The Samovar


Authority and Competence

The view that the people in charge know what they’re doing is implicitly prevalent. Although many people would say that the people in charge were incompetent, in fact there seems to be a widespread implicit assumption that they either do know what they’re doing or that someone else would know what they’re doing better. Underlying this is the assumption that it’s possible to know what you’re doing. In politics and economics, none of these are true – there is very little understanding of what is happening, what the effects of various actions will be, or what we should do. Understanding this is important, because at the moment there is a lack of critical thinking in politics. Although there is much criticism, of course, it usually fails to get at the root causes of problems and so the mass of critical feeling fails to achieve anything, and is wasted in irrelevancies.

As an example of this, the debate that was had a few years ago about extending the period that the police can hold people without charging them beyond 28 days in terrorism cases. Assumptions of competence pervaded this debate in many ways. For some, it was enough to note that the politicians thought that an extension was necessary to protect us. For others, that wasn’t enough, but the fact that the police thought that an extension was necessary for them to be able to protect us was enough. This was also the basis for a substantial amount of the debate in parliament. It was assumed that the fact that the police said they needed the extra time counted for something. Not everyone agreed that just because the police thought they needed it meant that they should get it, but it was universally agreed that their opinion counted purely on the basis that it was their opinion. Their perceived authority and presumed competence gave their opinion weight in and of itself.

However, very few people questioned why the police had come to their opinion, and what the evidence for it was. It turns out that one of the major claims was that in previous terrorist cases they had used more and more time, up to 26 days I think it was. The argument was that since they had used this much, it was probably the case that if the limit had been higher they could have profitably used more, and that future cases were likely to need even more. They were already at the limit, and this was holding them back.

This argument is terribly weak in many, many ways, but came under hardly any criticism at all (indeed, very few people even knew that this was the argument). But there’s no reason why it had to be like this – the weaknesses of this argument, and the counter-arguments against it, are not so complicated that most people wouldn’t be able to understand them. Rather, it was that the whole process of questioning the argument was made unnecessary by the fact that most people were willing to go along with the opinions of those in positions of authority based on their presumed competence. A more critically engaged society would be better able to protect itself against manipulation by those in power. We have all the necessary democratic mechanisms, but they count for nothing if we hand over our critical thinking to those in positions of authority (and that includes journalists).

In order to achieve a more critically engaged society, we need to understand competence better – where does it come from? What sort of things are we able to be competent about? How can we recognise it? We also need to dispel myths and misunderstandings about competence, which are widespread.

If we describe competence as being about having knowledge, then we can split it down into an explicit and tacit component. Explicit knowledge is something you can write down and tell others about, things like 2+2=4, the capital of France is Paris, etc. Tacit knowledge is everything that can’t be put into words, but that is still valuable. I can’t put into words what it is I’m doing when I solve a mathematical problem, but there’s definitely something I know that most other people don’t that makes me able to do them and them not. Tacit knowledge is built up from experience, thousands of particular cases, attempted and failed solutions of problems, etc.

The existence of tacit knowledge is very significant and certainly shouldn’t be underestimated. Indeed, this is a good argument that sometimes we do need to rely on the authoritative judgments of others (experts). But we shouldn’t make the mistake of just presuming that people do indeed have tacit knowledge about their area of work. First of all, you don’t get tacit knowledge about something just by doing it often, and secondly it is often easy to think that tacit knowledge is more general than it really is.

In the example of the debate above, the police may well have sincerely believed that they had the requisite experience and knowledge to make their judgment that they needed the extension to protect us from terrorism. But they didn’t. For a start, they haven’t dealt with nearly enough cases to get tacit knowledge that is worth much. Since the end of the IRA bombing campaigns, which were rather different to modern terrorism, there has only been one successful terrorist incident and a handful of failures. The police have had no great successes or failures in these matters – they have caught some people, but these have largely been fantasists who had no real ability to do the things they wanted to do. The fact that terrorism has been as little a problem as it has been is a consequence of the fact that there have been very few competent attempts at it, few individuals involved, and little will to carry it through. All the police know, then, is what they’ve done in the past, and what happened in consequence. Even on that basis alone, there’s very little to go on as chance and circumstance probably have as much to do with that as anything else. But further than that, there’s no basis for them to be able to know what would happen if they had got the extension they were looking for. They have no model, explicit or tacit, of the world that would allow them to make such a prediction, and no experience to go on. Almost certainly, what they actually had was the conviction that it couldn’t make it worse, and that it would make their lives easier.

It is vital, if we take someone’s judgment as an expert or authority, that we analyse what basis they might have for making the claims that they do, whether or not they could be in possession of explicit or tacit knowledge that would justify it, and where that knowledge could have come from. This is far from being a complete recipe for dealing with issues of authority, expertise and tacit knowledge, but even a better recognition of the importance of these issues would be a big step forwards.

One thing that needs to be addressed if we’re to achieve a more realistic understanding of these sorts of issues is cultural representations of expertise and competence – the myths that are portrayed in books, films, TV shows, newspapers and everyday discourse that support them. Films and TV shows typically portray hyper-competent individuals bursting with impeccable tacit knowledge. The reason for this on the one hand is obvious – a story about heroic, talented individuals is more interesting. Sometimes it’s obvious that people in these things act beyond human abilities, such as the hacker who can break into any computer system in the world in only 5 minutes. But other times the portrayal is more subtle and insidious, such as in The West Wing, a notionally realistic show about the US presidential staff in the White House. The technical competence of the heroes is constantly portrayed as a virtue in and of itself, and the show suggests implicitly that they have the right to rule by virtue alone of their greater ability to do so. Very few TV shows portray anything like reality in this regard, with the most notable exception being The Wire, one of the best things ever to be shown on TV, proving that it certainly is possible to do it (and be reasonably popular).

On a final note, these considerations apply very much to areas of life outside politics and economics. For example, some people might be shocked about the standards of evidence that count in science. But that’s another story.

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Good article on capitalism and the crisis
April 3, 2009, 12:21 pm
Filed under: Capitalism, Economics, Politics | Tags:

Shame about the title though. I think the words “Yes we can” should probably be banned. Anyway, here’s Robin Hahnel on “Change how the world works? Yes we can“:

Until capitalism is replaced, we want the tail to stop wagging the dog. Finance should serve the real economy instead of the other way around. If the financial sector improves the efficiency of the real economy, it is helpful. But if it misdirects investment resources to where they are less productive, it reduces production in the real economy by obstructing the flow of credit altogether. Then it is failing to accomplish its only social purpose. Jobs producing useful goods and services, and investments which help us to produce what we need with less human toil and less strain on the environment, are what count. Increases in the profit rates and stock prices of financial corporations count for nothing when they fail to correspond to real increases in productivity, as has too often been the case.

We have offered several positive alternatives to capital liberalization and to the governing structures and policies of the International Monetary Fund (IMF) and the World Bank, such as capital controls and a Tobin tax to protect smaller economies from volatile speculative flows. We have made suggestions on how national governments can restore competent regulation of their traditional financial sectors, and stressed the urgency of extending regulation to cover new financial institutions which were allowed to grow outside existing regulatory structures.

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Capitalism

Since the earliest entries on this blog, I’ve had in mind to write something about why I’m an anti-capitalist, and in what sense. I’ve written before several times about aspects of my opposition to capitalism (here, here, and here amongst other places, and also about parecon, an alternative to capitalism), but never attempted to do it comprehensively. Incidentally, that word “comprehensively” should be a sort of warning – this entry is long.

Defining capitalism is tricky because it is a very general concept, and means very different things in different places and at different times. So this entry will be necessarily somewhat nebulous, as it attempts to address the concept of capitalism without defining a specific conception of it. So it won’t be a strict argument against capitalism, but rather some ideas which might be useful in thinking about it, and also a guide to criticising me (being as it is, a summary of my own reasons motivating my opposition to capitalism).

In the broadest possible terms, I have two fundamental problems with capitalism: it creates inequality, and it forces us to pursue ends that are other than the ends we would choose of our own free wills. The relevant underlying principles are fairness and freedom. Although I state these two problems separately, they are really quite intertwined.

Fairness

Before I go on it might be worth saying  a few general things about fairness and freedom since they are key to my criticisms of capitalism. If you’re happy with these principles, you might want to skip this section and the next as I ended up going on and on for longer than I intended.

It might be objected that fairness is not important, that in the face of the enormous positive benefits that capitalism has brought the world, the fact that some groups consistently do better out of it than others is of marginal significance. I would agree that fairness as a principle doesn’t have the same level of support as freedom, for example. And I can understand why. Although freedom can be (in my view somewhat crudely) defined simply as the lack of explicit interference in ones affairs, fairness involves a comparison of the lot of one individual with the lot of all the others. On the basis of an individualistic view of the world, how better or worse of others are shouldn’t really effect anything. Supposing there are aliens on another world that are all living incomparably wealthy lives in comparison to ours, we shouldn’t feel hard done by. Similarly, it seems we shouldn’t feel badly done by if our neighbour is doing better than us through no merit of his or her own, the only difference being that we see the neighbour every day but we never see the incomparably wealthy alien.

So I can understand doubts about fairness as a principle, it doesn’t have the same uncomplicated status as the simple notion of freedom as lack of interference, but in my view it is still significant. I might go into why in more depth in another entry, but for the moment I’ll just make a couple of observations. First of all, things do change depending on what we know about. If the aliens landed on Earth and started visibly enjoying their wealth, even if they weren’t harming us by so doing, I think we would be within our rights to want part of that. Of course we couldn’t demand it in any incontestable way, after all we did nothing to deserve it – they developed the technology, found the resources, etc. But then, probably most of those aliens did nothing to deserve it either, most likely they just made small improvements on what their ancestors had done (and not even that in many cases). The application of this line of thought to the purely human situation should be obvious.

This leads me to my second observation, that criticisms that amount to criticisms of fairness as a principle come down to saying that there is no incontestable reason to choose the principle of fairness, it is not a “natural” and unavoidable principle and indeed in a “state of nature” there is very little of it. I would agree, but you could say the same about any principle, they are all matters of choice (see my earlier entry on arationality). It comes down to deciding what sort of world we want to live in, not what sort of world we ought to live in. Ultimately then, I choose to value fairness, and I would hope that others would choose likewise.

Freedom

Next I want to say something about freedom. It is often characterised “negatively”, particularly by right wing thinkers, as freedom from explicit constraints. And there are good reasons to be dubious about the “positive” version of liberty, because it seems to imply duties on someone to provide these liberties, in an unspecified way that can be taken to suggest the necessity of a strong central authority whose duty this would be. The philosophical debate about this is ongoing and complex (see the Stanford Encyclopedia of Philosophy entry on it). I tend more towards the “positive” version, but not straightforwardly.

We live in modern states whose functioning in practice cannot be ignored. Thousands of years ago, when someone who didn’t like the way his society was organised could leave, find some unused land, and set up his own, a purely negative conception of liberty would have made more sense than it does now. Nowadays, we’re not faced with the choice of whether or not to live in the society we find ourselves born into, we must live within the institutions that actually exist, and these inevitably circumscribe our liberty. This is a particular issue when these states have enormously extensive conceptions of property that include property in land as well as property in objects, and even go so far as to extend into property in ideas. Property is enforced by the state, and assuming that this is being done, the state already has power over an enormous part of our liberty. It is worth noting that some right wing thinkers would like the function of the state to be only one of protecting property rights. Despite their being apparently motivated by liberty, they fail to give due consideration to the extent to which liberty is circumscribed by the institution of property.

So although we can talk about simple negative liberties, any choice of institutional arrangement of society also defines, by the way in which it circumscribes our liberty, a positive conception of liberty as well. We can choose not to talk about that bit, but the choice of institutions and the functioning in practice of those institutions makes a choice whether we recognise it or not. Given that, I prefer to be explicit about the positive components of liberty as well as the negative ones. In particular, I want to draw attention to how a capitalist state, through its support of property, provides more positive liberties to some groups rather than others. In a nutshell: in building good roads, a state provides freedom to travel faster and more safely, but only to those who can afford a car and fuel to run it. In providing a police force that enforces property, it stops people from having the fruits of their labour taken away, but this service is enormously more valuable to those who have wealth to be stolen than those living from day to day on what they can earn.

Inequality

My first objection to capitalism was that it creates inequality. The questions are: why? and what of it? I’ll start with the second question first. A society of unequal wealth is first of all unfair. We all rely on the correct functioning of the state for the vast proportion of what we have. I don’t just mean that we’re paid by the state, although many are, but that if the state didn’t exist the circumstances in which we work wouldn’t be able to exist either. We need the rule of law, enforcement of contracts, property, etc. (I don’t say we need all of these in an absolute sense, but that we have them and if we couldn’t rely on them in this particular society we wouldn’t be able to profit from our work in the way we do.) If someone like me, tinkering around with equations in a comfortable situation, can earn hundreds of times what someone doing really demanding and unpleasant work can earn, then something is wrong (for what it’s worth, I don’t earn hundreds of times what anyone else earns, but as someone with a mathematical background I probably could if I chose to, or at least I could have if I had chosen to at the appropriate point in my life).

One criticism of this viewpoint is that capitalism does not make value judgements about the importance of the work that people do, the prices for different sorts of labour are set by the market. Strictly speaking that’s true, and it is indeed a good thing that there isn’t some governing body that decides the value of different types of work, but if the mechanism (the market) produces outcomes that are obviously crazy and in no sense fair then it can be criticised. We don’t need absolute inequality, we don’t have to have a principle that says that all sorts of labour are equally valuable, but we should use our common sense and point out that it is in no sense fair that people doing work that they enjoy in comfortable circumstances should be enjoying wealth that is hundreds of times that of people who are doing unpleasant work in difficult circumstances. Again, this comes down to a matter of choice, but it is emphatically not the case that capitalism represents a lack of choice or a natural choice. The state is making all of this wealth possible, and so if it makes more wealth possible for some and less for others, that too is a choice. We can’t look at inequality and shrug our shoulders and say “that’s the way it goes” – that’s not the way it goes that’s the way we make it go, and we could choose to do otherwise.

There are more reasons to be dubious about inequality than just the unfairness of it. For example, inequalities of wealth tend to produce political inequalities too. In a democratic capitalist society, political parties need funds to operate and they have to get these from somewhere. Wealthy individuals have more to give and so have more power than the poor. This is a problem that could be solved if there were political will to do so, which is not entirely impossible although the current system mitigates against it happening. There is a second mechanism by which economic inequality creates political inequality. When an individual or group of individuals can affect the entire economy by their own private economic decisions, everyone, including the government, must act in such a way as to stop them from making decisions which would hurt the economy generally speaking. In a society in which there were not huge concentrations of wealth, this wouldn’t be so significant (but then, the dynamic of capitalism is to increase inequality so to some extent this seems inevitable). This problem is aggravated by globalisation and hyper-mobility of capital, a point I’ll return to later. The result can be clearly seen today, all successful political parties are largely funded by the wealthy and work largely in the interests of the wealthy, and they cannot do otherwise. The only difference is the extent to which they are in favour of policies which mitigate the worst excesses of capitalism, and this is something which they have increasingly little control over (which again, I’ll return to later).

Now on the first question, which is why does capitalism cause inequality and is this inevitable? My answer is that the basic dynamics of capitalism tend to increase inequality but that these can be mitigated to some extent (by for example, social welfare programmes). First of all, the existence of wealth tends to create inequality in it. If there is any disparity at all, then those who have more are in an advantageous position, all other things being equal, to those who have left. The most obvious application of this is borrowing and lending. The wealthy lend money to the poor (indirectly through the institution of banks), and the poor then have to pay back the money loaned at interest. When an economy is growing, everyone can profit by this in absolute terms, but the wealthy profit by it hugely disproportionately to the poor, so inequality increases (or at least, never decreases). But there are other mechanisms too. For example, the wealthy can afford private education which gives them a competitive advantage even when employers make purely meritocratic decisions. Also, those with (possibly inherited) wealth have more freedom to choose between jobs because they can survive for a period without a job, whereas those who have nothing must take a job immediately, forcing them to take worse jobs where their prospects will not improve. (This is the aspect that can be mitigated by a social welfare programme.)

Those are some specific mechanisms by which capitalism causes inequality, but there is an overriding meta-reason too. Basically, in a competitive system some will get more than others, and all things being equal having more to start with must be an advantage. Assuming the advantage grows with the amount of extra wealth, over time the effects of these advantages must produce even larger disparities, and so on. This could probably be mathematically formalised, I expect someone has done it.

Profit

My second objection to capitalism is that it makes us pursue ends other than the ones we would choose to pursue. To some extent, this is inevitable. If I want to pursue a career in interpretative dance like Marty in The Big Lebowski, then I need to either find enough people who feel this is worth it, or pursue some other career which isn’t the one I would choose. Proponents of capitalism would say that this all there is to it, that although you may not like the collective choices we as a society make through our individual purchasing decisions, they more accurately reflect people’s real wishes than the prejudices of socialists and academics. Although I like the unsentimentality of the argument, and there is probably some truth in the attack on prejudiced ideas about what people really want, I think it rests on the unfounded and inaccurate notions that people can express their wishes through purchasing decisions, and that the mechanisms of capitalism aggregate these individual decisions into collective ones in a satisfactory way.

We clearly cannot express all our wishes through our purchasing decisions. For a start, there are many things that cannot be bought such as clean air, beautiful countryside or parks to walk in, etc. Economists recognise this problem of “externalities” (factors which are external to the market mechanism), but the capitalist way of dealing with the problem is to bring everything into the market and create new forms of (private) property. This is summed up in the classic economists’ treatment of the problem of the tragedy of the commons. But it exacerbates the problems of inequality mentioned above (imagine if clean air was something to be purchased, as in Ben Elton’s play “Gasping”).

More than our individual desires though, we cannot express our desires about the sort of world we want to live in through our economic decisions. We can express them through our political choices (who to vote for), but in politics, economics trumps everything else. The reason for this is that in a capitalist society, all aspects of the economy, and by extension all aspects of life because everything relies on a reasonably functional economy, are redirected towards the production of short-term profit. Capitalist society makes it much more difficult to implement a policy or take an action that favours a long term goal or the improvement of our lives through an “externality” in preference to short term profit.

Suppose a government wanted to increase taxation to spend on doing many things that people desired, such as better parks, health care, education, and so forth. The most logical way to do this would be to increase taxation on the largest concentrations of wealth, the companies and the rich. A government that chose to do this though, would risk a capital flight – the sudden movement of capital out of one country (where there is a perceived economic risk) to another which offers safer or better investment prospects. As the case of the Labour government from 1974-1979 shows, capital flight can be truly devastating to the whole economy (there’s an interesting analysis of this on the Anarchist FAQ). In other words, under capitalism we cannot choose to live in a society that doesn’t give priority to the interests of the largest concentrations of wealth without undermining our whole economy.

This sort of phenomenon is endemic to capitalism at every level – the interests of wealth, and in particular short term profit, are always absolutely prioritised over everything else. In a global capitalist system, different countries compete against each other to provide the most congenial environment for investors. This means that low taxation is forced, and consequently low state expenditure. This in turn means that public goods will be undervalued, and because social welfare programmes are so expensive they would also have to be limited in scope, and therefore inequality gets worse. As capitalism becomes more globalised, and wealth can be transferred even more quickly at lower cost, this effect is getting stronger and stronger, so that previously successful mixed economies are now struggling too, and are being forced to respond to the needs of capital and reduce taxation and spending.

The same mechanism of competition between countries, or even between different cities or regions means that regulation of companies tends to reduce. If one country offers its workers legal rights to compensation if they are injured at work, and another country doesn’t, all things being equal in a global economy the company will set up business in the country with less regulation. This works at every level, and the effect is that regulation of economic activity for reasons that serve human interests must inevitably decrease over time. This is bad for individuals, but it is also potentially unstable because regulation of economic activity can be good for the economy as a whole. For example, monopolies and oligopolies stop free markets from working correctly, but regulation is very weak. This may well be because big businesses who might be in danger of anti-monopolistic actions would move their capital out of a country that proposed stronger anti-monopoly laws.

At a smaller level, the same phenomenon can be seen in individual companies. In order to be successful, they must pursue short term profit over anything else (even their own long term profit). If they don’t, then another company will, and investors will move their money to the other one, destroying the one with a longer term plan before it could come to fruition. Recently this has been demonstrated with the subprime mortgage crisis. Here we had a situation in which all the people involved knew that it couldn’t work in the long term, but that because it was so profitable in the short term they had to keep doing it to keep up with their competitors.

There are certainly situations in which the pursuit of (short term) profit leads to beneficial effects. For example, the refinement of already existing products and technologies which capitalism excels at. However, because of the emphasis on short-term profit to the exclusion of all other things, the “invisible hand” of the market does not work towards the ends that we would choose, andis even self-destructive (perhaps a Marxist analysis could kick off here… another time).

To a certain extent, the same logic even applies to individuals although we are at slightly more liberty to choose our own paths (for example, we can choose to “buy” more leisure time by working at less high profile jobs). Nonetheless, in a world where the pursuit of profit, and more particularly short term profit, is fundamental in all organised economic activity, that must affect the way we see the world. More straightforwardly, if the whole economy is geared towards short term profit, then we are not free to pursue activities that are not also geared towards this. The problem therefore goes beyond that addressed by the hypothetical critic earlier in this section, it is more than just that we must do work that is valued by someone, we must do work that produces short term profit.

You’re almost at the end

I wanted to explain why I think capitalism is a bad idea, and hopefully the reasons above do that. I’ve mostly focused on the present, but perhaps a word or two on the past and on the future. After all this criticism of capitalism, it would seem reasonable to respond that capitalism has done a great deal of good too. As Adam Smith says in the first chapter of Wealth of Nations, capitalism has allowed everyone to live better than kings of the past did (I’m paraphrasing here). I think that’s true. One might question whether or not that could have been achieved more expeditiously, but it’s in the past and the question is whether or not we can do better in the future. The Marxist (and some anarchists) would say that how you should organise society depends very much on the level of wealth. A rich society can in principle choose to organise itself in a much more egalitarian way than a poor one can. As our basic needs are provided for to a greater extent, we can stop worrying about living from moment to moment, and focus our attention on reorganising society to be more like how we wish it would be.

Experiments with Communism in the past largely failed for political reasons (democracy is essential), but also because countries that tried it hadn’t reached the point where basic needs were met, and because central planning was an inefficient mechanism (the planners didn’t understand the effects of their actions well enough, nor what was needed). I believe that the time may have come, or at least will quite soon come, when we will have the necessary means (basic needs satisfied, better understanding of economics, decentralised planning mechanisms such as those of parecon or otherwise) to do better than capitalism.



Il y avait un manifestation

There are lots of interesting political things going on at the moment that I don’t have time to write about. In the UK, the government has lost, and probably had stolen, a copy of the records of 25m people (everyone in a family with a child aged 16 or under). There was also a very interesting looking report into the shooting of Jean Charles de Menezes that I may yet write about if I get the chance.

Here in Paris meanwhile, the transport unions and the students of many universities (not mine) are on strike. The issue for the transport workers is the regimes speciaux whereby transport workers have to work 2.5 years less than other workers before they can retire (37.5 instead of 40).

manif-2.jpg

Much of the discussion seems to revolve around the fact that this measure was introduced because the labour involved used to be much more onerous, but is no longer thanks to mechanisation. Personally, I think that’s not really the point. Sure, if society were organised along rational lines in the public interest, there would be no justification for it. But, that’s not the society we live in. We live in a capitalist, class based society in which different groups fight to keep what they have. The wealthier classes fight a quieter battle, by appealing directly to governments and media, or by moving their capital overseas. The poorer classes don’t have this access or any capital to move, so they use strikes. To be against strike actions to retain or gain privileges is in effect just siding with the wealthy.

It might be said though that the competition here is between the transport workers and other workers, not between transport workers and the rich. But, that’s where the principle of solidarity comes in. The idea is that other workers support the transport workers when they are fighting their battle, and in turn the transport workers support those workers when they fight theirs.

manif-3.jpg

The rail strike is apparently costing €400m /day, and the regimes speciaux cost €5bn/year (government figures), so 12.5 strike days is equivalent to 1 year of regimes speciaux. A reasonable compromise suggests itself. Why does the government not offer a pay rise of a total amount say €2-3bn/year. They would then be saving €2-3bn/year (which means losing the equivalent of 5-7.5 strike days compared to the situation if they could get rid of the regimes speciaux completely), and the transport workers would probably go for it, because for most people earnings now count for much more than earnings some 20 years down the line. I suspect the answer is that this isn’t really about saving €5bn/year at all, but really a strategy to weaken and divide the unions.

The pictures are of the manifestation that was going down my road today (some 300-700,000 people apparently).

manif-1.jpg



Insurance (and the ruthlessness of capitalism)
September 20, 2007, 11:11 pm
Filed under: Capitalism, Economics, Manifesto, Politics, Risk, Surveillance Society

Insurance. Not the most exciting of blog subjects, although that hasn’t stopped Michael Moore’s film Sicko from making $24m in the US alone. It is a subject that fascinates me though, for the simple reason that I don’t understand why people get insurance most of the time.

The nature of insurance is that on average you lose money by having it. It’s essentially just a gamble, and the bookie always weighs the odds against you. Now, there is a real reason to have insurance, which is in the case where you can’t afford the cost if the unlikely thing happens. Insuring your house against being burnt down is a good example of this. Most people can’t afford to rebuild their house from scratch if it gets burnt down.

The other end of the spectrum struck me when I bought a mobile phone a while ago. The salesman tried to persuade me to get insurance for it. Now, the insurance was £20 for one year, which on the face of it seems a fairly minimal cost for the satisfaction of knowing that if your phone is stolen you will get a nice new one. However, the phone only cost me £60, so for it to be worth my while getting that insurance, I’d have to have a 1/3 chance or more of losing that phone during the next year. Obviously a bad gamble. I didn’t get the insurance, and 5 years later the phone is still in my possession. Score £100 for me.

That mobile phone salesman made me realise that insurance is almost never worth having, because the consequences of a loss rarely justify the amount you end up spending on all the different forms of insurance. Take cars for instance. Now, you are legally obliged to have third party insurance, but anything beyond that is a total scam. If your car is stolen, you can buy a cheap replacement for a few hundred pounds. It won’t be flashy, but it will be functional. A few hundred pounds is often less than a single year’s insurance. Comprehensive insurance is even more of a scam, because you either have to have an enormous excess (which means you end up paying for most of the repairs yourself anyway), or you pay enormously high premiums. It gets more complicated, but the basic facts don’t change once you get into the arcanae of no claims bonuses, insuring your no claims bonuses, and the fact that even having insured your no claims bonuses making a claim will affect your premiums anyway. These points struck home with me when an old car of mine was stolen, and I realised (too late) that claiming for it was going to end up costing me more in increased premiums over the next few years than the amount they were paying out – by quite a lot.

So when is it worth having? Well, it’s worth having if you really can’t cover the costs of something going wrong: i.e. basically house insurance (but possibly not contents insurance), and, in the US, medical insurance. That brings me neatly on to my next point. I just saw Sicko the other day (recommended), and one of the points it makes very well is that US medical insurers will do anything they can to avoid paying out. In the event of an expensive claim (exactly the sort of claim that justifies having medical insurance in the first place), they will investigate everything about your claim. If you have ever said anything untruthful or inaccurate on an application form or on the phone to them, that will void your claim. If they can manage to persuade a doctor to rule that the treatment is too experimental or not guaranteed to work, they won’t pay out. And to ensure that they can persuade doctors to make these rulings, they pay bonuses to doctors proportionate to how many claims they reject. In other words, even when insurance really does matter (and with medical bills often in the tens or hundreds of thousands of dollars in the US, it really matters) it might end up having been money wasted.

Now, finally I’d like to twist this into a rant about capitalism in general, because, you know, I like to rant about capitalism. It’s my thing.

This story about insurance being essentially a scam, an enormous rip off, and one that disproportionately affects the poorest, is a sort of microcosm of the ruthlessness of capitalism. Because poorer people can’t cover losses as much as richer people, they are more in need of insurance. Perversely, this means that they end up (quite rationally) spending more of their money on insurance than wealthier people.

A more recent development is social sorting, where poor people actually get larger premiums or bills precisely because they are poor. I’ve written about this before, here, here and here. This sort of thing just underlines the fact that the nature of capitalism is that the poor get poorer, and the rich get richer. Now, this has always been true of capitalism, but for a while it was masked. The introduction of the NHS and the welfare state in Britain made capitalism slightly more humane, but it is being undermined, even though the NHS and the welfare state still exist, because of social sorting.

The problem is that as companies know more and more about us, they can extract money from us ever more efficiently. Not only can they do this, but in a competitive market they must do it if they can, because otherwise someone else will. Exploitation of every source of profit isn’t a choice for a capitalist in a competitive free market, it’s a basic necessity. So, assuming that it is profitable for a company to, say, offer cheaper insurance to “intelligent” people, they will all have to start doing it. The logic of capitalism then undermines many of what we think of as social goods. We think it is bad that smart people should be given cheaper insurance than others, because it’s not fair, and also because smart people probably have more money; we think it’s bad that poor people should pay more for the same thing than rich people, but that’s not what’s going to happen because it doesn’t fit in with profit seeking.

Finally, to go back to insurance, the consequence of insurance companies having ever more accurate information about us, and being ever better at evaluating our individual risk levels, is that it becomes self defeating. If you can predict entirely accurately who is going to have a heart attack, then there cannot be medical insurance against having heart attacks. Someone who isn’t going to have one won’t pay because he isn’t going to have one, and someone who is going to have one is going to have to pay anyway so why bother giving extra money to the middle man. Insurance companies have to get better and better at predicting this sort of thing to stay profitable, but by doing so they bring about their own demise.

In this situation, the only thing to do is to have national insurance schemes organised by the state. The purpose is not to spread your own risk (you can’t change who you are, or your congenital risk of heart attack for example), but to spread the good and bad fortune of our circumstances out amongst everyone. In other words, in the long term, effective insurance cannot be provided by a capitalist system, and the alternatives available to us are ruthless capitalism which by its internal logic must get more and more ruthless to stay profitable, or some sort of socialism.

If you have got this far, well done, I’m impressed! and I thank you. Please do write a comment, if only to say you made it to the end. 😉



The end of advertising
September 14, 2007, 1:12 pm
Filed under: Business, Capitalism, Economics, Media, Politics

Advertising is one of my perennial bugbears. It does so much harm and gives so little in return. It saps creative talent from society at large, it distorts culture and politics, and perhaps worst of all, it’s unpleasant, noisy and inescapable. Feel free to take me up on any of those points in the comments if you like. Economics arguments about the signalling function of advertising aside, the only good it does is provide a large budget for things like TV, newspapers, web sites, etc. But is this really a good thing? Wouldn’t it be better if these things were paid for by what people wanted to spend money on?

Like a growing number of people, I use the Firefox web browser with the Ad Block  extension to hide adverts on web sites. It makes web browsing a much pleasanter experience, and I highly recommend it to anyone who hasn’t got it already. Since a fairly small number of people are using Firefox, and an even smaller percentage using Ad Block, web sites which rely on advertising revenue have not had much reason to worry about this. A small group of tech savvy people were able to cut out the crap and still enjoy the free content paid for by the 3% of people who actually click on the banner adverts. However, that might be set to change.

The Register has an interesting comment piece on how things might be developing (the article is mostly about the business relationship between Google, which relies on advertising, and Firefox, which is largely funded by Google). Firstly, Firefox itself is becoming much more popular: just recently it was downloaded for the 400 millionth time (which is not to say that 400m different people are running it of course). Ad Block is also growing in popularity, the developers claiming that 2.5m people are using it, and an additional 300-400k per month downloading it. So, it’s beginning to be a serious threat. One web developer, Danny Carlton, wrote a piece of software on his web pages so that if you were running Ad Block, the whole web site would be inaccessible. Of course, this is fairly easily circumvented and there is the potential for a miniature arms race there. The ad blockers are bound to win this race for much the same sort of reasons as attempts to stop people copying music and films with Digital Rights Management (DRM) fail almost before they start.

So the question is: suppose enough people were blocking adverts, what would happen? What people are worried about is that all of these free web pages will have to start charging for access. Indeed so, but that could be a fantastically good thing. With modern web technology, it would be very easy to set up a system of micropayments. You subscribe to a micropayment service where you have an account you can top up just like a mobile phone. When you visit a web site, you pay a tiny fee to view their content. This fee could be the same or less than an advertiser pays to a web site. I don’t know how much that is, but it can’t be an awful lot given that on average only 3% of visits to a website end up with the person clicking the banner ad, and even then only a small proportion of those end up with an individual making a purchase. If the technology was unobtrusive and didn’t invade privacy, this could easily be very successful.

There is a danger though. Web sites might begin to rely on more subliminal forms of advertising and PR, like the ‘advertorial’ (an ‘editorial’ that is paid for) and subtler variants which are no doubt already out there. Like product placement, this is a form of advertising that can’t be blocked. Another short term danger is that the squeeze that this will put on content producers will mean they become much less adventurous with their output, and stick to what they know works (as is perhaps already happening).

One commenter on The Register article had an alternative suggestion: a “Reasonable Advertiser Network”. That is, an index of advertisers which do not use distracting animated or Flash adverts on web pages, but relatively unobtrusive, static images which do not take up too much space on the page. Users could choose not to block these adverts, but only the ‘unreasonable’ ones. That might sound far-fetched, but it has already happened to a certain extent. Part of the commercial success of Google is down to the fact that it has a very unobtrusive and straightforward advertising scheme: certain key words cause a clearly labelled ‘Sponsored Link’ to be included in your search results. You know exactly what the advert is, how it came to be there, and it doesn’t dance around your screen and sing at you.

My preferred solution however is the death of advertising, and there are some signs that it might be coming about anyway. Newspapers are apparently very concerned that advertising revenue is drying up, as are TV stations, etc.

It will be interesting to see how it plays out, and whether or not solutions that are easy to implement on the web (like a micropayment scheme) could be extended to other mediums like TV and news.

Now over to you: how do you feel about advertising on web pages and more generally? Do you use ad blockers? Would you be happy with a micropayment scheme like the one I suggested?



Ideology posing as rationality
August 27, 2007, 11:37 pm
Filed under: Economics, Environment, Politics

One of the defining themes of the New Labour government is that it claims not to do anything ideological, but just “what works”. But in fact, it’s largely just a cover. They invent elaborate and confusing ways of evaluating options so that their preferred choice seems to be objectively the best. PFI/PPP projects are the usual example of this, but this extremely interesting (although a little dry) article shows they’ve been doing the same thing with their road building programme.

Studies show that new roads do not solve congestion – they just generate more traffic. They add to pollution and, of course, they raise Britain’s greenhouse gas emissions. Road transport already generates 142m tonnes of CO2 a year – about 25 per cent of Britain’s total. As the European emissions trading scheme puts an ever-higher price on carbon, those emissions could cost the taxpayer increasingly dearly.

The Treasury and Department for Transport know this, so why do their economists give their blessing to Labour’s £13bn roads programme?

The answer lies far away from public scrutiny in the arcane and biased rules under which proposed roads are assessed. These New Approach to Appraisal (Nata) rules were introduced by Labour in 1998…

Under Nata, road builders such as the Highways Agency and local authorities must submit detailed assessments of proposed transport projects to the government. These are meant to be balance sheets showing the costs, benefits and environmental impacts. In theory this is a good thing, but in reality the rules are designed to make road schemes look better than any greener alternative, every time.

Take section 3.5.11 of the Nata rules. This awards extra points to schemes that generate more traffic because more cars and lorries on the road mean more fuel sales – and hence more tax revenue for the government. By contrast, public transport schemes, which take motor vehicles off the road and so reduce fuel sales and tax revenue, have points deducted.

Then there’s the rule on journey times, where planners can claim that a road will bring economic benefits if they can show it will cut the average journey time of each user. Every minute saved for a car driver is valued at 44p – which can be offset against the cost of building the road.

Just how biased this system can be is set out in the Nata rules that assign lower values to other types of traveller. A minute saved on a cyclist’s travel time, for example, isn’t worth 44p but just 28p. A bus-user’s time is valued at 33p a minute. The implicit assumption is that cyclists and bus-users make less contribution to the economy than car drivers.

Read the article for more…