip it in the bud. In other words, envy may be the little red light that starts blinking, tells you that something is amiss in a society, and that it is maybe time to do something about it. Envy – rather than being a social explosive – may ultimately be the trigger that makes swing back the famous ‘Polanyian pendulum’ towards better regulated markets, more egalitarian income distributions, and hence a more peaceful and stable society.

[1] The Oxford dictionary defines envy as “A feeling of discontented or resentful longing aroused by someone else's possessions, qualities, or luck”

[2] Just how widespread the malaise is at least in the UK can be seen from this poll.