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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Politics makes us 'stupid' because the world is complex

Written by Sam Bowman | Wednesday 16 April 2014

Ezra Klein has launched his new site, Vox.com, with an essay on ‘how politics makes us stupid’.

The piece is provocative, and Klein uses some interesting examples. Most striking is the study that shows that people’s maths skills get worse when the problem they’re dealing with has a political element and goes against their political instincts. (Klein seems to have slightly misunderstood the study he’s written about, but his basic point stands.)

The basic claim is that people engage in ‘motivated reasoning’ when they think about politics – in other words, they think in order to justify what they already believe, not in order to discover the truth. This, he suggests, is because the politically-engaged people get more loyalty to their ‘tribe’ than they lose by being wrong.

This ‘identity-protective cognition’, as he calls it, makes sense – a pundit who decides that the other side is right about some particular political issue (Klein uses global warming as an example) has a lot to lose in terms of status within the group they’re part of, and little to gain by being right.

Klein says that this has become worse as political parties have become more ideologically uniform and ideological ecosystems, like think tanks, blogs, media, more expansive. Not only is there the external cost of being wrong, but admitting to yourself that you’ve been wrong for a long time is quite difficult too, especially if you’re politically engaged and some of your sense of self is tied up with your beliefs. You could call this ‘rational ignorance’.

Even though that might seem plausible, I think he is assuming too much and is wrong about some of the phenomena he identifies. I’d like to suggest an alternative understanding of political ignorance that, I think, explains more and assumes less.

I think Klein’s fundamental error is to assume that the truth – or, at least, his mode of truth-seeking – is obvious. Basically, he starts off from the position that most people could reasonably see the light if they wanted to. If that’s right, then it could follow that incentive to disbelieve the truth. And “identity-protective cognition” is an interesting way of understanding that.

But suppose truth is not obvious – that we’re ignorant not because we want to be but because, in Keynes’s words, “we simply do not know!”. In contrast to the rational ignorance Klein is discussing, this kind of ignorance comes about because life is complex. The existence of this kind of ignorance is what allows people to disagree without either being willfully ‘dumb’.

To demonstrate his case, Klein uses examples of ideological dogmatism that are based on rejection of the hard sciences. Here he is assuming that a reasonable default position must be to believe in the usefulness of science, so anyone who deviates from that by disbelieving some scientific point must have an incentive to do so. But if they are simply unaware of the fact that science is usually a good way of learning things, them ignoring scientific consensus is simply a mistake.

Klein may see it as being obvious that science is great. But he has probably spent a lot more time thinking about it than most people – for many, rightly or wrongly, the jury is still out on science, as a great man once said. Error, not group loyalty, may be a simpler explanation for people’s refusal to accept what seems to be a well-established truth.

If the truth is difficult to determine, people who have an interest in politics need some way of sorting the truth from the information they can access. Since there is a huge amount of conflicting data and theory in nearly every area of policy (whether garbage or not), people need some way of sorting the wheat from the chaff.

That’s where an ideology comes in. An ideology, I suggest, is a type of ‘web of belief’ that allows people to use what they already believe to be true to sort relevant and true new information from irrelevant and untrue information. As Jeffrey Friedman puts it, ideology “provides pegs on which to hang the political facts of which non-ideologues tend to be so shockingly ignorant”.

This fits with the fact that ideologues are usually a lot more informed than non-ideologues, an important fact that, so far as I can tell, Klein ignores.

Klein’s view is that political ideology ‘makes us stupid’, but ‘closed-minded’ is probably a more accurate term. The vast majority of the public is shockingly ignorant of basic political facts, with the informational 'elite' also happening to be the more closed-minded. The alternative to closed-mindedness may simply be to be extremely uninformed.

This matters because the things Klein blames for politics making us stupid – ‘gerrymandering, big money, and congressional dysfunction’ – are mostly irrelevant if the view I’ve outlined here is correct. In a complex world where the truth is hard to discover, even the purest politics would make us stupid.

This implies a much more fundamental problem with the democratic process than Klein suggests. The trade-off between ignorance and dogmatism may be unavoidable in politics, making a well-functioning deliberative democracy virtually impossible to achieve. This may imply that less cognitively-demanding ways of making decisions, like markets, may be even more valuable than we realise.

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The progressive approach to immigration looks a lot like the conservative one

Written by Sam Bowman | Thursday 10 April 2014

In a way, it’s refreshing that Yvette Cooper’s speech on immigration today has identified ‘free market liberals’ as the main advocates of freer immigration policies. There aren’t many of us, though, so we usually have to rely on immigration liberals on the left to win the argument over there for decent reforms to take place. Unfortunately, it looks as if they're losing too.

Cooper’s main claims are that immigration reduces native wages and job opportunities, puts public services under pressure, and low-skilled immigrants are exploited by British firms.

The first two of these claims are basically wrong and the third is a little dubious, as I’ll try to show, but even if they were true they would only justify restricting low-skilled immigration. There is basically no decent economic argument against skilled immigration, and I’m doubtful whether even the most wild-eyed worrier about the cultural ‘Islamicization’ of Britain has Pakistani doctors in mind. But, without any explanation, Cooper says that Labour will keep the cap on skilled immigration (despite her admission that “top businesses are worried they can’t get the high skills they need”). Oh well.

On low-skilled immigration, the main focus of the speech, Cooper suggests that liberals support immigration “as cheap labour to keep wages and inflation low”. Ignoring that this is a straw man worthy of the Wizard of Oz, it’s also untrue. According to the impact assessment published by the Home Office last month, low-skilled immigration has, at most, a minor impact on native wages, which in a flexible labour market like Britain’s is temporary anyway. And on the ludicrous idea that anyone supports immigration to keep inflation low, see Lars Christensen – under inflation targeting, a positive supply shock like immigration will lead to more inflation.

The public services point is old and well-worn, and it hardly needs repeating here that immigrants pay more in tax than they cost in services – a phenomenon which over the next few decades will mean the difference between a national debt of over 180% of GDP (in a zero net migration scenario) and just over 50% (in a >260k/year net migration scenario). Presumably nobody really thinks that more high-skilled immigration would have a negative fiscal effect, but I suppose it’s possible that liberalizing low-skilled immigration a lot could change this. In that case, charge immigrants a fee to reside in the UK or restrict access to public services. There is no problem with immigration to which strict immigration controls are the best solution.

The final point is the one that Cooper focuses on the most, maybe so that the dreary conservative orthodoxy of her policies is less obvious. Undoubtedly, some genuine exploitation does take place – Cooper gives the example of agencies advertising in Poland for jobs that turn out not to exist, virtually forcing the victims into grim jobs that they did not sign up for. It may be that the law needs to be strengthened to punish people who defraud immigrants in this way. But there will be negative consequences too – by raising the risk for legitimate employers of employing immigrants, this kind of law will make it harder for immigrants to get legitimate work. The danger is that, as in the case of the Modern Slavery Bill, laws designed to prevent truly terrible crimes will end up curbing whatever legitimate work the government decides it wants to stop as well.

To be fair, there are two positives in Cooper’s speech: taking students out of the net migration figures would be good for the education sector, and taking refugees out is humane. But the fact is that Labour has accepted the “logic” of the net migration cap, is making no reforms to high-skilled immigration, and is basing low-skilled immigration policy on anecdotes instead of evidence. Liberals beware: the ‘progressive’ approach to immigration is starting to look an awful lot like the conservative one. 

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Video: the state of the minimum wage debate

Written by Sam Bowman | Tuesday 01 April 2014

Last month I spoke on the minimum wage at LibertarianHome's meet-up, and they have uploaded the video of the talk, as well as a very good summary write-up of my comments. I had a great time at the talk and I'm looking forward to attending more of their meet-ups in future. 

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Why get rich?

Written by Sam Bowman | Friday 21 March 2014

You might have seen this chart, which shows different professions' household income during childhood vs their income now:

A lot of people have focused on the fact that artists' incomes 'fall' more than any other group. It reminded me of this quote from the American Founding Father John Adams:

I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.

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Seven things we'd like to see in Budget 2014 (but probably won't)

Written by Sam Bowman | Tuesday 18 March 2014

Here are seven things we'd like to see at this year's budget:

1. Personal allowance and employee National Insurance thresholds should be merged and set at the NMW level (approx. £13,000/year after the NMW is raised to £6.50/hour). The government should legislate to keep the tax & NI thresholds at at least at the NMW level. It is crucial that the National Insurance contributions threshold be raised as well as the income tax threshold.

2. The corporation tax cut planned for 2015 should be brought forward by a year (to 20% this year), with a commitment reduce it further by 2.5% per annum for the next three years to 12.5%. In the long-run it should be abolished altogether as it is a stealth tax on income (workers’ wages bear approximately 60% of the tax) and a distortionary tax on capital.

3. The Chancellor should go forward with plans to merge Income Tax and National Insurance. Employers’ National Insurance Contributions should be included on workers’ wage slips to highlight that this is a stealth tax on wages.

4. Help to Buy should be wound down ahead of schedule to reduce house prices in London and the South East. To create jobs and encourage construction the Chancellor should endorse radical planning reform that would allow more houses to be built.

5. Subsidies (“financial relief”) to energy intensive industries should be ended with the money saved paying for a broad reduction in green energy taxes to reduce consumers’ energy bills.

6. The ring-fence of NHS spending should be abolished. If savings can be made in the education, policing and welfare budgets, they can be made in the healthcare budget as well.

7. The Bank of England’s mandate should be revised, with the Bank instructed to target the level of nominal spending (nominal GDP) in the economy along a predetermined trend. This would reduce inflation in boom periods and prevent deep recessions by stabilising aggregate demand.

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The NHS is meant to be for patients, not staff

Written by Sam Bowman | Thursday 13 March 2014

Jeremy Hunt has annoyed people today by refusing to give NHS workers a blanket 1% pay rise on top of the incremental pay rise they were already supposed getting. That’s hardly a surprise: the NHS is a religion, and Hunt’s decision is the equivalent of giving the finger to the Pope. But he’s got a point.

According to the BBC’s Nick Triggle, “all NHS staff will be getting at least a 1% pay rise. Just over half receive incremental pay rises each year - determined by their length of service and performance. Those whose incremental increase is less will have their pay rise made up to 1%, but many will get more. Last year, the average incremental pay rise was 3.5%.”

In other words, today’s announcement means that NHS staff won’t be getting an additional 1% pay rise over their existing agreed pay increases. That’s a real terms drop, but lots of the coverage I’ve seen has suggested that this means that nurses won’t be getting any rise at all.

Remember that real private sector wages have fallen every year since 2010. Public sector workers already have greater job security than private sector workers, so it's difficult to see why they should be regarded as being automatically entitled to pay rises that most private sector workers aren’t getting.

Obviously, there’s no ex-ante reason NHS staff should get a pay rise. The point of the NHS is to provide care for patients, not to provide welfare to NHS staff. Since the NHS's budget is limited, a pay rise to staff means foregone spending elsewhere.

It’s worth noting that, at least according to the government, this pay rise would be equivalent to 6,000 nurses. Now, I don’t know how the NHS should spend its money – it may well be the case that NHS patients are better served by additional staff or more investment in medical equipment than they would be by this wage increase. Maybe a pay rise is the best way to improve patients’ outcomes, maybe not.

I’m left wondering why NHS pay should be a political issue at all. In the end, this story just underlines the need for devolution of pay bargaining to NHS trusts. National pay bargaining makes little sense given differing labour markets and patient needs across the country. In other words, a pay rise that makes sense for patients in Suffolk may not make sense for patients in Sunderland. We don’t want Whitehall to determine supplies of medical equipment or the allocation of labour hours between staff. Why should pay negotiations be any different?

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Regulation seems to cause bank crises, not prevent them

Written by Sam Bowman | Wednesday 12 March 2014

City AM's Pete Spence (formerly of this parish) reminded me of Mark Carney's claims in January that free banking systems are more unstable than regulated ones. I'm not so sure. Take a look at these two charts from George Selgin's Are Banking Crises Free-Market Phenomena?, which mark an x for every instance of a banking panic. The first chart is for unfree systems, the second for free systems:

In this case at least, it looks like the evidence is against Mark Carney.

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Disqus or Wordpress for comments? Let us know

Written by Sam Bowman | Monday 10 March 2014

We're going to be moving over to a new, Wordpress-based site shortly. One of the things we're trying to decide is whether to keep Disqus for comments, or to use a native Wordpress-based comments system.

As I see it, the issues are this:

  1. Wordpress is simpler, requiring no login or registration. Disqus does allow guest comments but it can be quite fiddly.
  2. Disqus allows users to upvote their favourite comments and downvote others.
  3. All our current comments are kept on Disqus, though I'm not sure if we'll be able to bring these over in any case.
  4. Some users find Disqus to be extremely annoying to use; whether this is a specific Disqus problem or a more general problem I don't know.

Since ASI writers very seldom comment on the site, preferring to allow readers to discus among themselves (maybe that should change?), I thought the best thing to do would be to open it up to you — do you like Disqus? Hate it? Which would make you happier — the status quo, or a Wordpress-powered comment system? Let us know in the comments. Of course, the fact that those comments are currently powered by Disqus may skew the results...

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An ageing libertarian on drugs

Written by Sam Bowman | Monday 24 February 2014

Over at ConservativeHome I've written a response to Kathy Gyngell's piece that claimed that "ageing libertarians" (!) are pushing drug legalization on unsuspecting youths:

No, “ageing libertarians” are not pushing legalization on abstemious youngsters – in the US, at least, a recent poll found that 67 per cent of under-30s supported legalisation, compared to 58 per cent of the population in general.

No, it is not legitimate to dismiss inconvenient research because it comes from “pro-drugs lobby groups”. Nobody should dismiss Kathy’s arguments simply because she is anti-drugs either. We should all play the ball, not the man.

And no, it’s not good enough to say that drug laws don’t matter because drug use is ‘marginal’ compared to alcohol and tobacco use. In the 12 months ending March 2013, there were around 87,000 convictions for drug offences. If our laws are unjust, then roughly 87,000 people are being wrongly convicted every year. Around 70 per cent of drug offenses relate to cannabis possession.

Read the whole thing.

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How Scotland could flourish by unilaterally keeping the pound

Written by Sam Bowman | Friday 14 February 2014

Between 1716 and 1844, Scotland had one of the world’s most stable and robust banking systems. It had no central bank, no lender of last resort, and no bank bailouts. When banks did fail, it was shareholders who were liable for paying back depositors, not taxpayers. Scottish GDP per capita was less than half of England’s in 1750; by the end of the era in 1845 it was nearly the same. Now that George Osborne has ruled out a currency union if Scotland votes for independence, the Scots have an opportunity to return to this system more seamlessly than any other place in the world could.

As I said to the press this week, there’s nothing really stopping Scotland from continuing to use the pound unilaterally. (Unless the remaining UK introduced strict foreign exchange controls, which would be absolutely crazy.)

What the Chancellor's announcement actually means is that the Bank of England (BoE) would no longer consider Scottish interests when it determines monetary policy and that illiquid Scottish banks would no longer be able to use the BoE as a Lender of Last Resort.

I’m not sure that the first point really matters at all. Scotland’s five million people can’t have much of an influence over the BoE’s policy for the UK’s 63 million people as it is. And, frankly, I’m not sure the BoE knows what it’s doing well enough for it to matter whether it cares about you or not.

The second point is the interesting bit. George Selgin has pointed to research by the Federal Reserve Bank of Atlanta about the Latin American countries that unilaterally use the dollar. Because these countries – Panama, Ecuador and El Salvador – lack a Lender of Last Resort, their banking systems have had to be far more prudent and cautious than most of their neighbours.

Panama, which has used the US Dollar for one hundred years, is the most useful example because it is a relatively rich and stable country. A recent IMF report said that:

“By not having a central bank, Panama lacks both a traditional lender of last resort and a mechanism to mitigate systemic liquidity shortages. The authorities emphasized that these features had contributed to the strength and resilience of the system, which relies on banks holding high levels of liquidity beyond the prudential requirement of 30 percent of short-term deposits.”

Panama also lacks any bank reserve requirement rules or deposit insurance. Despite or, more likely, because of these factors, the World Economic Forum’s Global Competitiveness Report ranks Panama seventh in the world for the soundness of its banks.

I suspect that there would also be another upside. Following Walter Bagehot, central banks are only supposed to lend to illiquid banks, not insolvent ones. Yet since the start of the Eurozone crisis the ECB has clearly made significant bond purchases to prop up both insolvent banks and insolvent governments. This may have been a lesser evil than letting them collapse altogether, but it’s hard to say that this kind of moral hazard is not present.

So, given that some countries do survive and even flourish without a central bank, how would Scotland do it?

The basic mechanics, I think, would be this: in a hangover from the old free banking period, Scottish banks currently issue their own banknotes. After independence, they could continue issuing their own notes that entitle the bearer to GBP on demand. BoE pounds, in other words, would be the 'base money' that Scottish banks use to back their own private currencies, in the same way gold was used during the last Scottish free banking era.

A banknote from a Scottish bank would be, in effect, a promissory note redeemable on demand in BoE-issued pound sterling. (Scottish notes are already promissory notes, but issuance is closely regulated by the BoE.) Of course, there should be nothing stopping banks from issuing notes redeemable in something else, like US Dollars, gold, Bitcoins, or Tesco Clubcard points. Scottish banks would have to arrange private clearing houses, as they did in the last free banking era, to provide loans to illiquid banks, or they could follow Panama in simply maintaining very high reserves.

No bank would have monopoly privileges: any ‘bank’ could issue notes and it would be up to the market to decide whether to accept them as money or not. As Selgin explains here, banks free to issue their own notes will set their reserve ratios according to people's demand for money, stabilising nominal spending.

With respect to other regulations, I quote Selgin again:

"It is, in any event, desirable that there be no Scottish public authority capable of bailing out insolvent banks and of thereby introducing a moral hazard. Deposit insurance should be resisted for the same reason. Foreign banks should be admitted, by way of branches rather than subsidiaries, and should enjoy the same rights as Scottish banks. (Of course the major "Scottish" banks are themselves no longer really Scottish anyway.) Finally, re-establishing some form of extended liability (though not necessarily unlimited liability) wouldn't be a bad idea."

We take no position on Scottish independence — it is up to Scottish voters to decide. And while a return to free banking in Scotland may seem fanciful, this week’s announcement makes it much more likely. Keeping the pound and treating it as the ‘specie’ on which banks can base their notes would make the transition virtually seamless for the average Scot, while giving them a banking system that is unrivalled anywhere in the world for being stable, open, and free.

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