PICS serves up egg for our collective faces

PICS, the Liberal Democrat central policy resource, has offered up a standard press release on the Policy Exchange report Cities Unlimited: Making Urban Regeneration Work, which has been exercising politicians and bloggers throughout the day.

The basic tennet of the argument is that Policy Exchange is "David Cameron's favourite Think Tank", set up in 2001 by Michael Gove, and that we can therefore use it to bash the Tories for abandoning the North and giving up on poor struggling towns.

It is a fundamental mistake, and one that has prompted me to (unusually) reply to PICS suggesting that they may want to re-think it.

There are two significant problems with this line of attack:

1. David Cameron has already come out and condemned the report in very strong language, saying that the report was"complete rubbish" and that its ideas were "insane". To attack him (by association) now would be ludicrous and would open us up to accusations of opportunism, disingenuity and possible outright lying.
2. The report is co-authored by Tim Leunig, a Liberal Democrat member and economics professor at the London School of Economics. So if parties are to be condemned by association we are as guilty as the Tories.

Irrespective of the merits of the report (and I've made my comments, and recieved abuse accordingly, elsewhere) it is a fundamentally bad idea to try to use it as a weapon to bash the Tories.

What is more, it is depressing that we would rather do so than discuss the merits of the report in its own terms. Political debate is cheapened when we look upon innovative ideas (even flawed ones) as weapons with which to bash our opponents rather than stimulating suggestions which can trigger informed debate.

This is not a Liberal Democrat problem; it's a disease that has infected the entire body politic. Nonetheless, this latest PICS offering ought to be hastily retracted.

How a beautiful illusion is born from a fatal conceit

At his inaugural lecture, Professor G.L.S. Shackle gave a brief outline of what was required to be a “complete economist”:

“To be a complete economist, a man need only be a mathematician, a philosopher,
a psychologist, an anthropologist, a historian, a geographer, and a student of
politics; a master of prose exposition; a man of the world with the experience
of practical business and finance, an understanding of the problems of
administration, and a good knowledge of four or five languages. All this in
addition, of course, to familiarity with the economics literature itself.”

Few, understandably, live up to this demanding standard. One of those who came closest to doing so was Friedrich Hayek, at least according to G. R. Steele, Lecturer in Economics at Lancaster University Management School. Steele was launching his new book, The Economics of Friedrich Hayek, at Policy Exchange.

In fact, as Steele freely admitted, the book was about far more than economics, as Hayek was far more than an economist: indeed, he is recognised and taught in politics, sociology, philosophy and psychology, but economics courses usually ignore him; an essay on him by Steele was rejected by one (unnamed) economics journal on the grounds that their readers would not be interested in the history of economics (if only the same excluded tracts on Keynes!).

Hayek took a dim view of both Micro- and Macro-economics: the former a mathematical extraction that ignores social and institutional contexts, assumes perfect knowledge and rational behaviour, and sees no value in entrepreneurship; the latter a rationale for intervention based on broad measures which politicians could then seek to influence ( a view which the politicians were surprisingly keen to embrace!). For him, economics was a subset of a broad theory of human action founded upon social theory and psychology, and needed to reflect the fallible, partial and dispersed nature of knowledge.

This was the basis for Hayek’s defence of freedom and the market economy. No policy maker, no bank of civil servants, no computer in the basement, can ever capture the extent and subtlety of the knowledge that resides within each individual actor, and so can never improve upon the judgements of individuals exercising “particular knowledge [in a specific] time and place”. Steele might have added Lionel Robbins’ observation that economics is the interaction of scarcity and desire, so that individuals must assess for themselves what a commodity (car, medicine, an hour of one’s time) is worth. Thus Hayek realised that central planning – the second guessing of millions of citizens operating independently – was both a “beautiful illusion” and a “fatal conceit” that would destroy productivity, efficiency, liberal institutions, the rule of law, and ultimately civilisation itself. It is a big claim, and was the subject of Hayek’s most famous book.

Why, then, was (and, even more surprisingly, is) socialism so popular, particularly among the educated middle-classes. Hayek’s explanation was acerbic: “One’s initial surprise at finding that intelligent people tend to be socialists diminishes when one realises that, of course, intelligent people will tend to overvalue intelligence …” It flatters us to believe that we can exercise a guiding hand over something as vast and chaotic as the economy – itself nothing more than the expression of our wishes and our capabilities. It lets us play at being Olympians, shaping the lives and fortunes of mortal men far below. In fact there is only one hand that can truly guide the economy, an invisible hand subject to no single will.

Socialists have no “understanding of economic processes”: the price system and the mechanisms of the market leave them cold. Socialists fail to allow the vast amount of dispersed and tacit information to express itself, and so the economies they guide underperform. This in turn encourages them to seek to break through the torpor with ever more authoritarian measures: in Britain it was price controls, which destroyed industry; in China it was a concentration on the production of steel to the exclusion of food, which destroyed lives.

In 1974 Hayek was awarded (half) the Nobel Prize for economics. In his acceptance speech, he noted that he would have advised against creating such a prize, which would “tend to accentuate the swings of scientific fashion”, though in his case “the selection committee has brilliantly refuted [this fear] by awarding the prize to one whose views are as unfashionable as mine are.”

He was more worried, however, by the effect it may have on the recipients themselves, and their impact upon public policy: “the Nobel Prize confers on an individual an authority which in economics no man ought to possess… I am not sure that it is desirable to strengthen the influence of a few individual economists by such a ceremonial and eye-catching recognition of achievements… [The committee should,] on conferring the prize, remind the recipient of the sage counsel of one of the great men in our subject, Alfred Marshall, who wrote: ‘Students of social science, must fear popular approval: Evil is with them when all men speak well of them’.” Such acclaim was never granted to Hayek himself.

Iraq, the media and the war on terror

Matthew d’Ancona, editor of the Spectator, gave a speech yesterday at Policy Exchange at which he launched a pamphlet entitled Confessions of a Hawkish Hack – the media and the war on terror. He was also interviewed by the New Statesman’s Martin Bright. In what was a generally thoughtful and at times pessimistic discussion, perhaps the most interesting feature was that both the right-wing Mr. d’Ancona and the left-wing Mr. Bright admitted that that they might yet be proved wrong regarding their positions (respectively pro- and anti-) on the “War on Terror” and the Iraq War.

Those of you who now dismiss everything that supporters of the war have to say as though their every utterance is forever tainted should look away now, for this discussion is not for you. It is about you, however, for one of Mr. d’Ancona’s main themes was that one tragedy of the Iraq War is that it has undermined –perhaps destroyed – our society’s ability to engage in much-needed debate about the war between Islamic fundamentalism and Western values.

Mr. d’Ancona’s argued that Tony Blair’s decision to publish the Iraq Dossier both confused intelligence (the art of assessment, interpretation and educated guesswork) with spin (the art of presenting maybes as definites) and made the justification of the war rest on the existence of WMD, rather than Saddam Hussein’s violation of 12 years of Security Council resolutions. “Iraq” had now become shorthand for everything that is wrong with the New Labour project, and for its ultimate failure.

The result was that the much more important debate about how we confront Islamists bent on establishing a global Caliphate (an attitude that some American’s have taken to describing, quite accurately, as “Islamo-fascism”) is now framed in simplistic terms that paint everything as black and white and uses one single battle as a yardstick for the wider debate.

The question one is asked as a matter of course is “Where did you stand on Iraq?”, and how one answers is taken as indicative of where one stands on everything else, and whether one’s judgement is worthy of consideration. Mr. d’Ancona did not use the simile, but it would be like judging one’s position on the liberation of Europe by asking whether one supported the Battle of Arnhem.

Mr. d’Ancona’s fear is that we may be losing a war that many of us refuse to accept exists. While he recognises that “War on Terror” is a vague and unsatisfactory term, he questions what alternative President Bush could have used after 9/11: to name Islam even in context would have stoked the crusade fallacy Bin Laden would have us believe; to refer to it as merely a crime would not have satisfied the horror felt around the world. The enemy certainly views it as a war, and its plans span generations.

“This is the cold sweat war” in which the terrorist first spreads fear and then discord; we fight amongst ourselves, both between and within democracies. Meanwhile governments face the pressure to appear constantly new, constantly interesting, so that priorities become lost in “the quest for the daily mandate”. Governments have become subject to a form of ADHD, constantly flitting from one policy area to the next, frantically legislating and politicking, and journalists are party to it; they demand hyperactivity because it feeds their thirst for rolling-news.

The West is suffering from its own consumer culture (there d’Ancona would agree with both the domestic left and the Islamic far-right). If we don’t like a product we take it back and throw it away. This is liberating where MP3 players and mobile phones are concerned. With political parties it is harmful, and in foreign policy it is disastrous. Politics in general and foreign affairs in particular require strategic thinking; a sense of what we want at the finish and how we will get there. The key to strategy is that we stick to it even when faced with tactical setbacks; Tobruk didn’t make us abandon the North Africa Campaign.

Too many in the West now think that once the “Two madmen” that led us into Iraq have left office we will be able to put the sordid chapter of their folie à deux behind us and return to the norm of peace. This is wrong. “Modern conflicts are not trials of strength but of will”. This war, with a strain of Islam that teaches that the West is decadent and must be overthrown and which trains our own citizens to be its foot-soldiers, will grind on long after Blair and Bush are gone. The question is, do we have the patience we need to save our civilisation?

Goodbye Europa – reform or die

Last night I attended a lecture hosted by Policy Exchange at which Alberto Alesina launched his new book, co-authored with Francesco Giavazzi. The English title is The Future of Europe: Reform or Decline but it’s more exciting Italian title is Goodbye Europa?

In light of yesterday’s speech by Sir Menzies Campbell about Europe, and my own comments about the need for humbler, more liberal European Union, Professor Alesina’s comments were particularly germane.

He began by noting that between 1945 and 1985 Europe’s economy outperformed that of the USA as it emulated American technology and methods, eventually averaging 75% of American GDP. However, most of this was due to the high relative productivity of European workers – our Continental cousins may not work as long as Americans, but they are more productive when the do – and since 1985 Europe has begun to lose its edge. In future, as total productivity is further eroded by high unemployment (including the effect of demographics), short working weeks (that pesky Working Time Directive) and long holidays, Europe will begin to slip back. He observed that in 1950 Italy’s GDP per capita was 30% that in the USA, whereas in 1990 it had reached 80%; it is now back at 1970s levels and he predicts by 2030 Italy’s relative GDP will be back down to its level in the 1950s.

Professor Alesina was clear about what was needed – and what was not! European economies must liberalise trade in goods and services as a means of liberalising their labour markets. They should allow immigration, especially from areas with “high human capital” (i.e. educated Eastern Europeans), promote (but not subsidise) research, reform welfare and enhance competition. They should steer clear of pumping extra cash into universities, or obsessing about infrastructure, the Growth and Stability Pact, or further integration – especially in social policy.

This will not be easy, for some of our European neighbours are not natural liberals. He cited a University of Maryland study that noted that whereas 73% of Americans and 67% of the British said that they believed the market was the best way to structure an economy, in Italy this was only 59% and in France only 36%! (Interestingly, the highest level of support for the market, at 75%, was to be found in nominally-communist China).

Professor Alesina and the other speaker, Ludger Schuknecht of the ECB, both argued that gradual, piecemeal reform was ineffective. Mr. Schuknecht provided evidence that “timid reformers” had seen little or no change in their GDP growth rates, whereas “bold reformers” had seen GDP growth rise by more than 50%.

The message was clear. European economies need bold, liberalising reform. Whether they get it, however, is another matter.