The Student Revolt Against Tuition Fees and the Limits of Public Choice Theory

For what seems like decades the Right has claimed that markets or quasi markets in social goods and services protect the interests of consumers, and that public services are inherently subject to being run in the interests of the producers rather than the people who use them unless they are subject to such external discipline. These assumptions have been hard-wired into policy debate to such an extent that they have become all but invisible. In other words, they've become hegemonic.

The problem is defined as the constant danger of 'rent seeking' by public sector providers - exploitation of a monopoly position to rip off or under serve 'consumers'*. The implication is that we need 'contestability'.

Much of the middle level policy debate that takes place around 'public sector reform' in either its New Labour or Coalition manifestations can be boiled down to an argument about which services should be subject to which different kinds of such contestability; how immediate or regular such threats should be; and the degree to which the boundaries between third sector not for profit alternatives and the private sector itself can be blurred in defining potential alternative managers of public services.

Political and policy 'creativity' gets defined as thinking up new ways in which this basic underlying default assumption can be packaged as empowering consumers. Hence the change of emphasis from direct efforts at privatising state services such as we saw in the 1980s to more nuanced emphases on consumer choice of services, as evident in the drift of schools policy over the last decade or the shift to user controlled (a misnomer) budgets in social care. This social care development has the added 'advantage' of blurring another key boundary: between what the state should pay for and what each individual should pay for.

The Browne report is shot through with this kind of thinking, as Stefan Collini so tellingly analyses in the LRB,

"Browne proposes to scrap most of this. In its place, he wants to see a system in which the universities are providers of services, students are the (rational) consumers of those services, and the state plays the role of the regulator. His premise is that ‘students are best placed to make the judgment about what they want to get from participating in higher education.’ His frequently repeated mantra is ‘student choice will drive up quality,’ and the measure of quality is ‘student satisfaction’.....even in its own wildly optimistic terms, this report proposes a hefty cut in funding. In suggesting that the standard fee should initially be set at £6000 (which particular institutions might choose to exceed, though there will be various disincentives, including a ‘levy’ which would claw some of it back), Browne acknowledges that this would not fully replace the value of the block grant even for the most successful institutions. .....‘The purpose of starting the levy at a lower point is to instil a focus on efficiency throughout the system.’ Lots of courses may have to be closed and lots of people sacked, but that must mean, by definition, that they weren’t offering a product the consumer wanted, so good riddance."

This is, of course, manifest nonsense: ask the students. They seem to have a fairly good grasp of the fact that it is the providers - especially the Russell Group - not themselves, the putative 'customers', who benefit from the tuition fee rises. In fact the whole tuition fees plan arising from the Browne report could be seen as a form of provider capture: but one based on introducing quasi markets and 'consumer choice' - the very mechanisms which so called Public Choice theory tends to recommend as antidotes to provider capture. So here we a have an apparent case of the empirical/practical dog eating its own theoretical tail as it were: the whole approach collapses into incomprehensibility, at least when applied in this particular circumstance.

All theories have limits to their applicability. It may yet prove to be the Coalition's regret that public choice theory in Britain reaches its' limits just at a time when they're committed to slashing the state. But then that would leave them 'ideologically naked' as it were, simply cutting for cutting's sake. & that's not a good place for any government to be.





*Does this ever actually happen? Yes. I have direct personal experience of it happening. But does it happen often enough to be thought of as a structural problem which demands wholesale 'public sector reform'? No, I don't think this is proven in any sense, despite various Public Choice theorists having won the Nobel Prize for Economics. So I suspect we dealing with one of those 'true but trivial' issues which have engaged Chris Dillow in recent weeks - but one which is being used, systematically, for directly political ends.

Zombie Ideas

John Quiggin, a social democratically inclined Aussie academic economist, is writing a book including a chapter on the Efficient Market Hypothesis (and other 'zombie' idea): he's trying out rough drafts of bits of the chapter over at Crooked Timber. It's all worth a read, but I like this bit:

"Once the EMH is accepted, there is no need to worry about imbalances in savings and consumption. International capital movements can be seen as the aggregate of a large number of transactions between ‘consenting adults’, buying and selling financial assets in markets which, according to the EMH, have already taken into account all available information about future risks. If a national government has better information, the appropriate response is not to act on it, but to release the information to the markets.

On the traditional, income-based view, by contrast, asset-based arguments are misleading and dangerous. By the time sentiment shifts in asset markets, the opportunity for an orderly adjustment will already have been lost. Advocates of the traditional view pointed to episodes of contagious panic in financial markets..."

Well, quite.

A Question of Theory?

I'm working my way through this book; it's not a great choice for a non economist like me, and some of it is a bit above my head. Moreover, some professionals seem to confirm my inexpert feeling that it's a bit of a curate's egg as well. But given the title I thought I had to give it a go. Well, the title plus the fact he wrote a couple of smashing Spokesman pamphlets thirty years ago: Socialism and Parliamentary Democracy and Trotsky and Fatalistic Marxism. Both of those influenced me a lot as a teenager...but he's changed his view of the world it seems to me, though I'm cautious about judging the theoretical development of people whose theories I don't fully understand.

What I will take away from the book, however, is this rather striking set of phrases:

The...standard core of utility theory is non falsifiable. ...Boland (1981) asks if any conceivable evidence would refute the standard assumption of maximising behaviour. He shows that such an attempt at falsification could never work. Any claim that a person was is not maximising anything can always be countered by the response that the person is in fact maximising something else. Given that we can never in principle demonstrate that 'something else' is not being maximised, the theory is invulnerable to empirical attack...

The problem with the maximisation argument are doubly severe when it assumes utility is being maximised. There is no experimental or other phenomenon that cannot in principle be 'explained' within a utility maximising framework...No evidence can, in principle, falsify the assumption that behaviour results from individuals or households maximising their utility.....by encompassing all possible arrangements and interconnections, the important relationships and connections are lost in a sea of universal possibilities. Accordingly, the universality of a theory does not necessarily mean it is useful or informative...

A chapter of carefully phrased caveats and examples follow. But my interest remains with this broad opening claim. Does it imply that the model of 'rational' behaviour which underpins mainstream economics is actually unprovable? & isn't this the very complaint that Popper raised against Marxism all those years ago?

The Great Financial Crisis: A Review

30 years ago, academic sociology took two things seriously: the idea that as a discipline it was, as my non-Marxist professor told me in the first week of my undergraduate degree, 'nothing more than a century long conversation with the ghost of Marx' and the concept that it was the last redoubt of the idea of 'political economy' as conceived of by the pre-Marginal Revolution classical economists. Whether either of these propositions were ever true is a matter I'll leave to those who specialise in the archeology of academic pedagogy. But I have a very definite sense that they soon stopped being true as the postmodernists swept through sociology departments throughout the land in the 1980s.

But what it did mean was that the spotty faced young Charlie got to read, if not always understand, a number of left wing economic texts, notably Monopoly Capital (1966) by the Americans, Paul Baran and Paul Sweezy. (Sweezy has some claim to be American Marxism's only authentic native genius, a claim I'll leave others to debate). It was a conscious attempt to describe and analyse the political economy of the United States in the post war 'Golden Age', and to meld together Marxist and (left) Keynesian economic theory.

The key idea of Monopoly Capital was that capitalism creates huge surpluses for a small oligarchical group which led to economic stagnation, a term which is to be understood technically as meaning the economy functions well below its capacity with inherent unused productive capacity and significant unemployment and underemployment. (Stagnation in this sense is quite compatible with most people feeling richer over time, which clearly has happened in both North America and throughout the West). There are countervailing tendencies of course - notably military spending, a massive sales effort ( cf 'the rise of Madison Avenue') and the stimulus of new innovations - but these are intermittent and not always successful, whilst the tendency towards stagnation is permanent and structural. In retrospect it can be seen as the perfect theoretical lens for a left wing economist who grew to maturity during the Great Depression to use to look at the Keynesian Golden Age: it didn't deny things had changed since the 1930s, but questioned how long this could last.

Stagnation occurs because owners of capital must have something to invest in in order to further accumulate, but this depends on there being sufficient demand. But as industries mature they require less investment; not all new technologies need huge sums of investment in the manner , say, the switch from railways to cars did; growing inequality can limit demand in mass markets; and, in any event, the process of capitalist monopolisation reduces competitive pressures and allows the build up of larger and larger surpluses.

Baran and Sweezy did mention the growth of debt as a further possible countervailing tendency to stagnation but didn't accord it any great priority. Sweezy came to see this was a mistake, and did quite a lot of work later in life on the growing financialisation of US capitalism. Now his ideological heirs, two American scholars associated with the independent Marxist journal Sweezy founded, The Monthly Review, have published a series of essays of great interest - The Great Financial Crisis, Causes and Consequences by John Bellamy Foster and Fred Magdoff.

They quote Sweezy himself on the changes since the 1960s:

"...By the end [of the 1980s] the old structure of the economy, consisting of a production system served by a modest financial adjunct, had given way to a new structure in which a greatly expanded financial sector had achieved a high degree of independence and sat on top of the underlying production system."

In the 1960s, manufacturing was the source of 50% of all the profits in the USA, and the financial sector only produced 15%; by 2005 the position had almost reversed with only 15% of profits coming from manufacturing and around 40% from financial activities. The vast surpluses have been invested in FIRE (finance, insurance and real estate) activities; consumption and therefore demand have been buoyed by increasingly sophisticated instruments of debt, which allowed even a population on stagnant wage levels to live beyond their means. But - and this is crucial for understanding the power of Bellamy Foster's and Magdoff's argument - it isn't just a question of household debt alone. The more the growth in the productive economy slowed, the more capital sought to leverage its way out of problems by expanding debt and gaining speculative profits. So by 2007, when US GDP was around $13.8 trillion dollars, total national debt amounted to no less than $47.7 trillion - of which $13.8 trillion was specifically household debt, but a further $16 trillion was held by financial firms and $10.6 trillion by non financial business. (table 6.1, page 121).

So this financialisation of capital is not just a question of 'irresponsible' families taking on mortgages they couldn't possibly afford - it's a systematic change. The crisis might have come in the sub prime mortgage market but this was merely 'the straw that broke the camel's back': it wouldn't have mattered have so much if the whole system wasn't now orientated towards endless financial speculation. A new term for this system is now required: Monopoly Finance Capital. It is inherently unstable, requiring a constant stream of speculative bubbles to keep the show on the road. Minsky is much referred too.

Is there a way out of this nightmare? Bellamy Foster and Magdoff quote Sweezy again, on the desirability of a redistribution of income and wealth on a massive scale, and/or a massive expansion of civilian state spending. But they doubt the feasibility of a conventional Keynesian expansion (aka 'Obamanomics') because of resistance from the financial markets (aka 'class struggle from above'). So they end on a rising polemical note of rhetoric calling for 'labor to rise from its ashes' and the population to seize control of its political economy. Which does rather remind me of a line from the Billy Bragg song, North Sea Bubble :

"My American friends know what to do - but they'll wait a long time for a Beverly Hills Coup"

But it would be unfair to end on this note. This is a clearly written and very accessible collection of essays which deserves a wide readership on both sides of the Atlantic. It demonstrates the possibility of linking left Keynesian and Marxist theory in a powerful way, and indeed of the continued relevance of a specifically Marxist economic framework. What it doesn't do, ultimately, is convince me as a work of political economy because it doesn't link its' economic analysis to a strategy for change, however sketchily identified. This is not just a question of its vagueness on the subject of agency referred to above, but also its lack of engagement with the global aspects of financialisation, especially the degree to which Chinese, Japanese and Middle Eastern money now prop up the American economy. Nonetheless, it's hard to imagine any comprehensive explanation of the current crisis which doesn't engage with the Monthly Review analysis.

What Do We Want? Who Will Help us Get It?

Chris over @ S&M has a challenging post today, bewailing 'just how very far we are from any Marxist notion of revolution'. He says this for three reasons: the weakness of any plausible agency of change; the similar absence (or at least lack of popular awareness) of any plausible non capitalist economic models; and the continual framing of the debate in terms of a state v free markets dichotomy. He is, of course, completely right.

Of course, there are those on the left who, like some mechanistic old Social Democrat of the 1890s, feel capitalism is quite capable of seriously shooting itself in the foot without very much opposition at all. But even GTR ,who likes this stuff, only concludes it means ,"We are all fucked in other words. Unless we all get our shit together."

Well, yeah. No shit Sherlock.

A British Left has disappeared before. In some obscure way, I find it comforting that the 'Left' which disappeared, more or less, during the mid nineteen century, was driven by a democratic, ultimately post French Revolution agenda, albeit with an important Owenite subsidiary strand. It was primarily about electoral arrangements and the franchise (cf Chartism). The 'Left' which re-emerged afterwards was different - more focussed on industrial struggles, more concerned with financial as well as democratic equality, more 'socialist' or at least incipiently socialist) in a sense those of born in the twentieth century might recognise.

I've often wondered if we're currently living through a similar period, when the ideological foundations of the Left of my youth crumbles - but a period of apparent capitalist hegemony actually acts of a midwife to a new way of looking at the world. A flight of fancy, perhaps, but one way of looking at the times we're living through in terms of framing a coherent Red-Green response to changing conditions. But it won't happen during this crisis. I fear the most we can hope for is that the coming economic storm - and it is still coming, for the majority of us, no matter what happened at the G20 - acts as a midwife for the popularisation of some of the ideas Chris Dillow is talking about.

But that will still leave us with the problem of agency, a subject to which I'll have to return another time.

Parecon Optimism

Robin Hahnel is one of the goto guys for the whole parecon thing, probably the most developed form of post-Marxist socialist economic theory. (So post, in fact, they don't even use the word 'socialism' very often; I'm never clear how far this is a purely tactical choice or something deeper). Part of me is strongly attracted to this green, semi-anarchist vision, but another part is more than little skeptical about the viability of any schema depending on such a remorselessly high level of popular participation. But I'd recommend his ABC of Political Economy book to anyone as a fine, 'A Level-ish'* introduction to thinking about economic issues from a critical perspective.

All this is by way of clearing my throat before pointing to a very clear article he's written explaining the motivations behind the G20 protests. I particularly like this bit - its optimism cheered me up:

"....we reject the economics of competition and greed as a human necessity and embrace the possibility of an economics of equitable co-operation. These approaches to solving our economic problems are fundamentally different. One way motivates people through fear and greed and pretends that market competition can be relied on to bend egotistical behavior to serve the social interest, when too often it does not. The other way organizes people to arrange their own division of labor and negotiate how to share the efficiency gains from having done so equitably. This way motivates people to work at tasks that are not always pleasant, and to consume less than they sometimes wish, because they agreed to do so, secure in the knowledge that others are doing likewise. The driving force behind our economic world is participation and fairness, no longer fear and greed.

There is agreement among us that economic decisions should be made democratically, not by an elite or left to market forces. We would also give workers, consumers and localities more decision-making autonomy than traditional approaches to economic planning have allowed.

But, not surprisingly, there are different ideas on how best to do this. Given that before the demise of the communist economies most anti-capitalists simply looked to those economies for answers, and that after the fall of the Berlin wall many people stopped thinking about alternatives to capitalism altogether, it is surprising how much progress has been made. Much work in fleshing out visions into rigorous models, comparing similarities and differences, and evaluating strengths and weaknesses of different procedures to guide equitable co-operation has occurred already, and the pace of this work will surely increase in light of renewed interest. "

*Well, ‘A Level-ish’ if you ignore the equations, the way I do...

Via

Polanyi Quotes

Thirty years after I ignored the book on an undergraduate reading list, I'm tackling Karl Polanyi's 'The Great Transformation - the Political and Economic Origins of Our Time'. For a book originally published in 1944 it's holding up quite well.

I especially like his insistence that 'labor, land and money' are fictitious commodities.

"...labor, land and money are obviously not commodities; the postulate that anything that is bought and sold must have been produced for sale is emphatically untrue in regard to them...Labor is only another name for a human activity which goes with life itself...nor can that activity be detached from the rest of life... land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance."

So what would happen if the market mechanism was the sole director of these fictitious commodities? Well, 'the demolition of society':

" In disposing of a man's labor power the system would...dispose of the physical, psychological and moral entity 'man' attached to that tag. Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure; they would die as the victims of acute social dislocation through vice, perversion, crime and starvation. Nature would be reduced to its elements, neighbourhoods and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed. Finally the market administration of purchasing power would periodically liquidate business enterprises, for shortages and surfeits of money would prove as disastrous to business as floods and droughts in primitive society."

Suddenly I'm nostalgic for social democrats who meant it.

High Finance Theory Comes Round To Common Sense

One of the few points of agreement between a basic leftwing view of the world and the general opinion of the famous man or woman on the Clapham omnibus is that , in essence, the Stock Market is little more than gambling. This opinion is routinely patronised as not understanding the essence of high finance in almost all public discussions. We have been endlessly assured that the Stock Market allocates capital to productive enterprises in an efficient way.

I only mention this embarrassing feature of 'leftwing common sense' because, it appears, it is gaining some support in unexpected places. Willem Buiter of the LSE and FT - and formerly of the Monetary Policy Committee - wants the derivative markets to operate on an insurance basis rather than a gambling one. Only things which can be owned in some real sense - rather than just bet against - can be insured. This would massively downscale such trades in his view:

"It is certainly likely that notional outstanding stocks of derivatives and the trading volumes would fall to a quarter or less of their 2007 levels if derivatives could be used only to buy insurance, not to place bets."

But this is necessary because, actually, leaving things as they are is a recipe for proving those simple minded leftwingers - and the folk on that Clapham bus - right:

"The lotteries or bets that are the essence of contingent claims/derivatives markets could increase allocative efficiency if they permitted the given, exogenous risk in the economy to be born by those most able to bear it. Instead that risk has ended up with those most willing but not, judging by results, most able to bear it. .... It creates more opportunities for going bankrupt. Defaults and fear of defaults ..... are a source of macro-endogenous risk, even if no individual trader has market power or attempts to manipulate markets. Bets taken in the CDS markets..... or through spread betting cause massive redistributions of wealth and income that can destroy real resources, influence the prices of ‘outside’ assets and bring down otherwise viable economic entities. "

Antonio Gramsci's Thought For the Day

“Hence, squalor of cultural life and wretched inadequacy of high culture. Instead of political history, bloodless erudition; instead of religion, superstition; instead of books and great reviews, daily papers and broadsheets; instead of serious politics, ephemeral quarrels and personal clashes" Prison Notebook, p228

Via. With added contemporary weblinks.

The relative autonomy of the state?

Thirty years ago I wrote my undergraduate thesis on 'Marxist Theories of the State', of which there seemed to be an inordinate amount in the late 1970s. At certain academic institutions whole flocks of such theories could be dimly glimpsed poking about in their natural habitat of the thick undergrowth of wordy incomprehensibility.

As you might imagine, I'm rarely asked to recap on my wide reading on this subject at dinner parties. Which is perhaps just as well, as I don't think any of the great, grey radical tomes I waded through ever quite envisaged a situation where a Labour government was determined not to nationalise the banks whilst the Financial Times and quite a lot of bankers want them too.

Advanced Capitalism, Backwards Socialism (Round 2) ?

I've grumbled on this blog that the Left blogosphere - with a (very) few honourable exceptions - hasn't really got the measure of this economic crisis.

But, oh my, Angry Alice has:

"Today was an historic moment. The RBS and its barely comprehensible loss signaled the end of an era. The days when finance was the engine of the UK economy are definitively over. The UK banking sector has become the 21st century equivalent of coal mining; over-staffed, over-paid, and profoundly unproductive.

When the RBS announced that loss, it shot a fatal arrow straight into the heart of the UK banking sector. This loss is equivalent to 2 percent of GDP..... This is a bloated and obese behemoth....What is true of the RBS is also true of all UK banks. They are too big; they employ too many people and their funding model is unsustainable. .... we as a nation simply don't have enough money to cover up the losses of our banks."

I don't know anything of Alice's general world view, except to say that her links seems financially related, and those who comment on her blog appear, to me at least, to have a libertarian/right wing tone. But I don't think it's too wild a step into the unknown to hazard a guess she's not a socialist of any stripe.

But she's got an inkling of the immensity of what's happening. Just as the Right did in the late seventies and early eighties - and just as (most of) the Left didn't then.And don't seem to have now. It was precisely that dichotomy which drove the young Charlie into arms of the 'yummies' (Young Upwardly Mobile Marxists, copyright New York Times). How else to remain true to the basic values of my personal history and yet recognise the reality of change?

& now we have bank nationalisation discussed as a technical necessity in the op-ed columns of the Financial Times. One of their people even says, "Shoot the bankers, nationalise the banks".

& where are the Left? What is our strategy for this new world opening up before us ? A strange and confusing world where the other side seem to want to adopt many of our - previously considered outlandish - policy prescriptions? They will "steal our clothes and run away", as Disraeli did to the Whigs 150 years ago, as Thatcher did with her rhetoric of freedom, unless we can grapple with this new modernity as well.

Come back Martin Jacques, all is forgiven.

A Stray Thought on Politics and Management

I do like Simon Caulkin, the Observer's Management writer. He is bright, committed, well-read in his subject and almost totally impervious to the beguiling sirens of management bullshit. This week, however, he makes an explicitly political judgment :

"As a class, ever since the separation of ownership and management in the 19th century, managers have always occupied a neutral position at the heart of the enterprise - neither labour nor capital, but charged with combining the two for the benefit of both the company and society itself.

Everything changed in the 1980s, however, with the advent of Reagan, Thatcher and Chicago School economists who preached the alignment of management with shareholders in the name of "efficiency". In effect, "efficiency" came to mean short-term earnings to the detriment of long-term organisation-building; what was touted as "wealth creation" was actually "wealth capture", from suppliers, clients and employees as well as competitors, on the grandest scale since the robber barons. Its purest expression was private equity."

It would be all too easy to rip into the assumption that management is somehow ‘neutral’ in the struggle between labour and capital. Of course it isn’t – if it was management wouldn’t measure success by profits and dividends.

But let’s not get hung up on the terminology intrinsic to different world views because, stripped of this default assumption, there is something in the idea behind his phraseology. I do think ‘organisationally based’ representatives of capital can often be more attentive to the social ecology necessary to ensure long term business growth than the disembodied concerns of pure finance capital. & that social ecology undoubtedly includes both suppliers, customers, regulators and even employees. This, surely, is another way of thinking about the debate around 'embeddedness' which the economic sociologists are so keen on.

There's an intellectual space here which a wise and forward thinking political left might seek to colonise. A space where concepts of social solidarity - remember Orwell said the basic purpose of socialism was 'human brotherhood' (sic) -could be intertwined with alternative notions of 'efficiency'; a space where at least some of the holders of the technical skills necessary to co-ordinating complex organisations might even be partially won over to the idea of greater workplace democracy. A space, if you like, where the idea of socialism might once again attempt to start being about the future and not the past.

The trick, however, would be to find this space without succumbing to the illusions of 40 years ago and the potential for the 'white hot heat of the technological revolution'.