Why governments' attempts to pick winners produce more losers than winners.
I hope to examine this in more detail later. But I wanted to get on record as soon as possible that the events of the last 48 hours have taken a decisive turn in the battle between inflation and deflation.
Commentators backing one or other economic trend are not really making judgments about economics, but about politics (and psychology). Either effect is a likely outcome of a set of political decisions. The deflationists believe that forces will conspire to make it difficult for politicians to inflate the money supply, without which our economic difficulties naturally lead us to deflationary conditions (like Japan for the past two decades). Inflationists believe that, faced with the pain of deflation, politicians will find a way to inflate their problems away.
The two major indicators that the inflationists have it right, at least in the medium term (the short-term is always too subjective to predict with much confidence) are:
I should have explained sooner the latest sustained silence on this site. Frustrated by the dishonesty of all the main parties with regard to the economic challenges that we face, we formed a new political party (Freedom & Responsibility) to be frank about the problems and to propose some radical solutions. My father stood as its candidate in Maidenhead, against one of the leading Tory wets (Theresa May), and I acted as his agent, and the Nominating Officer and Policy Director for the party. Consequently, all my efforts went into that rather than this site for a while.
It was a fascinating learning experience. For instance, we learnt how much the spending limits make it difficult for independents and minor parties to make any impact on an election, to the great benefit (unintentional, of course) of the main parties who designed the system. They have very generous spending limits or their national campaigns, from which all of their candidates benefit, whilst most of the spending by independents is classified as "local" and therefore subject to such tight constraints that one must choose (for instance) between having many billboards on display around the constituency, and much advertising in the local papers.
What do they teach these people on Oxbridge human sciences courses? First the Cameroons demonstrate their ignorance of what it is that is holding British business back (clue: it isn't that it takes 14 rather than 7 days to register a business). Now, with their plans for "worker co-operatives" to run public-sector services (echoing their calls for a "post-bureaucratic age"), they demonstrate their ignorance of the difference between bureaucratic management and profit (or commercial) management.
It looks like George has been reading the wrong book.
Here's a tip, George: try Ludwig von Mises' Bureaucracy, and then you'll understand what profit management means, why it is preferable but not always suitable, where bureaucratic management is necessary, and how it operates on an entirely different basis to profit management. It's only a little book, and a better introduction to real economics than any mainstream textbook or Oxbridge course. Excuse me for quoting at length, but it has never been more clearly explained (and the Tories obviously need it spelling out in very simple terms):
Bureaucratic management is management bound to comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. His discretion to act according to his own best conviction is seriously restricted by them.
Business management or profit management is management directed by the profit motive. The objective of business management is to make a profit. As success or failure to attain this end can be ascertained by accounting not only for the whole business concern but also for any of its parts, it is feasible to decentralize both management and accountability without jeopardizing the unity of operations and the attainment of their goal. Responsibility can be divided. There is no need to limit the discretion of subordinates by any rules or regulations other than that underlying all business activities, namely, to render their operations profitable.
The objectives of public administration cannot be measured in money terms and cannot be checked by accountancy methods. Take a nation-wide police system like the F.B.I. There is no yardstick available that could establish whether the expenses incurred by one of its regional or local branches were not excessive. The expenditures of a police station are not reimbursed by its successful management and do not vary in proportion to the success attained. If the head of the whole bureau were to leave his subordinate station chiefs a free hand with regard to money expenditure, the result would be a large increase in costs as every one of them would be zealous to improve the service of his branch as much as possible. It would become impossible for the top executive to keep the expenditures within the appropriations allocated by the representatives of the people or within any limits whatever. It is not because of punctiliousness that the administrative regulations fix how much can be spent by each local office for cleaning the premises, for furniture repairs, and for lighting and heating. Within a business concern such things can be left without hesitation to the discretion of the responsible local manager. He will not spend more than necessary because it is, as it were, his money; if he wastes the concern's money, he jeopardizes the branch's profit and thereby indirectly hurts his own interests. But it is another matter with the local chief of a government agency. In spending more money he can, very often at least, improve the result of his conduct of affairs. Thrift must be imposed on him by regimentation.
In public administration there is no connection between revenue and expenditure. The public services are spending money only; the insignificant income derived from special sources (for example, the sale of printed matter by the Government Printing Office) is more or less accidental. The revenue derived from customs and taxes is not "produced" by the administrative apparatus. Its source is the law, not the activities of customs officers and tax collectors. It is not the merit of a collector of internal revenue that the residents of his district are richer and pay higher taxes than those of another district. The time and effort required for the administrative handling of an income tax return are not in proportion to the amount of the taxable income it concerns.
In public administration there is no market price for achievements. This makes it indispensable to operate public offices according to principles entirely different from those applied under the profit motive.
There is much more of similar insight and clarity in this little book, which I urge you to read (it's worth buying, or available to read online if you prefer). But hopefully you get the drift. An understanding of and preference for markets does not imply rejection of bureaucracy where necessary, but it does require an understanding of the critical differences between them. Someone with a real understanding of markets can easily distinguish between the activities where markets are the best means of coordinating social cooperation and the activities where the conditions necessary for markets to work are not present and where bureaucratic management is therefore necessary. In fact, many people unencumbered by an Oxbridge education would probably have a reasonable intuition of which type of management is best to apply in many cases. But the Tories (and Philip Blond, the "Red Tory" who originated this nonsense) are so sophisticated that they believe they can breed exotic hybrids from markets and bureaucracy to coordinate activities in private- and public-sector activities. Of course, they end up with a mule.
Third in the list of this week's bad policy ideas* is the revival of talk of a state-owned or -backed infrastructure bank. The FT wrote approvingly of how both major UK parties are considering this option:
By reducing the risk to investors, it could bring down the cost of capital for the industry and hence the ultimate cost to consumers...
The bank could fund projects such as nuclear plants and wind farms, spreading the risk over a range of investments and issuing bonds that could carry tax advantages and possibly a state guarantee...
In return for the cheaper funding, the industry would have to accept tighter regulation, moving away from the UK's free market for energy towards a framework of returns agreed between companies and the regulator.
The Conservatives' New Economic Model, launched on Tuesday, promises:
We will create Britain’s first Green Investment Bank, which will draw together money currently divided across existing government initiatives, leverage private sector capital to finance new green technology start-ups and back the bright ideas of the future. Lord Stern has agreed to advise us in the creation of this Bank.
It turned out that Lord Stern had agreed no such thing, thank goodness (haven't the Tories noticed that fewer and fewer people think the Stern Review's approach to carbon valuation holds water?). But that's just a sideshow. The point is that, with or without Stern, the Tories are quite committed to the concept.
Meanwhile, Labour (according to the FT) is:
considering such a bank as a way to raise funds from long-term investors such as pension funds
It looks like most of our intellectual class thinks we need goverrnment-managed lending to deal with the difficulties of long-term investment in infrastructure. They are wrong. We need to deal with the reasons that businesses judge there to be insufficient reward to justify the risk of investment in infrastructure, not preserve those inefficiencies by hiving off a chunk of the risk to taxpayers, pension-fund beneficiaries and the like. The following is an attempt to explain how and why.
Second in the list of this week's lousy initiatives* announced by the Government is the micro-generation Feed-In Tariff (FIT), or "clean-energy cashback" scheme. The micro-gen FIT is a scheme to pay significant amounts of money, over and above its value to consumers, for every unit of electricity generated by renewable generators upto 5 mega-watts (MW) in scale.
You may feel that 5 mega-watts doesn't sound very "micro", and indeed it is enough to supply the needs of several thousand houses, but let's not carp. That is hardly the main issue.
Now, I have to declare an interest. Our company may benefit from this initiative. So I would like to thank all of you for your generosity - your extraordinary, overwhelming generosity. But you can afford it, can't you? It's not like we're all strapped for cash or anything...
Don't take my word for it. The Government has detailed exactly how generous you are being. According to their Impact Assessment (IA) of this initiative, it will cost...
£8.6 billion (bn).
But you can't just look at the costs. You have to weigh the benefits against it. And those come to the princely sum of...
£420 million (m).
That's right. According to the Government, it is worth spending £8.6bn in order to make carbon savings of £420m.
As reported on the Environment Agency's website:
A series of civil sanctions will give the Environment Agency the discretion to avoid the time consuming and costly process of having to take businesses that commit certain types of offences to court. These will include monetary penalties, the power to make business repair environmental damage and the power to stop businesses from continuing operations that are damaging the environment. Organisations will also be given a formal opportunity to restore voluntarily any damage they cause. The new powers will not replace the Environment Agency’s approach of using advice and guidance and are expected to be used sparingly. The Environment Agency will still take criminal cases against business and individuals that cause deliberate, reckless and grave environmental damage. Such activities also often undercut law abiding business.
The Environment Agency has already been allowed to usurp the planning process. If you get planning approval, they can effectively over-ride it by applying impossible strictures, and they can overturn it by retrospectively imposing non-viable conditions.
They shoot first and ask questions later, even going public with baseless accusations. Any retraction is grudging, delayed, and not publicized, and apologies rare as hen's teeth. Their behaviour and attitude is arbitrary, depending largely on the attitude of the individual agent. They are one of the single most important obstacles to economic development and to good environmental practice in the country.
They have an infinite budget (because the Government is bound to provide them with funds for any actions they take, however many and spurious). Their powers were already excessive, unaccompanied by responsibility or restraint. And now the Government proposes to further expand those powers, without the inconvenience of having to prove their case in court.
"You have been judged!"
In the established NuLab manner, language is perverted to portray this as a benefit to business:
more flexible powers will be used that make it easier and more cost effective for businesses to operate within environmental laws.
This will mean fairer and more effective environmental regulation.
So progressive is this development, in fact, that it is to be the model for the expansion of such powers to other regulatory organisations:
The Environment Agency today became one of the first organisations to be granted new civil powers to complement existing regulatory powers.
"One of the first"? So there are others to come?
The reason they are to be trusted with extra powers is because the Better Regulation Executive reckon that they have improved their performance. One would think that a purpose of the BRE would be to oppose extensions of arbitrary regulatory powers. If they can't do that, in fact if they are recommending extension of powers, what good are they? Proof that you can't improve regulation by creating regulators to regulate the regulators, or quangos to recommend on how to control the quangos. Another candidate for the bonfire of the quangos that the Tories have promised and probably won't deliver.
There is much more to make you want to scream or sob in the EA's announcement of this development. Read it and weep.
The Real World Economic Review is taking votes for its Ignoble Prize for Economics, "to be awarded to the three economists who contributed most to enabling the Global Financial Collapse (GFC)." The shortlist is outstanding, and indeed many of the nominees who didn't make the shortlist deserve greater recognition for their roles in the destruction of real economic understanding. The candidates are:
I hadn't heard of Richard Portes (his economic "achievements" being rather less significant than his political "achievements"), but once I read his resume (which you can find in brief on the same page as the poll), I had to demote Robert Lucas to fourth place so I could give Portes my vote. This has provided a key missing piece in the jigsaw of causes for the complete obliteration of real economics in the UK, to a greater extent than any other country.
One name is particularly conspicuous by its absence. Where is Shriti Vadera? Gordon Brown is more culpable for the global mess than people realise, and guess which "beneficiary" of an Oxford PPE education joined his team as economic adviser in 1999, roughly when he started his spending splurge? She is now economic adviser to the G20, because you just can't do enough damage within the British government.
A poll for a Noble Prize for Economics will follow, but get your votes in now for the biggest knaves or fools in the field.
I have been lucky enough to be involved in several discussions recently in small, ostensibly-liberal* groups including some leading figures in public life and other fields. They were all private gatherings, and some were under Chatham-House Rules, so I am not going to talk about the content or the individuals, but about a depressing conclusion, which the combination of experiences makes it hard to avoid.
Most of these supposedly-liberal figures are not really liberal. They talk a good game about the generalities and principles of smaller government, but when you push them on the details, they object to the government's winner-picking not on the basis that it's not what governments should or can do effectively, but on the basis that they believe the government has been picking the wrong winners. They have a list of their own winners, and believe that picking winners would work fine if only the government took better advice (i.e. picked their winners).
That is depressing enough - that in a society where self-professed liberals are probably in a minority, only a minority of that minority really are liberal. But that is just the context, not the truly depressing conclusion.
I have seen it said, and believe it to have more than a grain of truth, that one reason why (real) liberals lose is that liberal beliefs are ill-suited to the political fight. The liberal believes in other people's rights to do and say what they want, and respects contrary opinions. His respect for reason, principle, freedom, and the rights of the individual means that the ends can never justify the means. The socialist, or conservative or other authoritarian, believes himself to be possessed of moral superiority over his opponents, that the purpose of government is to steer people towards outcomes that are good for them (whether or not they realise it), and that the ends therefore often justify the means. While the liberal tries to achieve his ends armed only with his powers of persuasion, the authoritarian uses whatever means he judges effective to achieve his ends, without worrying about treading on toes and breaking eggs. Collateral damage is a price worth paying. He will gather many people to his side by such means as self-interest, fear or appeal to base emotions, and undermine his opponents by such means as misrepresentation or tricks of rhetoric and false logic, while the liberal struggles to persuade many people to his view.
That also is depressing, but is also not the depressing conclusion I have in mind. After all, having realised this, the liberal may (though rarely does) alter his approach. I, for one, have no problem with the illiberal imposition of liberal policies. They may not realise it, but those liberals who are not prepared to bite that bullet might as well give up on political delivery of their ideals. They are unlikely to achieve anything other than passing on their ideas to the sympathetic minority.
As I listened to the pseudo-liberals at these gatherings, with their pet technologies or solutions, I began to realise another reason why it would always be difficult for genuine liberals to gain enough political support to implement a genuinely liberal programme. One pseudo-liberal's magic bullet is rarely contradicted by another's magic bullet. But they are both contradicted by the real liberal's opposition to all magic bullets.
The pseudo-liberals can deploy the "politics of and", while that luxury is not available to the real liberal. If one pseudo-liberal likes coal and another likes nuclear, they can agree that the government should promote the use of coal and nuclear power. The real liberal cannot compromise in the same way. There is no meaningful trade-off to be had. They cannot agree to have no winner-picking, but also to pick coal (or nuclear) as a winner.
Of course, the "politics of and" dissolves once in power, faced with the reality of budget constraints. (The pseudo-liberals and authoritarians never have properly understood the concept of scarce resources.) So they compromise again and have (in their respective views) not enough coal and not enough nuclear, but (through the alchemy of taxation and government-debt) more of both than can realistically be afforded or would have been justified by undirected investors. This compromise provides the handy excuse (or "saving lie") when their winner-picking fails - it wasn't their idea or the whole concept of winner-picking that was at fault, but the other person's bad idea. They then start building new coalitions and new compromises, which they believe will work better next time. And so on, ad infinitum.
Only in one rare and fleeting circumstance can real liberals hope to get the reluctant support of enough pseudo-liberals to implement a genuinely liberal programme - when the economy collapses so badly under the weight of complex and contradictory initiatives, that few people can fool themselves that there is enough money to fund the magic bullets. Some may even be converted to real liberalism by the evidence of pseudo-liberalism's failure, at least for a while. Most of them will gradually convert back, though, as the economic improvements created by the real liberal policies provide the funds to rekindle the belief that economic outcomes could be improved by a bit of judicious targeting here and there. Their reversion will be justified by the ridiculously high standards to which they hold the highly-imperfect, trial-and-error mechanism of the market, whereby any imperfections of outcome are seen as failures that could be improved through intervention, even though experience should have taught them that the outcomes of intervention were very much less perfect than the imperfect outcomes from the market.
The truly depressing thought, then, is the combination of all of this:
It's more grist to the Schumpeterian and Marxian mills. Circumstances like 1979/80 only come round once in a blue moon, and when they do, liberals will face severe competition from extreme authoritarians pushing the communist or fascist delusions. We may not be so lucky in the swing next time, and if we aren't, you can get locked into an authoritarian nightmare for a very long time.
But I still don't believe the Schumpeterian or Marxian theories that the collapse and replacement of capitalism is inevitable. I still believe it's a question of individual choice (aggregated as democratic choice), and that the promotion and defence of real liberal ideas is a fight that one must keep fighting. But, my God, it's an uphill battle, with no end in site, nor many allies, nor a strong chance of winning. It makes one appreciate the small number of allies there are, like the IEA, and the Cobden Centre, and Progressive Vision. At least their number is growing slowly, and some new initiatives (like the Cobden Centre) offer some prospect that it may start growing a little faster, and with stronger intellectual foundation.
A couple of months ago, I sat next to a leading economist, reputedly of the free-market variety (though our conversation led me to doubt it). I suggested to him that GDP was not a good indicator of the health of the economy. He said he thought it was, and (immediately betraying the weakness of his position) proferred the straw-man challenge that perhaps I preferred Gross Wellbeing.
Though the smarmy economist would not like to acknowledge it, it is possible to be critical of GDP without endorsing the hippy, Cameroony, pseudo-statistic of Gross Wellbeing. Here is one of many reasons why GDP hides a litany of economic and (particularly) political sins.
Consider two economies identical in every way - same size of population, same output of products, same prices - except for one feature. In one economy, the work is done by half the population available for work, working on average 70 hours per week whilst the other half of the working population do not work. In the other economy, the whole population available for work is in employment, working on average 35 hours a week. In aggregate, the same amount of money is paid in wages for the same amount of work to produce the same amount of goods, and the same amount of wages is spent on the same value (though probably not the same types) of goods. The GDP of the two economies would be identical. But are these economies equally healthy? To my mind, clearly not, and for fairly simple economic reasons.
In a speech reproduced at the excellent Cobden Centre website, James Tyler argues for the introduction of a free money system (i.e. independent, private issuers of currency). This is part of the ongoing debate between sound-money advocates about the best way to achieve their agreed objective. Some believe that money must be backed by a commodity (typically gold) whose quantity is difficult to change rapidly (we might tag this the Misesian approach), others believe like James that competition between issuers will favour currencies whose value is debased most slowly and that private, competitive currency is therefore the way to achieve sound money (this might be called the Hayekian approach, though strictly we ought to call it the late-Hayekian approach, as Hayek had for a long time favoured the former solution, until he despaired that state-owned banks would ever adopt a sound-money approach).
James presents the Hayekian case in positive form - that competing currencies themselves would be beneficial. I am more Misesian than Hayekian, but I can see a case for the Hayekian approach. But that case is negative, not positive. In my opinion, the best argument for Hayek's approach is that it would fail, not that it would succeed. Let me explain.
Money is not a good like any other good. Neither is any other good, of course (I hasten to add before I fall into the mainstream economists' trap of over-generalization). Each good has its own characteristics, which makes it quite difficult to express the value of one good in terms of another. That is why barter is impractical, and highlights two of the key characteristics of money (part of whose function is to get round this problem). To serve its purpose well, it must be liquid and fungible. It also needs to be durable, portable, finely-divisible, and of consistent quantity (so that it retains its value as a reliable metric against which supplies of and demand for other goods can be judged). But for these purposes, the key point is that the more widely accepted a currency is, the more useful it is.
I think we in secular society are missing God. Too many people have an inflated estimation of human understanding, power and impact. They think that our economic activity can be understood and controlled to everyone's benefit by a few experts looking at statistics and pulling economic levers. They think that, of all the animals on the planet and all the forces in the universe, man is the dominant force on our climate, and that we can calculate accurately the causes of changes to our climate, predict those causes and impacts for a century into the future, and know how much of which measures to take over the course of that century to mitigate our impact. They think that they can know what is right for other people and other cultures that they barely know, and impose it on them.
I'm sorry. This is human action, nature and the future we are talking about. We don't even know that much about ourselves. We know less about our acquaintances, almost nothing about the vast majority who are strangers to us, less than that about the complex web of interacting factors that is nature, and the only thing we know about the future is that it will almost certainly turn out differently to how we expected.
That, incidentally, is why I am particularly sceptical about "solutions" to anthropogenic global warming like "carbon-capture and storage" and "geo-engineering". Geo-enginering - "engineering the world" - how arrogant is that? Are we to be real-life Slartibartfasts, putting finishing touches to Norwegian fjords? It is bad enough that we over-estimate our understanding and impact. But to compound that by over-estimating our powers to manage the climate and to anticipate the consequences of global-scale engineering projects with absolutely no benefit other than the theoretical impact on the climate, is to take our arrogance to extremes. Climate sceptics promoting geo-engineering are a particularly strange combination of humility and hubris. "We humans are too insignificant to impact the climate, but sufficiently powerful to engineer that climate", they seem to be saying.
Belief in an omnipotent, omniscient God makes believers acutely aware of their insignificance, ignorance and impotence. It may not be a coincidence that America retains a higher proportion of active worshippers than most other developed countries, and also retains greater scepticism about the power of the state and the accuracy of climate models (though their attitude to exporting democracy shows that their faith has not made them immune to delusions of omniscience). Nor that the growth of the managerialist mindset has been increasing for the century and a half that faith has been declining.
Unfortunately, I cannot bring myself to believe something simply because that belief has social benefits. Fortunately, there is an alternative that can make atheists and agnostics (like myself) feel as insignificant and impotent as any god can make a believer feel.
I am off skiing in a couple of days. As any experienced skier will tell you, you must not fight the mountain - the mountain will always win. If you have stood and looked, overawed, at a sea of peaks as far as the eye can see, you cannot have failed to realise your own insignificance. If you have skied in powder that could slip and bury you at any moment if you do not treat it with the utmost respect (and a good dose of luck), you will have been mortally aware of your own impotence.
It doesn't have to be skiing. Go to the coast during a storm for a graphic reminder of nature's power. Better still, get out on the sea. Windsurfing on a big wave, you are aware that there will be only one winner if you get it wrong. You can never anticipate perfectly how even that tiny section of sea that you are riding will behave. The inevitable sinus-full of salt water at the end of the day is a reminder that you will never conquer the sea, you can only do your best to work with it. And what a feeling it is for those brief moments when you are in harmony with the sea and the wind.
For others, it could be mountaineering, or kayaking, or mountain-biking, or sailing, or surfing, or paragliding. It doesn't matter what, so long as it exposes you to the force and infinite variety and unpredictability of nature.
The greatest understanding we can have is to know the limits of our understanding. So this Christmas, get yourself to a place of worship or to the great outdoors (whichever works for you), and experience a force so great and incognisable that it refreshes your humility and humanity.
This is presumably one in a series. Look also for:
Have Bloomberg (and the financial sector generally) maybe slightly misunderstood the concept of freedom? I'm not sure that it is best used in the sense of "making free with other people's money".
GoogleAds has been pleased to inform me that they are donating $20 million to charities on our behalf for Christmas.
I've got an idea. How about GoogleAds cuts its charges by $20 million, and we'll each decide which charity we'd like to give our savings to, rather than have Google decide for all of us which charities are the most deserving.
Not that monopolies are toxic, or anything...
In this week's MoneyWeek (best economic journal out there at the moment), an article by Simon Wilson on the risk of a "City exodus", prompted by Darling's special bankers' bonus levy, included the following sentence:
"The confusion over whether certain businesses will end up paying this tax is symptomatic of the wider problem faced by the City of London - increased uncertainty and political risk."
Good! It's called "sovereign risk", and I hope they choke on it. The rest of us have been swimming in it for years, thanks to the micro-managing, targeted mechanisms that successive governments have deployed and repeatedly modified, in order to encourage preferred technologies and outcomes (i.e. "pick winners"). And which group of organisations were most instrumental in advising the government about which winners to pick and how to incentivise them? That's right: their corporate pals, and in particular the financiers and consultants in the City. The banding of the RO, and the EU-ETS farrago are classic examples, but there are many others in the energy sector alone.
It's tempting to hope that this might be a salutary lesson that teaches them to oppose targeted intervention, but there's as much chance of corporates, consultants and pin-stripes renouncing rent-seeking and admitting the limits to their knowledge and intelligence, as there is of Gordon Brown admitting he screwed up.
The latest Economic Affairs (the quarterly journal of the Institute of Economic Affairs) arrived today. Its leading topic - Corporate Social Responsibility (CSR) - reminded me that I never published the short talk I gave at an EU "stakeholder" workshop on CSR (or Environmental Social and Governance [ESG] disclosure, as they have re-named that rancid and decaying rose) in Brussels a few months ago. I thought it might be of some interest: (I didn't choose the title.)
Why do some enterprises choose not to disclose ESG information?
Let me be clear first about two reasons why I am not opposed to ESG Disclosure.
- I am not opposed to companies taking account of environmental and social issues. We do, to a greater extent (relative to our size) than most companies who are enthusiasts for CSR.
- I do not argue that small companies should be treated differently to big companies. A sign of a bad system is one where it is necessary to treat small companies differently to big ones.
Indeed, I am not opposed to companies choosing to promote their environmental and social activities in any way they choose, including ESG Disclosure if they want.
What I oppose is any attempt to make it mandatory, or to give preference to companies who do it, or to make it a condition of doing business, or indeed to portray it as somehow virtuous or effective.
Running a business is not easy. Businessmen have large amounts of information to digest, possibilities to consider, and responsibilities to uphold. They must be good at predicting the future course of events, and at reacting quickly to changes they didn't foresee. They must be able to tell the difference between conventional wisdom and fundamental truth. Failing to do so can be catastrophic, as we have had to learn yet again.
Anything that distracts them from this focus - that complicates their judgments or clouds the information available to them - can be detrimental not just to their business, but to society at large. CSR does exactly that.
Accounts and prices are ways of condensing a lot of information into an easily-comprehensible, commensurable form. Commensurability is key to business information, and it is absent from the many CSR standards. What does it mean when we quote an “employee engagement score”? How do we weigh a change in that score against a change in our “business practices measure”? Can we compare our “business practices measure” against other companies' “business practices measure”? And where these scores are achieved through surveys, what are we really measuring – fundamental performance, or how we have influenced people's perceptions on the issue?
Even where you think you have something objective, like a firm's carbon footprint, it often turns out to be illusory. For example, BT (a firm with a strong reputation for CSR) claimed to have cut their carbon footprint dramatically by buying "green electricity", when in reality their contribution to the carbon savings was negligible. Despite an unfavourable decision by the energy regulator, BT maintain this fiction in their latest CSR report.
Where you have a material externality, the right approach is to create an appropriate institutional framework to internalize it. Businessmen and other leaders will then be able to take account of it through their conventional business tools and will have sufficient incentive to act where appropriate. Investors will be able to measure a business's success in acting on the externality through their single bottom line.
What drives real change is not fine words and woolly numbers in glossy reports, but incentives of sufficient value that they justify action. One danger of CSR is that, by creating greenwash for companies to pretend that their minimal and often illusory contributions are somehow significant, it provides cover for those companies to oppose measures that would have real effect.
We must judge, promote and reward businessmen according to their entrepreneurial ability, not their ability to direct or present their company's activities in a way that accords with some prescriptive attitudes to certain social and environmental issues. Otherwise, we will end up with the wrong type of people leading homogenised businesses, undermining the diversity that is vital to the effective functioning of markets.
All of the following businesses were strong proponents of CSR: ABN Amro, ING, Bradford & Bingley, Northern Rock, HBOS, RBS, Woolworths, Anglo Irish Bank, AIG, Bear Sterns, Lehman Bros, Merrill Lynch, Morgan Stanley, Washington Mutual, Fannie Mae, Freddie Mac, SachsenLB, Hypo Bank, Kaupthing, Martinsa Fadesa, General Motors, Chrysler, Nortel, and of course Enron before that.
I don't intend to be that type of businessman running that type of business.
Some friends of mine in the energy sector have been excited by a new report by Dan Lewis on Securing Our Energy Future. This report does indeed make some excellent criticisms of current energy policy, but I'm afraid it does not follow (as they seem to have assumed, perhaps from too quick a reading) that the author's recommendations are of equal merit, nor even that the analysis is balanced or complete. Unfortunately, it is tarnished by Dan's obsession with certain electricity technologies.
The day that Dan treats the three main energy uses (electricity, heat and transport) with the equal weight that they occupy in our energy systems and recognizes their close inter-dependence (particularly between heat and electricity, but also with transport now that electric transport looks an increasing prospect) is the day that his views will deserve serious consideration. Unfortunately, that day has not dawned, as the following section from his introduction makes clear:
"And whilst energy use can be broadly divided up into heating and cooling, transport fuel and electricity, historically and today, energy policy has really always been understood to be about the UK's electricity supply. That then will be the focus of this report."
Really? You mean, because governments have always been blinkered and stupid, that is a sound basis to continue to be blinkered and stupid?
Just a thought: has it reached the point where the best thing that could be done with BA is to break it up and close it down? Is it worth less as a going entity than the sum of its parts? Is it effectively a bed-blocker to making better use of the landing slots at Heathrow and elsewhere?
If they broke it up, sold off the landing rights and any other assets of value, they could use the proceeds to fill as much as possible of their pension black hole, and prevent that black hole from getting worse by closing down the company and making all the expensive future beneficiaries redundant, freezing their entitlement. Given the attitude of their staff, isn't trying to keep it alive just pouring good money after bad?
A return to asset-stripping? It wouldn't be popular in the current climate, but isn't it the logical outcome of 15 years of malinvestment?
See this article for evidence that (a) for the Chinese, Copenhagen (and climate-change generally) is about getting as much out of the developed countries as possible without committing to any major effort on its part, and (b) Chinese media is simply the propaganda arm of the state and not inclined to independent, critical analysis. Where are the counterbalancing considerations?
Interesting that Google chose this as the top news item on the subject, ahead of Reuters, The Times, the FT, BBC, Washington Post, etc. Not that they've sold out to the Chinese government on freedom of expression, or anything...
Lest anyone fall for China's offer to cut its carbon intensity by 40% (relative to 2005 levels) by 2020, let's put that into perspective. If China's economy grows by 8% a year, that commitment would be consistent with a 77% increase in China's carbon emissions in absolute terms from 2007 levels. If it grows by 10% a year, carbon emissions could increase by 107% compared to 2007.
I love Liverpool. But sometimes you wonder if they go out of their way to maintain outsiders' perceptions...
From DEFRA's Waste Strategy Annual Progress Report 2008/9. That's three incidents per Scouser.
As usual, the problem has been "solved" by changing the reporting policy, not by actually reducing the incidence.
These programmes¹ are examples, like the EU-ETS, where government intervention hands commercial advantage to the VILE (Vertically-Integrated Large Energy) companies, to little beneficial effect.
The VILE companies point to the fact that demand for domestic energy has fallen in the last couple of years, as evidence for their success. I have argued this was largely a response to price increases, increasing disparities between costs-of-living and disposable income, and warmer winters (until last year), and not the effect of their energy-efficiency programs. In my opinion, the timing demonstrates the point. EEC was introduced in 2002, and Warm Front in 2000, but domestic energy demand carried on rising until 2005², which coincidentally was when global wholesale gas prices spiked (consumers did not feel the full effect until Winter 06/07, but there was already concern and initial increases in 2005).
It is difficult to prove the relative significance of different factors on this basis. The VILE companies can argue that it would take time for the modifications funded by EEC and Warm Front to accumulate and their effect to be felt. But a small news item in last week's New Statesman offers a pretty clear way to assess which was the more significant factor. If efficiency improvements were the main factor, so the elderly and underprivileged (the main targets of these programs) could maintain a decent temperature whilst consuming less energy, you would expect excess winter deaths to fall. If the price rise was the main factor, so people were choosing to heat their houses less because of the cost, you would expect excess winter deaths to rise.
According to the New Statesman, "excess winter deaths rose by 49 per cent in England and Wales last year in comparison with the year before." The information appears to have come from a page on the National Statistics website.
"This island is made mainly of coal and surrounded by fish. Only an organizing genius could produce a shortage of coal and fish at the same time."