Wednesday, 6 December 2017

We Gotta Get Out of This Place

The government's attempt to find a form of words that would satisfy the EU27 and allow progress to phase 2 has run aground not on the mechanics of commercial regulation, which are as much of a mystery to most MPs as to the general public, but on the vexed issue of sovereignty. It's worth reminding ourselves at this point of the difference between internal and external sovereignty. The former concerns who has the ultimate authority within a state. That authority includes the right to pass domestic laws to accommodate the interests of foreigners in general (e.g. allowing non-citizens to own property in the UK) or other states in particular (e.g. allowing the US to operate airbases on UK soil) , but doing so does not compromise sovereignty because those laws can always be repealed or otherwise amended in the future. The ability to reject the past and impose a new regime is a defining characteristic of the sovereign. Constructively ambiguous though they may be, terms such as "no divergence" and "regulatory alignment" imply a commitment to keep domestic regulations in sync with the EU, but they do not imply submission to regulation or oversight by the EU. This is therefore an exercise of internal sovereignty.

External sovereignty concerns the concession of specific authorities beyond the state. Historically, that was often the result of coercion, such as by colonies in an empire or through the ceding of territorial control (e.g. by China to the UK over Hong Kong). Today, it is more likely to mean cooperation, such as intergovernmental organisations like the International Criminal Court, or collective regulation among peers, such as the EU single market. In respect of sovereignty, there is no fundamental difference between the UK's relationship with the EU and its relationship with the UN, NATO or the WTO. In all cases the UK has pooled authority in return for specific benefits. While states can always revoke concessions of cooperative external sovereignty, as the UK is now doing in respect of the EU, the reciprocal nature of those concessions entails a quid pro quo: we necessarily lose something, a point that the EU has repeatedly emphasised but some Brexiteers remain in denial about. Though it has received less media coverage than the border, the actual issue of external sovereignty that remains up in the air is the continued status of the ECJ as a final court of appeal in respect of the rights of EU citizens in the UK post-Brexit.

The government presumably hoped that their preferred wording on the Irish border would provide sufficient reassurance to the EU27 to allow progress to phase 2 of the negotiations without any concession of external sovereignty; in effect substituting the Good Friday Agreement as a guarantor in place of any EU institution. This would have been an astute move if the DUP were genuinely keen to preserve the GFA, but even a passing acquaintance with Irish politics should have alerted London to the unlikelihood of that. The DUP chose to interpret the wording both in terms of external sovereignty, as a concession to a foreign power (the Republic), and in terms of internal sovereignty, as an erosion of the constitutional integrity of the UK. Leaving aside for the moment that this integrity is illusory (not least in Northern Ireland), this shows the way that mixing the two produces a volatile combination in which matters of practical international cooperation are inflated into existential threats. The Tory ultras have done likewise, condemning the proposed wording as both a constraint on future trade deals with other nations and as an attempt to achieve a united Ireland by the back door.

Today has seen members of the cabinet provide two key insights into the British government's thinking. David Davis told the Commons Brexit Committee, "The strategy we decided way before the October council, before March, indeed before the triggering of article 50, was that we would go for an over-arching, comprehensive trade deal". For Davis, this was a reason to not bother preparing impact assessments, but it also implies that the government did not expect to have to elucidate, let alone honour, the wording in respect of the Irish border. The gamble appeared to be that a superior deal could be agreed in phase 2 that would make the wording irrelevant. However, while it wasn't unreasonable to believe that the EU27 also wanted a comprehensive trade deal, it was risky to imagine that this would be bespoke rather than off-the-peg. We know that the government can only reconcile the demands of Brexiteers with the need to maintain advantageous market access through cherry-picking, but that is precisely what the EU27 will not allow (it is also likely to fall foul of WTO rules if it is anything short of comprehensive, and a comprehensive deal with the EU would limit the potential for deals with other countries).

Of the off-the-peg solutions, the Norway option (EEA) is clearly unacceptable to the ultras because it entails the free movement of labour and continued payments to the EU, while the Canada option (CETA) would be inadequate because it doesn't cover services and would require a hard border. At the moment, the Canada option looks like the logical starting point for the phase 2 negotiations, assuming we ever get there. The omission of services would be difficult to rectify short of a comprehensive scope, which is essentially the EEA option. A more limited deal for financial services will no doubt be mooted, but that would be picking the largest and juiciest cherry, which is unlikely to meet EU27 approval unless there are major concessions elsewhere. The need for a hard border could be avoided by agreeing to align with the EU's external tariffs, but that would be identical to remaining in the Customs Union and would constrain the UK's ability to agree trade deals with others. The UK might be able to swing a financial services sector deal in combination with continued membership of the Customs Union, but that would pretty much kill the "free trade" vision of Brexit and indicate that the government's priority remains the City of London. That's not a popular look.

The second key insight came with Philip Hammond's admission that there has been no substantive discussion by the cabinet on what the Brexit end-state should be. His explanation was that this would have been premature before the end of phase 1, though it is unclear what new data or understanding has been gained over recent months that would have a material impact on any debate. Given Davis's admission that impact assessments haven't been carried out, Hammond's caution seems at odds with the general air of insouciance. One way of reconciling these two attitudes is to assume that the key players have arrived at the same conclusion from different directions, namely that Brexit will largely mean whatever the EU27 decide it means. The phrase "nothing is agreed until everything is agreed", which has replaced "Brexit means Brexit" as the stock answer to most questions, might suggest this. Rather than May, a woman not known for sunny optimism, adopting a Micawberish attitude of "something will turn up", it looks more like she is hanging on grimly in the hope that reality and the EU's own red lines will gradually persuade the cabinet to concede that the Norway option really is as good as it is going to get. Until that realisation dawns, we must continue to plod wearily through the slough of despond.

Tuesday, 5 December 2017

It's Always Raining Over the Border

There is a suggestion that Theresa May was trying to use the outline deal on the Irish border to bounce the cabinet into agreeing "continued regulatory alignment" of the entire UK with the EU. The political logic was that this could square the DUP by ensuring no divergence in standards between Northern Ireland and the Republic, and thus no need for a hard border, while also avoiding the North having special status or any regulatory divergence from Britain, thus maintaining the integrity of the UK. The risk is that a permanent commitment to regulatory alignment with the European Union would be indistinguishable from continued membership of the Single Market and Customs Union - the softest of soft Brexits - and would thus negate the chief economic benefits of leaving the EU, namely the ability to negotiate independent trade deals and to dispense with EU "red tape". Though the deal was being described as a form of words that would keep the specifics suitably vague until the trade talks got under way, it looked more like membership of the European Economic Area (EEA) than the basis for a bespoke, comprehensive trade deal.

This scenario looks suspiciously like a remainer fantasy. I doubt that membership of either the EEA or the EFTA (the European Free Trade Area) is likely. Theresa May clearly stated in January of this year that leaving both the Single Market and the Customs Union was an inevitable consequence of the 2016 referendum, a point she reaffirmed in her Florence speech in September. That speech also explicitly ruled out both the option of EEA membership (the Norway model) and a "traditional free trade agreement" (the Canada model), positing something unique in between. The EU27 in turn ruled out any bespoke deal: it's either Norway, Canada or no deal (Switzerland, which is in the EFTA but not the EEA, due to a referendum reverse, has a series of bilateral deals with the EU but is considered an anomaly, not a precedent). There is no doubt that the EU27 would prefer the UK to adopt the Norway model, and that many "releavers" consider this to be the least-worst outcome, however it would be a bridge too far for most Brexiteers.

Assuming the report of a continued role for the European Court of Justice in respect of EU citizens' rights is well-founded, and adding in the concession on the £50 billion "divorce bill", the decoupling process was beginning to look less like a soft Brexit than a Brexit in name only, which would obviously be unacceptable to the ultras. It was therefore critical that any deal on the Irish border was framed in such a way as to avoid the suggestion that continued membership of the Single Market and Customs Union might yet be possible. You can understand why Nicola Sturgeon and Sadiq Khan spun the news otherwise, and there are plenty of remainers in the media who were only too happy to point up the implications, but what is remarkable is how quickly the idea gained currency, causing an apparently spooked DUP to row back. Not for the first time, the UK government has shown itself to be less than tactically astute when it comes to handling negotiations, which hardly bodes well given the importance it has placed on future free trade deals with all and sundry.

There is no doubt that the government was briefing on Monday morning that a deal was about to be done and that a form of words had been agreed that was acceptable to the UK and the EU27. According to an RTE leak, those words were: "In the absence of agreed solutions, the UK will ensure that there continues to be no divergence from those rules of the internal market and customs union which, now or in the future, support north-south cooperation and protection of the Good Friday agreement". Apparently, "no divergence" was then amended to "regulatory alignment". Assuming this is accurate, it indicates three things. First, that this position was envisaged to be a back-stop in the event that further terms were not agreed during the phase 2 negotiations. Second, that the scope of the rules in question was limited to those that support all-Ireland cooperation, not to the entirety of the Single Market and Custom Union. Third, that the entrenchment of the Good Friday Agreement within the framework of the EU was to be replaced by its entrenchment within the final deal between the UK and the EU27. There is ambiguity in the language, but there is also a clear acknowledgement of the island of Ireland as a special case.

It is difficult to believe that this wasn't squared with the DUP in advance, and I'm sceptical about the idea that it was kept from the likes of Michael Gove and Boris Johnson with the intention of being presented as a fait accompli later in the day, not least because David Davis and other Brexit true-believers were surely in the know. Media commentators tend to place far more weight on the concept of "constructive ambiguity" than is usually warranted, essentially to excuse their own uncertainty of interpretation, but on this occasion it does appear as if the language was sufficiently opaque to support multiple readings, up to and including continued membership of the Single Market. One explanation for this would be a desperation on the part of the UK to get to phase 2, in the hope that "something will turn up" to resolve the border issue later. Another explanation is that the British government is not sincere (Varadkar's emphasis on May "negotiating in good faith" was volunteered unprompted, which is often a sign of doubt) and that it always intended to use the threat of a semi-hard border (i.e. a minimalist interpretation of the scope of north-south cooperation) as leverage for a trade deal.

There is still a possibility that a form of words can be agreed that would allow progress to phase 2, however I suspect this will have to be far more concrete than "continued regulatory alignment", not least to avoid introducing generic elements that might be hijacked by the First Minister of Scotland or the Mayor of London. I suggested last week that a deal could take the form of a Northern Irish commitment to mirror EU regulation in specific sectors such as agriculture and energy, justified on the grounds that these are all-Ireland markets that require coordination, combined with a UK commitment to accept exports of specific goods from the entire island of Ireland without any customs control (in effect giving the Republic a bye ahead of the phase 2 haggling), which would avoid an Irish Sea border. This could be achieved by building on the foundations of the Good Friday Agreement, which already covers a number of Island-wide concerns via the North/South Ministerial Council, and might allow further matters to be quietly incorporated during phase 2. The problem is that it would require the DUP to be willing to extend the GFA and accept greater cooperation with the Republic, which is at odds with its raison d'etre.

The failure to secure common ground among all parties on Monday will have two consequences. The DUP has now retreated to its comfort zone of obdurate victimhood, in which "never" is the stock answer and the London government can be cast as untrustworthy. This was always likely at some point, and a cynic might suggest that the party deliberately led Number 10 along with this very outcome in mind (though, to be honest, I don't think they're that Machiavellian), but I can't help feeling that a more subtle operator than Theresa May, whose negotiating style also appears to be a mix of the pathetic and the obdurate, might have manoeuvred the DUP into a better space rather than simply backing them into a corner. Now, her only real option is to call the DUP's bluff by proposing a more specific compromise tied to the GFA that could potentially command support among less hard-line unionists in the North. This would leave the DUP at risk of revealing itself to be a party that prioritises weakening the Good Friday Agreement over the health of the Northern Irish economy.

The second consequence is that May herself is now vulnerable to challenge within the Conservative Party. You don't have to believe the myth that she was planning to gut Brexit to see that her solution is likely to fall some way short of the ultras' vision. They appeared to be willing to give her the benefit of the doubt over the money, but the continued role of the ECJ in respect of citizens' rights and the possibility of future EU regulations being unilaterally applied to a part of the UK represent an unacceptable compromise with their conception of sovereignty (the Leave Means Leave letter published on Friday looks like another back-stop, ruling out further regulatory alignment beyond March 2019, which might indicate that they had got wind of the proposed deal terms last week). May has managed to remain as Prime Minister, despite the General Election debacle, because no one else wants the poisoned chalice of having to sell a final deal that would disappoint almost everyone to a degree. Now, with the possibility that she might be more of a saboteur than a patsy, it becomes necessary for the ultras to unseat her before a loss of momentum leads to a demand for a second referendum. It's going to be an interesting week.

Wednesday, 29 November 2017

What We Talk About When We Talk About Industrial Strategy

All states intervene in the direction and management of industry, whether by providing direct funding, tax-breaks or indirect support through infrastructure and education. A laissez-faire state is no more to be found in the real world than a nightwatchman state. Where states differ is in their institutional structures and their public rhetoric. The fundamental weaknesses of the British economy relate to the former, but this is often obscured by the latter. In the UK, "industrial policy" has traditionally been limited in public discourse to heavy industry and manufacturing, while the language used has tended towards the pathological metaphor of an ailing patient. One result of this was that a dirigiste strategy to support the City of London, from the mid-80s "Big Bang" through the Jubilee Line extension to the bailout of the banks, could be passed off as something else entirely. Likewise, the concept of "innovation" in British political discourse has come to mean invention rather than application, which reflects a social bias towards research embedded within the institutions of elite education. It might seem harsh, but Stephen Hawking is part of the reason why the UK doesn't yet have universal, high-speed broadband.

In the postwar years, the legacy of large scale R&D in business, together with the need for state direction to coordinate the rebuilding of industrial capacity, led to a fashion for "national champions" in most developed countries, often in sectors with a strategic defence dimension such as aerospace or steel-making. In the UK, this gradually gave way to the more pejorative phrase "picking winners", which was both an ideological critique (you can't second-guess the market) and an attack on government competence (you keep picking losers). The incidence of primary research within business then declined, as an expanded higher education sector provided outsourcing opportunities for national firms and globalisation allowed multinationals to consolidate their efforts. This was part of a wider turn that deprecated the concept of firms as institutions, as opposed to financial assets or simple market actors, which had an obvious attraction in the era of privatisations and mega-mergers. While human capital was eulogised by Gary Becker, the firm was reduced to the boundary of administrative efficiency theorised by Ronald Coase.

The classic UK example of this was the car industry. Its prewar firm and brand fragmentation had been preserved by wartime and the seller's market of the immediate postwar years. This meant too many models, antiquated organisation (e.g. the reliance on piece rates), which in turn encouraged craft union fragmentation and poor industrial relations, and self-satisfied management. Though belated efforts were made to rationalise the industry and consolidate production, notably with the creation of BLMC in 1968, this was never pursued aggressively enough. The eventual nationalisation of the industry in the form of British Leyland in 1975 was twenty years too late. Though the political wind then turned against state ownership, government continued to support the sector directly while urging further rationalisation, which laid the foundations for foreign direct investment by the likes of Nissan in the 80s. As the UK's continued success with marquee brands such as Land Rover, Jaguar and Mini proved, the problem wasn't a lack of R&D or skills among the workforce, but a failure to apply these capabilities more widely due to poor organisation and management.

If the industrial strategy of the 60s and 70s tended towards the vertical, focused on particular sectors and the selection of large firms for preferential treatment, the strategy of the 80s and 90s was more horizontal, seeking to create a level playing field for the market to select winners through the free movement of factors of production, not just nationally but internationally, such as in the case of the EU Single Market. Though this shift was successful in many respects, it had two problems. The first was the wrenching effect of the transition, which in the UK saw the disruption of specialist supply chains tied to the old national champions, contributing to the steady decline of manufacturing as a proportion of GDP. The second problem was the tendency for pro-business policies to protect poorly-performing companies that survived the transition. Had the British government been less dogmatic in the early-80s, and less obsessed with lowering the tax burden on business thereafter, the underlying productivity growth of British industry, which was flattered by North Sea oil and financial services between 1988 and 2008, might not have been so weak.

The publication on Monday of the government's industrial strategy white paper comes at a significant time, given both the clear evidence that austerity doesn't work in its own terms, so future deficit reduction must depend on stimulating growth, and the debate over the UK's future trading relationships (ironically, Brexit has made the idea of national champions politically salient once more, and not just on the left). But these political imperatives are ignored by the white paper in favour of generic environmental factors, described as "Grand Challenges": AI & data economy, clean growth, future of mobility and ageing society (like MBA bumf the world over, the paper has a lot of abstract nouns and pious verbs but a shortage of definite articles). The key policies are grouped into five "foundations of productivity": ideas, people, infrastructure, business environment and places. Like the challenges, their generic nature indicates that there is little that is distinctive about the analysis or the proposed solutions, while some of the specifics point to longstanding institutional flaws that aren't about to be addressed.

An example of the latter is the continued segregation of technical and elite education. The paper commits to "Establish a technical education system that rivals the best in the world to stand alongside our world-class higher education system". UK universities routinely appear in the top 10 of global ranking tables. By contrast, Germany, France and Japan rarely make it into the top 50, but those countries are clearly superior to the UK in terms of productivity. This isn't simply because their efforts tend to be directed more towards technical education and away from elite establishments, but because there is actually little connection between pure research (let alone elite status) and the application of technology by industry. That, after all, is why we've traditionally had a "brain drain" and a reputation for being good at coming up with ideas and poor at making money out of them. Rather than privileging research, a better industrial strategy would focus on disseminating and applying existing technologies to SMEs. As the Japanese experience in the 60s and 70s showed, absorbing innovations made in other countries will actually create the institutional infrastructure necessary to then incubate native inventions. Rather than case studies about thriving UK businesses, the white paper would have done better to include case studies of successful state intervention by other countries.

History suggests that jumping on the bandwagon of emerging technologies, such as robotics or batteries, can lead you up a blind-alley (consider the trajectory of the UK's semiconductor industry, particularly in light of last year's sale of ARM Holdings to Japan's SoftBank). Many other countries will do likewise, which reduces the prospect of any comparative advantage, while the presence of a home market is usually crucial to success. A country with a sizable manufacturing base, an ageing population and a well-developed electronics sector is more likely to succeed in the area of robotics, which is why much of the early running has been made in Japan. More generally, a focus on a general purpose technology (GPT), like steam-power or IT, will only deliver advantage during the early-adoption phase. Once the technology becomes ubiquitous, that advantage largely disappears or is overwhelmed by more fundamental factors such as geography. The strength of the German car industry has less to do with the pioneering work of Carl Benz and Gottlieb Daimler and more to do with the proximity of large markets in all directions. One obvious trend over time is the quickening pace at which GPTs become ubiquitous. Today, a productivity-enhancing change in software can be disseminated globally in a few days. Seeking first-mover advantage is increasingly a fool's errand, which partly explains the growing reluctance of business to invest in R&D.

Like its weak productivity growth, the UK's low R&D rate (1.7% of GDP compared to the OECD average of 2.4%) is partly a reflection of the dominance of the services sector (and financial services in particular), but it also reflects the financialised turn of the last 30 years. The problem with capital allowances and R&D credits is that they are of limited effectiveness if the tax regime makes the distribution of free cash via dividends more attractive. To increase the proportion of profits reinvested in industry, you need to make taking the money out of businesses (or its use in share buybacks) less attractive. You also need to address the persistence of zombie firms: the long tail of low-productivity and lifestyle businesses that survive by dint of low wages and a tax regime that indulges private owners. An industrial strategy should concern itself not just with facilitating market entry but also with encouraging market exit. Given that the paper considers the high level of firm formation (one every 75 seconds) to be something to crow about, ignoring that the vast majority of these are micro-businesses that won't survive beyond 5 years, I doubt the promised "review" of this area will seriously grasp the nettle.

Overall, the white paper looks like a holding operation. There are old initiatives rehashed, more promised reviews and commissions, and the usual lip-service to devolution and innovation. More fundamentally, it does not represent a departure from the horizontal policy adopted since the 1980s, despite talk of "sector deals". As with Theresa May's commitment to addressing inequality, there is little here beyond a change in tone. A serious analysis would start by considering the strengths and weaknesses of the economy. This doesn't just mean identifying comparative manufacturing advantage, but looking at institutions and regulatory arbitrage. The UK's current status depends on three things: a hybrid relationship with the EU (inside the Single Market and Customs Union but outside the Eurozone); London's role as a global financial entrepot (and tax haven gateway); and our ability to leverage the English language (through business services as much as media). Given that we are in the process of degrading the first of these, and habitually omit the second from strategic consideration, the white paper was never going to offer more than liberal references to our "creative industries". The doctor's report still reads "poorly".

Sunday, 26 November 2017

The Missing Sovereign

One of the odder developments in the world of books during the early years of this decade was the revived interest in the American author John Williams' 1965 novel, Stoner. After a politely received debut and a couple of modest reprints in the US around the millennium, the book became a bestseller after 2010 in both France and the UK, and even Waterstones' book of the year in 2012. Literary fiction is a marginal interest at the best of times, but its occasional eruption into wider consciousness (when not tied to a film or TV adaptation) is often related to its political resonance with a small number of "taste-makers" in the media. Given that Stoner was set over the course of the first half of the twentieth century and followed the third-rate life of a second-rate academic, its resonance doesn't immediately appear to have much to do with the pivotal 60s, but its concerns with truthfulness in life and academic integrity place it between the existentialism of the 50s and the postmodernism of the 70s. It has moments of self-awareness, but it's not a very good book: the characters are flat, the language carefully monotonous, the baddies wear all-too-obvious black hats. It appears to be the combination of its unadorned style and relentless self-pity that helped it find favour among the grand names of contemporary British fiction.

Much of the praise for the novel focused on its moral lessons: "We live in an era in which happiness and success are pursued ruthlessly, selfishly. We feel entitled to have them, at any cost, whether that involves divorce or questionable ethics. This is a novel that serves as an antidote to that expectation, reminding us that a life that looks like a failure from the outside, that will be quickly forgotten once it ends, can be a noble, quirky and somehow beautiful experience". That assessment should indicate the conservative virtues at the heart of the work, but it is worth being precise about who is cast as the serpent in this particular garden. The plot involves two strands: William Stoner's emotional estrangement from first his dirt-poor parents and then his wife, Edith, a frigid, unsympathetic solipsist; and his academic career, centred on the teaching of Rennaisance literature, which is blighted by the growing malevolence of his head of department and reaches a climax over the latter's protégé, a fraud and a liar. Though some sceptics have noted the class contempt and misogyny of the first strand, the reason for the book's renewed popularity is to be found in the second strand and its tale of a decent man done down by relativism and the special pleading of the aggrieved (both the department head and his protégé are disabled).

With its focus on academic bad faith and social pretension the novel is ahead of its time, occasionally reading like Malcolm Bradbury's The History Man, but without the humour and as much instrumental sex. If that mid-70s work captured the emerging reaction against post-structuralism and post-modernism, it also prefigured the way that "historical inevitability" would be recuperated from the left to advance reactionary politics. Bradbury subsequently claimed that the novel's protagonist, the self-styled radical Howard Kirk, ended up voting for Thatcher in 1979 and Blair in 1997, the two politicians who made belief in a higher truth central to their appeal. Stoner's contemporary resonance has more to do with the salience of campus free-speech and safe-spaces in media discourse than the socio-economic realities of teaching, but it also elevates a traditional ideal of male integrity and literary fidelity to the level of hagiography, which goes down well among writers prone to berate "snowflakes" and anti-canonical minorities from the security of their well-appointed studies. As one awed reviewer described Stoner's miserable span: "He has been a priest of literature, and given himself as fully as he could to the thing he loved. The book’s conclusion, such as it is—I don’t know whether to call it a consolation or a warning—is that there is nothing better in this life".

You don't have to hunt too far to find claims that post-truth and fake-news are the products of postmodernism rather than the economy of the media, and thus something rotten in the academy rather than the logic of capitalism. The response to this displacement has been a doubling-down among academics on the foundational nature of truth. This has led to what one might term "grade inflation" in respect of the political consequences of truth's abuse. For example, the American historian Timothy Snyder has claimed that "post-truth is pre-fascism". His argument is built on a chain of dependencies: "Democracy only has substance if there’s the rule of law. That is, if people believe that the votes are going to be counted and they are counted. If they believe that there’s a judiciary out there that will make sense of things if there’s some challenge. If there isn’t rule of law, people will be afraid to vote the way they want to vote. They’ll vote for their own safety as opposed to their convictions. So the thing we call democracy depends on the rule of law. And the things we call the rule of law depends upon trust. Law functions 99 percent of the time automatically. It functions because we think it’s out there. And that, in turn, depends on the sense of truth. So there’s a mechanism here. You can get right to heart of the matter if you can convince people that there is no truth. Which is why the stuff that we characterize as post-modern and might dismiss is actually really, really essential."

The "mechanism" can be summarised as follows: democracy depends on law, which depends on trust, which depends on truth. This is questionable. The idea that democracy depends on the rule of law is no more meaningful than the idea that autocracy does - all forms of government depend on laws. The idea that law depends on trust is here reduced from the expectation of justice to mere administrative efficiency: the automatic functioning of the law. Up to this point, both Nazi Germany and the Soviet Union have ticked all the boxes. The idea that trust depends on truth ignores the collective insistence of philosophers, sociologists and economists that it depends on self-interest (or enlightened altruism, if you prefer). We might still take oaths on holy books, and the shame that arises from the breach of social rules about lying is a deterrent, but what ultimately keeps us honest is consequentiality: the fear of worldly punishment or of lost opportunities arising from reputational damage. In Snyder's argument, trust is a rickety bridge intended to span the gap between law and truth. A straight link between the two is difficult to make when laws in a democracy aren't intrinsically "true" but simply norms that we have agreed to through political debate. What distinguishes democracy from autocracy is who decides, not the quality of the decision.

Snyder's equation of good governance with laws and laws with truth is actually a conservative argument that harks back to the pre-democratic era when laws were deemed to have divine sanction through monarchy. What democracy depends on is not a law against vote-rigging, but a social convention that you don't cheat. Challenging claims to absolute truth does not undermine democracy. In fact, just as contesting miscarriages of justice occurs more in democracies than autocracies, it should be seen as a sign of a healthy society. Likewise a press that is routinely sceptical rather than partisan. Looking back at Germany in the 1930s, Snyder notes the power of the media: "The second thing that German Jews were not aware of, or Germans were not aware of, was how new media can quickly change conversations. In that way, it’s not exactly the same, but radio at that time often ended up being a channel for propaganda. There are parallels with the internet now, where there were hopes that it would be enlightening. But in fact, it turns out that with presidential tweets, or with bots, or isolated habits of viewing, it isn’t necessarily enlightening. It’s the opposite. A lot of us were blindsided by the internet in much the same way that people could be blindsided by radio in the 1930s."

The jump from prewar radio to the Internet is telling, skipping both television and modern newspapers, not to mention their current symbiotic relationship with social media. This historical elision also ignores the deregulation of radio and TV that started in the 1980s, which created a market for news and opinion in which fairness and objectivity withered under commercial pressure. Given that the Internet cannot be held responsible for the growth of a right-wing media ecology in the 80s and 90s founded on myths, bullying and paranoid conspiracy, the idea that postmodernism was to blame for the erosion of truth serves the dual purpose of diverting attention while affording media practitioners, many of whom were at college in those decades, a degree of revenge for past slights and embarrassments (notably their own temporary commitment to intolerant strands of activism). More fundamentally, this characterisation of the Internet as a propaganda machine without precedent beyond the archetypal medium of mid-century totalitarianism serves to cast the present situation as exceptional: "we are facing a real crisis and a real moment of choice", as Snyder puts it.

This sense of impending crisis encompasses both the belief that the forces of an emergent Fascism might engineer a state of emergency - for example, Snyder suggests that Trump might leverage a terrorist attack in the manner of the Reichstag fire - and the idea that the erosion of truth by self-interested Internet companies and Russians waging nonlinear warfare has gone so far as to require state intervention to revoke the errors of a misled democracy, such as in the case of Brexit. Apart from the cognitive dissonance required to hold both of these views, the obvious flaw here is the casting of two dim kids on seaside donkeys as horsemen of the apocalypse. While acknowledging the dangers of complacency and the all-too real erosion of rights since 2001, I can't help but suspect that Trump is too lazy to mount a putsch while the outcome of the EU referendum has been a series of botched coups (usually involving Michael Gove) that never managed to get beyond the beer hall. To borrow the terminology of Carl Schmitt, the Nazi jurist and originator of the concept of the state of exception, what has been striking is the inability or unwillingness of anyone to take on the role of the sovereign. In that sense, William Stoner's failure to command his own life, and his escape from the world into the imaginative consolations of the past, makes him all-too representative of our time.

Monday, 20 November 2017

The Nature of the Political Firm

A theme of Corey Robin's analysis of the conservative tradition is the relationship between the older conception of aristocratic virtue and the newer idea of value arising from judgement in the marketplace. Though the latter crystallises in the late 19th century with the substitution of subjective preference for objective labour as the source of value, Robin shows that its roots lay in the reaction to the French Revolution, notably in Edmund Burke's tentative search for a philosophical justification for the virtue of capitalists as a replacement for the discredited virtue of the ancien regime, a search that put him at odds with Smith, Ricardo and Marx, but which connects him beyond the Marginalists to Friedrich Hayek and the contemporary vulgate of entrepreneurs and "wealth creators". A further link in this chain is Friedrich Nietzsche's equivalence of esteem and value, which both emphasised the idea of personal judgement and restored the importance of rank: the esteem of the superior sort creating a superior value (there's a lot of Nietzsche in Google's Page Rank algorithm). The point that Robin makes in his study of conservatism after 1789 is that it responded to modernity "by turning the market into the realm of great politics and morals", and that it was inching towards this long before the emergence of the Austrian School.

Robin's basic premise is that modern conservatism remains an essentially reactionary movement that seeks to preserve private hierarchies against democracy. It employs both aristocratic virtue (e.g. constitutionalism) and rabid populism (e.g. Trump), despite the inherent antagonism of the two. In practice, the attempt to reconcile elite virtue with the market as a mechanism for determining value has led to an increasingly narrow definition of the virtuous elite as the merely wealthy - i.e. those who have been rewarded by the market - hence the contemporary contempt for "elites" not founded on wealth, such as democratically-elected politicians and professionally-credentialed scientists. An obvious problem for conservatism is the lack of virtue displayed by the modern rich, which is evident not just in disquiet over predatory business practices and tax avoidance, but in the personal "unworthiness" of Donald Trump and the "sociopathic" behaviour of Mark Zuckerberg. Though these critiques are loudly voiced by liberals, they are essentially a conservative demand that rank should reflect conventional ideals of virtue (not unrelatedly, much of the liberal abhorrence of Russia arises from what is seen as Putin's presumption and the vulgarity of his oligarchic supporters).

Friedrich Hayek's importance to the conservative tradition is often reduced to an instrumental borrowing of his defence of markets and the price mechanism, which takes at face value his claim to be a classical liberal rather than a conservative. Though Hayek saw the market as the ultimate arbiter of knowledge, he also believed (as a good neoliberal) that the market was made, and specifically through the guidance of the wealthy as an avant-garde of taste. But while Hayek thought that the rich had to drive society forward through their daring and experimentation, he wasn't a fan of the self-made man, let alone the "disruptor" (Schumpeter's creative destroyer, in older terms). Rather he advocated an aristocracy that benefited from elite education and the productive idleness enabled by freedom from material want: "The grosser pleasures in which the newly rich often indulge have usually no attraction for those who have inherited wealth" (insert your own Trump joke here). Hayek seems to have missed the partial democratisation of taste over the course of the twentieth century: the wealthy may have pioneered the mobile phone, but they didn't pioneer jeans. Contra Hayek, there isn't a single avant-garde and taste is a field of contest not consensus. In his top-down view of taste, Hayek echoes Burke's ideal of a contract between the generations - i.e. the importance of inheritance to values as much as to property.

In this light, Robin's updating of his seminal work The Reactionary Mind to include Trump (the first edition concluded with Sarah Palin) is interesting because of the renewed emphasis he appears to place on the dichotomy of traditional political virtue and the value of the market (I'm judging from press articles as the new edition paperback won't be out until the New Year and the hardback is nearly £50 - that's the market for you). Robin sees Trump as a product of the market realm whose attitude presents a challenge to the more aristocratic tradition of political virtue (that The Donald was criticised as a would-be monarch by the Republican Party's Whig nobility rather supports this view), though he also notes the destabilising scepticism that Trump has himself displayed about the operation of the market, which is clearly part of his populist appeal: "So he is on the one hand very legible as a kind of great man of the economy, but on the other hand he also can be very skeptical of that tradition, and is constantly exposing it as a fraud and a deception. That really is at the heart of what makes Donald Trump new and innovative within the conservative movement and the Republican Party". Trump may not be a complicated man, but he is a political paradox.

In a blog post, Robin maps Trump onto another revealing dichotomy: "In his classic article 'The Nature of the Firm' ... the economist R.H. Coase divides the economic world into two modes of action: deal-making, which happens between firms, and giving orders, which happens within firms ... When it comes to wielding power in the political sphere - I'm not talking about executive orders, of which Trump has issued many, and which are a sign of his weakness, not his strength; I'm talking about exercising power that requires the assent and cooperation of other political actors - he's completely out of his league. There's a reason for that: the conception of power he has - such as it is and however bad he is at it - is drawn from the Coasian world of the firm". This is true, but it also highlights that Trump is a product of inherited wealth more than business school. His corporate experience has been characterised by fealty and whim, hence his ease with mobsters and his attractiveness to small business owners everywhere. He has bullied politicians and threatened bankers ("too big to fail" was a feature of New York real estate long before financial services). He has rarely had to persuade employees or shareholders beyond bluster. Revealingly, he entered national politics as a "birther" (questioning Obama's legitimacy to serve as President) and has gone out of his way to appoint family members to key positions on the basis of little more than birthright. He may be a yahoo in liberal eyes, but in his own mind he is an aristocrat.

Robin sees this dichotomy - the reduction of politics to giving orders and making deals - as another example of neoliberalism's colonisation of politics with economic modes of reason. That is certainly plausible if we think of the operation of politics within the domestic sphere (Coase obviously influenced the discourse of privatisation and the extension of transactional management to the public sector), however there is a dimension of politics in which the Coasian dichotomy is perhaps more legitimate, rather than simply an ideological imposition, and that is the distinction between internal and external sovereignty: who ultimately decides and what compromises must be made with other states. While the former has become symbolically both more demotic and economic during the democratic era (think of the prominence of the household budget trope today), the latter has retained an aristocratic tone, however squalid the reality of foreign affairs. This has thrown Trump's more vulgar approach - ranting about unfair competition and promising "great deals" rather than diplomacy - into sharper relief and encouraged the hyperbolic accusations of a lack of competence and integrity.

The distinction between internal and external sovereignty is a fundamental attribute of all organisations, which might make it seem a rather banal observation, but it also allows us to think of politics in terms of transaction costs, which is particularly relevant to the current Brexit negotiations because those centre on the redrawing of the boundary between the two realms. In Coase's conception, a firm will take on the overhead of dealing with an external supplier when the cost of doing so is lower than the cost of making provision inhouse - i.e. when outsourcing is cheaper than insourcing. Rather than a federal superstate or a bureaucratic imposition, the EU can be thought of as a series of outsourcing arrangements, from the regulation of medicines to the control of borders. The separate cases for joining the Common Market and quitting the European Union that bookended our membership focused on the benefits of trade, but the reality was a reform of the scope of the state (which was misleadingly interpreted by europhiles as an attack on internal sovereignty) and choices about what was and was not a "core competence" of "UK Plc". This rational (if often covert) discourse has now been replaced with irrational theatre.

In Coasian terms, what recent months have shown is that UK government ministers aren't very good at doing deals, even allowing for the unhelpful barracking of the Brexit ultras and the Tory press. Where their ability to secure an external deal has been constrained by circumstance, that has often been the consequence of the self-defeating issue of orders internally, such as the premature invocation of Article 50 and the calling of a general election. But this seems all the more baffling when you consider just how successful the UK was in doing deals with the rest of the EU over the last 40 years, from the famous rebate to exemption from the euro and the Schengen Agreement. To put this in terms of the conservative tradition described by Corey Robin, if the US is led by an instinctive aristocrat who lacks aristocratic virtue (a Hayekian without taste), the UK is plagued by inadequate Nietzscheans, such as Boris Johnson and Michael Gove: monsters of self-esteem who can barely hide their contempt for the herd and have only a dilettantish understanding of matters "economicky". If the UK really is a firm, then we unquestionably have the wrong management team.