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The great Harvard economist Joseph Schumpeter, writing in the 1940s, predicted the eventual demise of capitalism. He did not want this to happen. But he envisaged that the “intellectual class” would eventually develop values which were hostile to free markets and private property.

Schumpeter’s definition of “intellectuals” was very wide. He meant people in a position to develop critiques of the economy and society, but who were themselves not responsible for running them.

The social science and humanities departments of almost all British and American universities fit this description perfectly. Even though capitalism offers them a standard of living far superior to that of any alternative system, they appear only too keen to undermine it.

The idea pervades these departments, for example, that the prosperity of the West depends upon slavery. It is this which underpins the current fashion for wanting to pull down statues of historical figures, including Britain’s greatest naval hero, Admiral Nelson.

One of the things on which the success of the West actually does depend is what we might call the empirical mode of thought. Put more simply, a theory is only any good if it is tested successfully against real life evidence.

Slavery still exists even today. In Mauretania, slavery was not abolished until 1981. Today, 1 in 25 of the entire population are estimated to be slaves. Yet Mauretania is not rich. Indeed, it is one of the poorest countries of the world.

For thousands of years, slavery has been widespread. The economy of the Roman Empire was essentially based upon stupendously large estates, all worked by slaves.

Yet none of these societies ever became rich. It is only under capitalism that this has happened. So the idea that slavery makes a society prosperous is rejected very decisively by the evidence. But this does not stop it from being almost an article of faith amongst many British academics.

Ludicrously, many of these people describe themselves as “socialists”.

The point simply cannot be made too frequently that we have seen several major natural experiments, which contrast the empirical performances of economies based upon market oriented principles with those based upon the planned economy principles of socialism.

The United States and the Soviet Union, West and East Germany, South and North Korea, India and China under different forms of socialism until the 1980s and India and China under different forms of capitalism since then. Venezuela is but the latest example. Capitalism wins decisively in every single case.

Countries such as South Korea which were very poor in the mid-20^th century and which have adopted the principles of market oriented economics have since flourished.

Economists enjoy arguing amongst themselves. But the profession in general believes in private property and markets as the basis for prosperity. Empirical studies, rather than pure theory, have become much more important within economics in the past 20 to 30 years.

Economists need to take a bit of time out to confront their common enemy. Namely, the unscientific output of many social science departments in British universities.

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Ten years ago, the financial crisis began to grip the Western economies. During the course of 2007, GDP growth slowed markedly everywhere. By the end of 2008, output was in free fall.

A key theme in economic commentary is the sluggishness of the subsequent recovery of the developed economies.

The picture is not quite as bad as it is usually painted. True, last week the Office for National Statistics announced a dip in UK growth in the first quarter of this year. But from 2009, the trough of the recession, to 2016, GDP growth averaged 2.0 per cent a year.  Not exactly a stellar performance. But from 1973, the year prior to the major oil price shock, to 2007, the British economy expanded by just 2.3 per cent a year on average. The contrast between the two periods in the US is slightly greater. From 1973 to 2007, growth averaged 3.0 per cent a year, and since 2009 it has been 2.1 per cent.

There is a very stark contrast with the experience of the 1930s, the last time there was a global financial crisis. This time is different, things have only got better. The recovery may be slower than desirable, but it has been much more widespread than in the years following the Great Depression of the 1930s.

A decisive indicator is the length of time it took not just for growth to resume, but for the previous peak level of GDP to be regained.  So in the UK, for example, the economy started to grow again in 2010. But it was not until 2013 that there had been enough growth for the economy to get back to its 2007 size.

Looking at a group of 18 developed economies, which includes all the main and medium sized ones, GDP had regained its previous peak within 3 years in no fewer than 8 of them. By 2016, everyone in the group except Finland, Italy and Spain had a GDP which exceeded its previous peak.

Three years after output began to fall in 1930, not a single economy had managed to regain its 1929 level of output. Even by 1938, output was below its 1929 level in Austria, Canada, France, the Netherlands, Switzerland and Spain.

Perhaps Keynes’ most powerful insight was why the slump was so prolonged. He developed the concept of “animal spirits”, which are not a mathematically based prediction of the future, but the sentiment of the narratives which companies form about the future. He wrote: “the essence of the situation is to be found in the collapse of animal spirits…. this may be so complete that no practicable reduction in the rate of interest will be enough.”

Zero interest rates and low growth! Keynes got there before us.

Still, capitalism has performed much better in the aftermath of the financial crisis of the late 2000s than it did in the crisis of the early 1930s. Animal spirits may not be buoyant, but they are in much better shape than in the 1930s.

As published in City AM Wednesday 2nd May 2017

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The Prime Minister recently announced that the civil service will now introduce name-blind recruitment.  When people apply for public sector jobs, their name will not appear on the documents sent to the appointment panel.  Major companies such as HSBC, KPMG, the BBC and the NHS are following suit.  Economists have produced a substantial body of evidence which shows that some employers discriminate on the basis of the names of the applicants.

The classic paper was written as long ago as 2003 by two academics at the National Bureau of Economic Research.  The title is “Are Emily and Greg more employable than Lakisha and Jamal? A field experiment on labor market discrimination”.  The article does what it says on the tin. The answer to the question is ‘yes’.  People with names which sound white have a better chance of getting a job than those with names which are obviously black or Muslim. The results have since been replicated in numerous studies.

Perhaps David Cameron’s measures do not go far enough.  The ethnic origin of an applicant will, after all, be immediately apparent at the interview.  The job seekers should really enter the building covered by a security blanket, sit behind screens, and have their voices distorted by computer so they all sound like Stephen Hawking.

More seriously, the question of discrimination was discussed at length by Milton Friedman in his great book ‘Capitalism and Freedom’.  He pointed out that capitalism was by far the most successful form of social and economic organisation for reducing discrimination.  We can readily contrast the situation in, say, the UK or Germany with that of the treatment of so-called ‘enemies of the people’ and their families under socialism in the former Soviet Union and China, and the widespread gender, sexual and religious intolerance found in many Muslim countries.

Friedman’s argument was essentially that a market economy separates economic efficiency from irrelevant characteristics of the product or service being offered.  So when you buy a shirt, for example, you are not interested in the colour or creed of the person who made it, just in whether it is a nice shirt at the right price.

So far, so good.  But Friedman went on to much weaker ground by arguing that the very concept of discrimination did not make sense in a market economy.  In particular, employers who discriminated would be making less efficient choices and so would eventually be forced out of business by non-discriminators.

This makes logical sense.  But there is the question of the additional costs a company might incur in conducting a more extensive search process.  These have to be balanced against the potential loss of efficiency, which might be quite small.  A more fundamental point is that markets for goods and services do not usually expose inefficiencies swiftly.  Substantial differences in productivity between firms in the same industry can persist for years.

Markets are indeed much more colour, creed and gender blind than any other form of economic structure.  But they are not completely perfect, and David Cameron’s initiative is to be welcomed.

As published in City AM on Wednesday 4th November 2015

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The activities of the House of Lords are very much in the news at the moment.  But the members do carry out serious work, not least on the economic affairs committee.  Last week, Lord Green, former chairman and chief executive of HSBC, appeared before them.  Yes, the noble Lord admitted, the bank had not got everything right. “There were things we should have done differently with the benefit of hindsight”, he told the committee.

This sort of apology has become routine from those who led banks in the run up to the financial crisis.  What was certainly not routine was Lord Green’s view on how the board could obtain reliable information about what was really going on inside the bank.  He was nostalgic for what he called the ‘old’ HSBC before the takeover of the Midland in 1992.  Then, he said, “you could rely on the people on the spot because you knew them, and had probably been to school with them”.   Rather disappointingly, at a time when the Prime Minister likes to surround himself with old school chums, Lord Green himself only went to Lancing rather than to Eton.

But his rather throwaway remark does raise an issue of fundamental importance for all large organisations like HSBC.  Just how does the board find out whether managers are cutting corners in order to meet profit targets?  Indeed, are the profits which are being reported fair and true?  The directors of Barings were certainly duped by Nick Leeson and lost their bank as a result.

Lord Green longed for the days when he had been to school with key people reporting to the board.  That is certainly one approach to obtaining sound information.  Stalin adopted a similar method in order to know what was actually being produced in the Five Year plans of the old Soviet Union.  He believed Nikolai Voznesensky to be completely reliable and promoted him to run the entire Soviet economy when still in his thirties.  Voznesensky did indeed provide years of loyal service, though his first slip up was his last.  He was shot in 1950.

Boards can’t liquidate employees who distort the information which flows up to them.  Yet even this measure, which an economist might regard as providing the ultimate incentive to behave properly, does not seem to have worked.  So much depends upon the internal culture of an organisation, as the long and interesting discussion between Lord Green and the members of the economic committee makes clear.

Recent innovations using modern computer science might help.  For example, the emotional content of internal emails and communications can be extracted using advance textual analysis.  Potentially risky attitudes might be detected, even though the reported numbers tell a different story.  Perhaps even more powerfully, by the use of network theory, the patterns themselves can reveal anomalies, regardless of the content of the messages.   The Enron internal email traffic has been dissected in a number of academic papers, and the problems were certainly identifiable in advance.  At heart, however, it is the culture, the human factor which matters, and it is here where many banks have yet to clean up their acts.

As published in City AM on Wednesday 29th July 2015

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