Margaret Thatcher and Me

Writing about web page http://www.voxeu.org/article/economic-legacy-mrs-thatcher

Like a million other bloggers and tweeters, I woke this morning thinking about Margaret Thatcher, who has just died.

The front page of this morning's Coventry Telegraph calls her "The woman who divided a nation." In the Financial Times, Janan Ganesh notes that those who call her policies "divisive" often wish to avoid a simple fact: "It is almost impossible to do anything significant without enraging some people"; at best, they indulge "the fantasy that her reforms could have been undertaken consensually."

In my heart, at the time, I was enraged by what Margaret Thatcher did. But now she belongs to history. In my head, looking back as an economic historian, I have to acknowledge the necessity of it. When she came to power, our country was a pretty miserable place: stagnant, strife-torn, and full of bullies. Money was more equally distributed than it is now, but money was worth less than power, and power was highly concentrated in the hands of state monopolies, private monopolies, and organized labour. If you are among the many that think heavier taxation and more market restrictions can make a more consensual, peaceful society, you need to take a closer look at this period of our history. In short, Margaret Thatcher did not invent social division and conflict, which were already present, but she redrew the lines in favour of market access and free enterprise.

When the economic historian looks back, what else is there to see? No one has looked back more clearly than my colleague Nick Crafts on yesterday's Voxeu, so I'll leave the last word on that to him.

I'll finish on a personal note. Nothing annoyed me more at the time than what Margaret Thatcher famously had to say about "society," for I am a social scientist and what she appeared to say was that society does not exist:

I think we have gone through a period when too many children and people have been given to understand “I have a problem, it is the Government's job to cope with it!” or “I have a problem, I will go and get a grant to cope with it!” “I am homeless, the Government must house me!” and so they are casting their problems on society and who is society? There is no such thing! There are individual men and women and there are families and no government can do anything except through people.

Yet a close reading shows that Thatcher had in mind something very close to the kind of model that all economists must use to understand the distribution of income in society, based on the idea that income must be produced by some before it can be redistributed to others:

When people come and say: “But what is the point of working? I can get as much on the dole!” You say: “Look” It is not from the dole. It is your neighbour who is supplying it and if you can earn your own living then really you have a duty to do it and you will feel very much better!”

It's a message for today. I didn't want to hear it at the time. Thatcher didn't seem too bothered by that, and that annoyed me even more. It's still hard for me to say it, but it was a good thing she didn't care.

Mark Harrison : 09 Apr 2013 10:03 |  Tags: Economics Politics Thatcher |  Comments (10) |  Close comments |  Report a problem

North Korea: Dangerous, but Not Crazy

Follow-up to From 1914 to 2014: The Shadow of Rational Pessimism from Mark Harrison's blog

Is the North Korean regime crazy or calculating? Here is a timeline of North Korea's actions since March 10, when I wrote last.

• March 11: North Korea revokes the armistice ending the Korean War in 1953.
• March 12: Kim Jong Un places the North Korean armed forces on maximum alert.
• March 20: Attacks on South Korean news and banking websites, possibly from North Korea.
• March 27: North Korea cuts a military hotline to the Kaesŏng special region (a joint economic project with South Korea).
• March 29: Kim Jong Un places the North Korean armed forces on standby to strike U.S. territories.
• March 30: North Korea warns of a state of war with South Korea.
• April 2: North Korea will restart weapons-related nuclear facilities.
• April 3: North Korea closes entry to the Kaesŏng special region.

In various ways, these are all costly actions. Some are financially costly to Pyongyang, such as restarting nuclear facilities and disrupting Kaesŏng-based production and trade. Other are reputationally costly, because they stake out positions that are hard to retreat from without loss of face. All of them have a common element of danger -- the risk of triggering a ruinous catastrophe.

Why is North Korea doing these things if they are so costly? In a common interpretation, the North Korean regime is crazy. They don't understand the world or know what is good for themselves. I think this is unlikely.

On the basis that the North Korean leaders are not insane, there are several possible ways to think about their actions and understand them, but in the end they all point to the same outcome.

Opportunity cost. While the measures listed above are costly, North Korea believes that it would not find a better alternative use of the resources consumed or put at risk as a result of their actions. There are few profitable opportunities for production in the world's worst economic system. Investing in confrontation may well be, for North Korea, the better alternative.

Diminishing returns.In the past, North Korea has extracted billions of dollars of aid from South Korea and the West by holding its own people hostage and showing a willingness to play with fire. The problem with this strategy is that Western countries and their Asian partners have learned how it works. As a result, the North Korean strategy has run into diminishing returns. Pyongyang can continue to extract an advantage only by going to greater and greater lengths. This means taking greater and greater risks with peace.

Rational pessimism (That's what I wrote about here). North Korea's leaders see two scenarios. In one, there is a peaceful future in which their regime will inevitably disintegrate and howling mobs will drag them into the street and tear them to pieces. In another, there is a high probability of war in which millions might perish but there is some faint chance of regime survival. You wouldn't jump at either, and you might not rush to make a choice. Still, ask yourself: If you were Kim Jong Un, and push came to shove, which would you prefer?

Mark Harrison : 03 Apr 2013 12:55 |  Tags: Economics History North Korea War |  Comments (2) |  Close comments |  Report a problem

From 1914 to 2014: The Shadow of Rational Pessimism

Writing about web page http://www.ft.com/cms/s/0/e29e200a-6ebb-11e2-9ded-00144feab49a.html

China’s territorial claims and bellicose actions in the Western Pacific have aroused concerns about where this process could lead. In The Shadow of 1914 falls over the Pacific (in the Financial Times on 4 February), Gideon Rachman asked whether we are watching a re-run of events that led to the outbreak of World War I in 1914.

Then, a rising power (Germany) was challenging the established power (Britain) for a say in world affairs and a share in the world's colonial territories. It was not Germany's plan to make war on Britain; German leaders wanted only a say and a share. The economic, military, and naval power that they built was not made to go to war, only to prevent Britain from blocking Germany’s demands. They wanted to ensure peace and to command respect. The war that then came about was not meant to happen. The war would not have happened at all if allies, agents, proxies, and third parties beyond their control had not helped to bring it about.

Replace Britain by the United States, Germany by China, and Austria-Hungary, Russia, and Serbia by Japan, Vietnam, and North and South Korea, and you have Rachman's story in a nutshell. Rachman's conclusion is hopeful, however: China's leaders have tried to learn from history. That, and the inhibitions added by nuclear weapons, will help to avert war.

What was the role of calculation in the outbreak of World War I? Rachman writes as though the war was not calculated at all:

Leaders on all sides felt helpless as they were swept towards a war that most of them did not want.

But something is missing here. While the war was in some sense unwanted, the leaders were not helpless: they chose war. It was a calculated decision, and it was not a miscalculation: those who favoured war correctly estimated that victory was far from certain. They had a war plan for a quick victory over France that relied on a high speed military manoeuvre on a colossal scale, a decision by Britain to abstain, and a Russian mobilization that would obligingly wait until the German Army was ready to switch its focus from West to East. They knew it was an outrageous gamble.

Critical to this story was something that I will call rational pessimism. By 1912, Germany no longer felt itself the confident, rising power once led by Bismarck. Germany’s leaders had come to fear the future. Their own attempts to secure Germany’s rightful place in the sun, they feared, were leaving Germany ever weaker.

These fears were well founded. Externally, the balance of power was tilting away from Germany. More countries were adhering to the anti-German alliance of Britain and France. Britain and Russia were rearming at a pace that nullified Germanys’ own efforts. Given time, Germany would only become weaker. Within Germany the balance was tilting away from monarchism and conservatism towards parliamentary socialism. The fiscal demands of rearmament were opening up new social divisions. Germany’s Prussian bureaucracy and aristocracy felt itself more and more besieged.

Increasingly the calculation became: If we fight, we may lose but at least there is a chance that we win. If we remain at peace, we certainly lose. From this point of view the war was a gamble, but it was not a miscalculation. It was simply the choice with the highest expected value. For this reason the leaders of the Central Powers went to war full of foreboding, but they went to war anyway.

In July 1914 the German chancellor Bethmann Holweg confided in his friend Kurt Riezler, who wrote in his diary:

Russia’s military power growing fast … Austria grows ever weaker … This time things are worse than 1912, because now Austria is on the defensive against the Serb-Russian agitation. … The future belongs to Russia, which grows and grows into an ever great weight pressing down on our chest.

The chancellor is very pessimistic about Germany’s intellectual condition. Frightful decline of our political niveau. Individuals are becoming ever smaller and more insignificant; nobody says anything great and honest. Failure of the intelligentsia and of the professors.

This pessimism was general. When Germany’s Wilhelm II was informed of the Austrian ultimatum to Serbia, he wrote:

Now or never.

In Vienna, Kaiser Franz-Josef wrote:

If we go under, we better go under decently.

(The latter quotes are from Holger Herwig’s The First World War: Germany and Austria-Hungary, 1914-1918, published in 1997 by Arnold).)

From this perspective it becomes crystal clear why North Korea’s predicament is so dangerous. Day by day, North Korea is provoking enemies and losing friends. The tensions within the country are largely unknown but surely increasing. What insider would predict a peaceful future for the Pyongyang regime that is better than today? What does Kim Jong-Un have left to lose from gambling on conflict, no matter how poor the odds? Rational pessimism is surely tilting North Korea’s choices towards war. Still, we are not there yet.

As for China itself, the threat of war should be thought of as one for the future. It seems unlikely that China’s leaders would ever choose to gamble everything on a major war as long as they expect to gain more from a continuation of peace. Their optimism is a bulwark against war.

The risk is that optimism is fragile. China faces many problems that could sap the confidence of its leadership. Edward Luttwak (in The Rise of China vs the Logic of Strategy, published in 2012 by the Belknap Press of Harvard University) has written that China is pursuing an impossible trinity of prosperity, diplomatic influence, and military power. China’s economic growth may falter. Even if economic growth is sustained in China, the chances are that at some stage the West will recover its prosperity and technological leadership. Meanwhile China’s rearmament and territorial claims are losing it friends in Japan, Vietnam, and India. At home, there are protests over a range of issues that widens continually: the rule of law, corruption, censorship, inequality, wages and working conditions, land grabs, and pollution. China’s rulers rely on xenophobia and stories of foreign encirclement and penetration to manage these threats to their legitimacy.

Putting all this together, it is not hard to envisage a future in which China’s leaders would become rational pessimists. Would they then be held back by knowledge of history and by the possibility of nuclear war? Maybe. Is Kim Jong-Un restrained by these things today? So far, yes. If Germany’s rulers in 1914 could have seen the future, would they have chosen differently? Perhaps. Unfortunately, we can’t be sure.

Mark Harrison : 10 Mar 2013 19:28 |  Tags: China Germany History North Korea War |  Comments (2) |  Close comments |  Report a problem

Alternatives to Capitalism: When Dream Turned to Nightmare

Writing about web page http://cpasswarwick.wordpress.com/overview-2/peking-conference/proposed-topics/

On Friday evening I found myself debating "Socialism vs Capitalism: The future of economic systems" at the Peking Conference of the Warwick China Public Affairs and Social Service Society. The organizers also invited my colleagues Sayantan Ghosal, Omer Moav, and Michael McMahon, who spoke eloquently. The element of debate was not too prominent because we all said similar things in different ways. I'm an economic historian and the great advantage of history is that it gives you hindsight. Anyway, here is what I said:

Let’s start from some history. There was a time between the two world wars when the capitalist democracies, like America, Britain, France, and Germany, were in a lot of trouble. In 1929 a huge financial crisis began in the United States and went global. There was a Great Depression. Around the world, many tens of millions of farmers were ruined. Tens of millions of workers lost their jobs.

As today, people asked: What was the cause of the problem? One answer they came up with was: Capitalism is the problem. Lots of people decided: the problem is the free market economy! The government should step in to take over resources and direct them! The government should get us all back to work! The government should get us building new cities, power stations, and motorways!

Another answer many of the same people came up with was: Democracy is the problem. Lots of people decided: the problem is too much politics! We need a strong ruler to stop the squabbling! Someone who can make decisions for the nation! Someone who can organize us to build a common future together!

So there was a search for alternatives to capitalism. Different countries tried different alternatives. The alternatives they tried included national socialism (or fascism) and communism under various dictators, like Hitler and Stalin.

What happened next? On average the dictators’ economies did recover from the Depression faster than the capitalist democracies.

(Here's a chart I made earlier to illustrate the point, but I did not have the opportunity to use it in my talk. Reading from the bottom, the democracies are the USA, France, and the UK; the dictatorships are Italy, Germany, Japan, and the USSR. You can see that Italy does not conform to the rule that the dictators' economies recovered faster. Without Italy, the average economic performance of the dictatorships would have looked even better.)

But solving one problem led to another. Before the 1930s were over the dictators’ policies had already caused millions of deaths. A Japanese invasion killed millions in China (I'm not sure how many). An Italian invasion killed 300,000 in North Africa. Soviet economic policies caused 5 to 6 million hunger deaths in their own country and Stalin had a million more executed.

And another problem: As political scientists have shown, democracies don’t go to war (with each other). Dictators go to war with democracies (and the other way round). And dictators go to war with each other. The result of this was that in the 1940s there was World War II. Hitler, Mussolini, Tojo, and Stalin went to war -- with the democracies and with each other. Sixty million more people died.

After the war, capitalism recovered. In fact, far from being a problem, it became the solution. By the 1960s all the lost growth had been made up. Think of the economic losses from two World Wars and the Great Depression. If all you knew about capitalist growth was 1870 to 1914 and 1960 onwards, you’d never know two World Wars and the Great Depression happened in between.

(To illustrate that point, here's another chart I made earlier, but did not use. It averages the economic performance of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Netherlands, New Zealand, Norway, Sweden, Switzerland, the UK, and the USA.)

After World War II fascism and national socialism fell into disrepute, but communism carried on. In China, Mao Zedong’s economic policies caused more deaths. In 1958 to 1962, 15 to 40 million people starved. Communist rule led China into thirty years of stagnation and turmoil. After that Deng Xiaoping made the communist party get its act together. And the communists forgave themselves for their past and agreed to forget about it.

Here's the takeaway.

Liberal capitalism isn’t perfect, but it has done far more for human welfare than communism. It has been the solution more often than the problem. Last time capitalism experienced some difficulties, many countries went off on a search for alternatives. That search for alternatives led nowhere. It wasn’t just unproductive. It was a terrible mistake that cost many tens of millions of lives. Lots of people have forgotten this history. Now is a good time to remember it.

Postscript. At one point I thought of calling this blog "Alternatives to capitalism: the search for a red herring" (a "red herring" is something that doesn't exist but people look for it anyway.) But I realized that would have been wrong, because alternatives to capitalism have actually existed. The problem with the alternatives is not that we cannot find them. It is that the people who went searching for them fell into a dream and woke up to a nightmare.

Mark Harrison : 04 Feb 2013 08:34 |  Tags: China Economics History Mao Politics Russia Stalin |  Comments (7) |  Close comments |  Report a problem

Fighting For Us — But Against Whom?

Writing about web page http://www.bbc.co.uk/news/uk-20813673

On 21 December Britain's prime minister, deputy prime minister, and leader of the opposition broadcast their Christmas messages to our troopsin Afghanistan and elsewhere. On Boxing Day Prince Charles, whose son Prince Harry is serving in Afghanistan, added his pennyworth.

These messages were notably similar. One after another, they worked the themes of courage, risk, danger, sacrifice, distance from home, and separation from family at Christmas.

Remarkable, also, was what they left out. According to our political leaders the threat confronting our troops is nameless and faceless. If we believe them, it is like an Atlantic storm or an airborne virus, a natural hazard that arises suddenly from nowhere and needs no explanation. Nick Clegg, the deputy prime minister mentioned an "invisible threat." Only Prince Charles referred to anonymous "insurgents." Cameron and Miliband did not mention an enemy at all.

In this postmodern age we struggle, it seems, to acknowledge that enemies face us who hate us and would like to kill us. They hate, specifically, our democracy, our traditions of political and religious toleration, our freedom of speech and association. They hate science, education, and public health. They hate women, particularly when educated and independent of men. These enemies do not hide their identity: they call themselves Al Qaeda and the Taliban.

Naming the enemy is only a start. Many questions then arise that do not have obvious answers. If enemies exist, should we go out into the world to find them, or wait until they come to us? Should we aim for victory or for a negotiated peace? Must we always be enemies or can we find common ground? These are questions on which reasonable people will differ. But we cannot put these questions clearly if we do not acknowledge that there is an enemy.

If our leaders cannot bring themselves to mention the enemy when they address the soldiers who risk their lives for us and for the families who must live with those risks, it is hardly surprising that most civilians at home are confused and doubtful of our armed forces' mission overseas. If there is no enemy, why have we put our soldiers in harm's way?

Mark Harrison : 03 Jan 2013 12:31 |  Tags: Afghanistan |  Comments (3) |  Close comments |  Report a problem

The Census of 2011: Some Christmas Stories

Writing about web page http://www.coventrytelegraph.net/news/coventry-news/2012/12/12/one-in-five-people-living-in-coventry-born-abroad-2011-census-reveals-gallery-92746-32411647/

The results of the U.K. census of 2011 have been published. They carry three messages for Christmas. One is a tale of foreigners bearing gifts. Another concerns the decline of Christian belief. Finally, the first two stories are connected, but not in the way you might think.

To start at the beginning, the Coventry Telegraph reported (on 12 December):

ALMOST one in five people living in Coventry were born abroad [...] When the last census was carried out in 2001, about 10.35 per cent of the population of Coventry was born abroad.

• The first Christmas story in the census is that migrants bring us a gift: the gift of diversity.

Migrants are different from us in skills, talents, ideas, and culture. By being different, they open up new cultural, technological, and business possibilities. At higher skill levels, they increase the variety of skills and talents. At lower skill levels they reduce business costs. They increase diversity and, by increasing diversity, they make us all richer.

One result is that the places where migrants cluster become rich. You can see this clearly by setting two maps side by side. The one on the left, courtesy of The Guardian, shows the proportion born here (darker is more) and the one on the right from the Office of National Statistics shows average incomes (darker is richer). Basically, the map on the right is darker where the map on the left is lighter.

It's clear that richer places have more immigrants. You might worry about causation, because richer places also attract more migrants. The fact is that the advantages of cities like London that attract migrants don't decline over time, and if anything increase, which suggests strongly that immigration promotes prosperity.

(The maps are just for illustration. There's harder evidence on this, for example Gianmarco Ottaviano and Giovanni Peri, "The economic value of cultural diversity: evidence from US cities," Journal of Economic Geography 6(1) (2006), pp. 9-44, Repec handle http://ideas.repec.org/p/cpr/ceprdp/4233.html.)

It follows that I have little time for two commonly held beliefs: that immigrants take our jobs and that our island is so overcrowded that it cannot take any more. Rather, immigration brings mostly benefits, and cities are our way of accommodating them.

It is true that immigration is not a unmixed blessing for everyone. Diversity makes some people uncomfortable. I do not belittle this. I believe that people should generally be free to choose their neighbours. Some people like to mix and share cultures and some don't. It's a fact.

You might expect the problem of different preferences to be solved by sorting, so that people that prefer sameness live in one place (e.g. villages) and people that prefer mixing live in another (e.g. cities). Then, everyone could have what they want.

One difficulty is that societies with a lot of immigration are also very dynamic, and this imposes continual change on the character of neighbourhoods that is often unanticipated by those that have chosen to live there. You think you’ve settled down in a quiet village full of people like you; the next thing, the town next door has turned the village into a suburb, and after that come the immigrants (who may come equally from Romford or Romania). So people don't always get what they bargained for.

Finally, Britain as a society has not reached a consensus over the terms on which we are willing to live alongside large numbers of new immigrants. At one extreme are backward-looking nativists who wish to protect a mythical “indigenous” community at any price, including isolation and stagnation. At the other extreme are cringeing multiculturalists who think suicide terrorism is okay if it’s your culture.

Somewhere in between there might be a less defensive, more confident national culture that knows what being British means and accepts immigration on the basis that immigrants make a free choice to both to join our society and contribute something of their own to it. But we are a long way from this. And it is fair to add that countries that have achieved this are the exception, not the rule.

The Coventry Telegraph reports:

The census also showed that a majority of Coventry residents describe themselves as Christians – but only just. It found that 53 per cent of the population were Christian, while 7.5 per cent were Muslims, 3.5 per cent were Hindus and five per cent were Sikhs.

• The second Christmas story in the census is the decline of Christian belief.

The decline over time is illustrated in the next two maps, both courtesy of The Guardian; the one on the left shows the proportion of the population professing Christian belief in 2001 (darker is more) and the one on the right shows the same in 2011. You can see how the map has become lighter over the last ten years.

The history of the Christian church in England began with migration. Christianity was originally an imported idea and so it was a gift of migration. In other words, as well as skills and talents, migrants bring us new beliefs, and this also can be fruitful.

Two thousand years later, what explains the decline of Christian belief? There are several possible explanations; the one we hear most frequently is clearly wrong. We often hear that the spread of secularism is an inevitable concomitant of modernity. Yet a counter-example suggests this is wrong; America shows the opposite.

Another explanation might be that today's migrants are responsible for importing non-Christian beliefs. Yet migrants from Easterrn European and West Africa are often more enthusiastic and committed Christians than the congregations of our own Church of England.

A more plausible explanation lies in a market failure. The transplant of Christianity to the British Isles was so successful that the church won a monopoly. In the long run this has been bad for Christianity.

By law, the Church of England is the church of the nation. Its head is the English monarch. The Crown appoints its prelates who sit in the House of Lords. What incentive do they have to fight for their beliefs? What need to they have to put real demands on their members? Evidence from the United States shows, in contrast, that Christian churches do best when they have to compete for a congregation. (The standard reference is Laurence R. Iannaccone, "Introduction to the Economics of Religion," Journal of Economic Literature 36(3) (1998), pp. 1465-1495, Repec handle: http://ideas.repec.org/a/aea/jeclit/v36y1998i3p1465-1495.html.)

• Thus the third Christmas story in the census is that the privilege of an established church is bad for the religious meaning of Christmas.

I'm not sure how much I care, exactly. I will celebrate the non-religious meaning of Christmas, which is family, children, loving, and giving.

Merry Christmas!

Mark Harrison : 16 Dec 2012 14:56 |  Tags: Christmas Immigration Religion |  Comments (4) |  Close comments |  Report a problem

Abusers, Victims, and Historical Memory

Writing about web page http://www.bbc.co.uk/radio4/features/desert-island-discs/castaway/93ade3b5#p009mn2c

The late Jimmy Savile's episode of Desert Island Discs went out on BBC Radio 4 on 30 March 1985. Desert Island Discs has been running weekly (with a few breaks) since 1942. The BBC has uploaded recordings of more than 1,450 episodes to its website. Jimmy Savile's was one of these, but no longer. About six weeks ago, the BBC took it down.

This was one of a number of steps taken by the BBC and others to remove Jimmy Savile's name from public prominence since his exposure as a prolific abuser of young women and children. All over the country plaques and memorials have been taken down. Organizations bearing his name have been retitled or disbanded. The BBC will no longer repeat Savile's shows, from Top of the Pops to Jim'll Fix It.

To my surprise I found myself on this morning's BBC Radio 4 Today Programme in a three way conversation with Dr Jennifer Wild of Kings College London and Justin Webb, the presenter. The starting point was the parallel with what once happened to politically disgraced people under communist rule.

First, they were accused and found guilty of monstrous crimes, often on fabricated evidence and forced confessions (confusingly, however, among them were a few real monsters who were as bloodsoaked as their executioners). Then, their names were eliminated from public discourse; they could never be mentioned again, except as hateful enemies. Their pictures were taken down. Photographs of important events that could not be retaken without the offender were doctored (today we'd say they were photoshopped) to replace the offender's image with another person or a neutral background. There are some nice examples here on Wikipedia. Towns or squares named after them were renamed. Their writings were removed from public libraries and confined to the spetskhran, the special storeroom, accessible only to investigators licensed and approved by the ruling party. It became dangerous for private collectors to keep the books the offenders wrote or articles that reported their views; you were supposed to declare your holdings and turn them in to the authorities, risking questions about why you kept them in the first place. They became what George Orwell later called "unpersons": there was no evidence they had ever existed, except when the authorities brought their names up to condemn them further.

The case of Jimmy Savile presents important differences. Savile's reputation was destroyed by the courageous witness of his many victims, not to suit the convenience of a Great Leader. It seems entirely proper that, when someone was honoured and turns out to have been unworthy of it, we should take the honour away. Moreover, we live not under a totalitarian state but in a free society that respects the private realm. If you have the abuser's image on a DVD or an old tape casette at home, it's your property and no one can confiscate it or order you to destroy it.

The reason I was asked onto the Today Programme, I think, was to argue that it is a further step to delete the historical record. The BBC has chosen to archive its sound recordings for the public. To go back and remove an item because we no longer approve of the person it featured is to create a blank page in history. One of the features of the communist police state was to impose unequal access to historical records. Official historians, who had proved their political loyalty, were allowed privileged access to the "special storeroom." The public could not be trusted, and was kept out. It makes me uneasy to see the BBC recreate this in our own country.

Jennifer Wild (whom I accidentally called Joanna: sorry!) made an important counter-argument. She explained how important it is that victims of abuse feel that that the community believes them and acknowledges how they have suffered. Seeing the marks of Savile's honour removed from public display is part of the process that supports them and helps them to recover. That's something that I accept, of course. All I added on the programme is that there is also another principle at stake, and it may not be easy to reconcile it with the needs of Savile's victims. That other principle is free and equal access to the historical record.

For the next seven days you can listen again here. The item begins at 2:24:00.

Here's my conclusion. If you count up all the things that are in our power to do to vindicate and support the abuser's victims, we should unhesitatingly do 99 per cent of them. Nothing should be named after Jimmy Savile. The BBC shouldn't schedule repeats of his shows. But there is a residual 1 per cent where we should stop and think twice. To hold back from deleting the historical record of Desert Island Discs may leave us uncomfortable -- some, I acknowledge, much more than others. But it is required to preserve free and equal access to our own cultural history.

Ironically, the BBC's own policy seems to have left it in the middle. Jimmy Savile's Desert Island Discs recording has gone, but it has been removed without acknowledging the true reasons. The Desert Island Discs website continues to display his image and beside it the programme notes of the time, which speak only of Savile's successes, not of his disgrace.

Consistent with this, the Desert Island Discs FAQs state the perspective of the historian:

Every piece of data is part of the overall Desert Island Disc archive, and much of what was said captures a particular moment in the castaway’s life which puts the interview itself in the context of the time it was recorded.

But if the historian's rule is right, it should also protect the recording.

Mark Harrison : 23 Nov 2012 16:18 |  Tags: BBC Politics |  Comments (0) |  Close comments |  Report a problem

The Value of a Vote and China's Governance Deficit

Writing about web page http://www.bbc.co.uk/news/world-us-canada-20233064

Whatever you think of the outcome this morning, it's clear that American voters placed a high value on their chance to choose the next president. In the East Coast states buffeted by Hurricane Sandy, where many are homeless or without power, turnout was heavy.

That's not how it is in China, where the next leadership will "emerge" in a few days' time from the communist party's eighteenth national congress.

Although not a professional China watcher, a few months ago I began to notice a rash of articles telling us how much better off China is with its supposedly meritocratic leadership selection process. What's more, we are told, it's such a great system that the Chinese people themselves endorse it. China's leadership, although selected in secret by unknown rules, is apparently "legitimate." I saw this first in February in an influential article in the New York Times by the Shanghai "venture capitalist" Eric X. Li on Why China's Political Model is Superior. In August the China-based academic Daniel A. Bell was extolling the merits of China's meritocracy in The Huffington Post. A few days ago the China pundit Martin Jacques repeated the same message in the BBC Magazine.

Some contributions in this vein refer to the empirical research of the Harvard political scientist Tony Saich. Saich has carried out repeated opinion surveys in China. These indicate that Chinese respondents are generally more critical of the lower tiers of government. However, high proportions are "relatively or extremely satisfied" with higher tiers, and their satisfaction rises with distance so that at least 80 percent are satisfied with China's central government. Moreover, satisfaction levels have been rising over time.

An alternative source gives a different picture. The Worldwide Governance Indicators dataset measures perceptions of the quality of government in over 200 countries since 1996 on six dimensions -- Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. Each indicator is based on hundreds of individual underlying variables, taken from a wide variety of data sources. Each indicator is scaled from +2.5 to -2.5, with the global average set to zero. (The dataset is described by Daniel Kaufmann, Aart Kraay, and Massimo Mastruzzi, "The worldwide governance indicators: methodology and analytical issues," Policy Research Working Paper Series 5430, issued by the World Bank in 2010; RePEc handle: http://ideas.repec.org/p/wbk/wbrwps/5430.html).

The advantage of the Worldwide Governance Indicators is that they are worldwide; they allow one country to be measured against others on a uniform methodology. For China I'll give you the 2011 results, but the Worldwide Governance Indicators go back to 1996 and they are fairly stable over time.

In the table below, the first column shows that the data include most countries in the world. The second column shows the percentage of countries that score below China on each of the six dimensions. The third column shows China's score. Since we are also given the standard errors associated with the scores, we can also work out whether China's difference from the world average (zero) is statistically significant. An asterisk indicates that China's score is significantly above or below zero at 5 percent.

Three things stand out:

• China scores below the median country in the world in every dimension except one: effectiveness. China's citizens definitely agree that their government can make decisions and carry them out.
• In two dimensions, effectiveness and regulatory quality, China's score is not signficantly different from the world average. In the other four, it is significantly below.
• In voice and accountability, China is grouped among the worst countries in the world.

How can we reconcile China's deficit in the Worldwide Governance Indicators with praise for the "legitimacy" of the communist one-party state? I'd start from Tony Saich's finding that Chinese people are least critical of the level of the government that is farthest from them. It would seem that in their society there is still a place for the myth of the "just monarch": the benevolent ruler in the faraway capital city.

According to this myth, the just ruler thinks of nothing but the plight of his people. But his will is said to be distorted by ambitious and corrupt intermediaries -- his ministers, the provincial barons and local authorities, who stand between the people and the king. The king relies on the people to tell him of the injustices from which they suffer; supposedly, only he can put them right. If they will reach out to him directly, bypassing those that pervert his intentions, he will answer their prayers and petitions and right their wrongs.

People who believe this can thus reconcile personal experience of oppressive and corrupt rule with the idea of a kindly but distant ruler who will eventually vindicate them.

One reason the myth endures is that it is open to manipulation. A ruler who is not benevolent but self-interested and power-seeking can exploit it to remain in power. From time to time he will give up some local princeling to assuage popular anger and build his own legitimacy. Stalin did this; Mao did it; today's Chinese communist party does it.

But managing the mythology of benevolent dictatorship is like riding a tiger. For the myth of the just monarch does not make the people passive; on the contrary, from time to time they may rise up in the name of the ruler to act directly against those that oppress them. (See for example Daniel Field, Rebels in the name of the tsar, published by Houghton Mifflin in 1976.)

Finally, in many peasant societies, as China was until quite recently, this myth has persisted until the illusion is shattered by some collective blow. There will be some setback, some outrage, or some scandal that is too deep for the myth to endure -- at least, until some new ruler emerges who can once more take up the mantle of the true king.

Mark Harrison : 07 Nov 2012 11:05 |  Tags: China Obama Politics |  Comments (0) |  Close comments |  Report a problem

Afghanistan: Tragedy, History, and Foresight

Writing about web page http://www.publications.parliament.uk/pa/cm201213/cmselect/cmintdev/403/40302.htm

The House of Commons International Development Committee has reported this morning that:

The future of Afghanistan is uncertain [...] The UK Government may have to recognise that a viable state may not be achievable in Afghanistan.

Is this depressing judgement realistic? It depends partly what you mean by a viable state. Afghanistan had a monarchy until the king was overthrown by a coup in 1973; this was followed by a communist insurrection in 1978. Although not a clean, non-corrupt democracy, the Afghan state was viable at least until 1973. Although some terrible things have happened between then and now, history suggests that a viable state in Afghanistan is not an impossible aspiration.

What the British government means by a viable state is more ambitious than this, however. It is expressed, for example, in DFID targets for popular approval, electoral turnout, spending capacity, and civil service reform. In other words, our own government's goal for Afghanistan is not just a viable state but a stable, clean, non-corrupt democracy.

A stable, clean, non-corrupt democracy: This is what the parliamentary report says will not happen in Afghanistan. For anyone who knows a little history, it is laying claim to the bleeding obvious.

I don't mean just that it is obvious now, after ten years of blood spilt and treasure lost. It was obvious beforehand. Here are things I wrote in 2001 on December 4, updated in 2002 on January 9, and in 2009 on July 18 and August 30, in 2010 on January 1, and in 2011 on October 27. It may seem like I'm bragging, but I'm not. I'm sure I've been wrong about lots of things. I'm not an expert on counter-insurgency and I've never been to Central Asia. I'm saying that even an idiot like me could work this one out.

Even an idiot is helped by knowing a little history. The history I know tells me three things.

• In the past it took hundreds of years to build and agree the rules of the game that we call democracy. Maybe we can compress that a bit, perhaps to within a generation or two. But we cannot shorten it to less than the lifetime of a Westminster government. Note: I am not giving this as a reason to do nothing. On the contrary, a long time horizon is a reason to start immediately! But it is also a reason to set realistic goals, not goals that are so unrealistic that they destroy our chance of ever meeting them.
• Modern liberal capitalism and competitive democracies did not emerge from nothing, by an act of will. They resulted from a long historical evolution. This evolution was not steady and it was not non-violent. But there were staging posts. Many of those staging posts fell short of what we would today consider to be democracy, but they still offered more rights to the citizens than existed before.
• In the world today some societies are so weakened that they cannot choose democracy over non-democracy or clean government over corruption. The best they can hope for is a fairly corrupt, not-very-democratic government that offers stability and shares some of the spoils through basic public goods such as highways, policing, and education. Of course, many societies should work for more: Russia and China for example. But some societies are in such a bad state to begin with that the only alternative to a fairly corrupt, not-very-democratic government is civil war. It's a matter of judgement which places belong in this category, but Afghanistan is one.

In other words, living under what I once called "the right kind of feudalism" Afghan citizens would have only limited rights but they would still have more rights and make more progress than under any feasible alternative. There would still be a loot chain, but a stable loot chain can be consistent with modest prosperity and confer benefits compared with a perpetual struggle of each against all.

Setting the wrong goals for Western involvement in Afghanistan has left a trail of blood and broken promises. There will be more of this before we're through. But the roots of a viable state for Afghanistan must be found in the history of Afghanistan, and nowhere else.

Mark Harrison : 25 Oct 2012 10:20 |  Tags: Afghanistan Corruption History |  Comments (0) |  Close comments |  Report a problem

Markets versus Government Regulation: What are the Tail Risks?

Writing about web page http://ideas.repec.org/a/aea/jeclit/v45y2007i1p5-38.html

Tail risks are the risks of worst-case scenarios. The risks at the far left tail of the probability distribution are typically small: they are very unlikely, but not impossible, and once or twice a century they will come about. When they do happen, they are disastrous. They are risks we would very much like to avoid.

How can we compare the tail risks of government intervention with the tail risks of leaving things to the market? Put differently, what is the very worst that can happen in either case? Precisely because these worst cases are very infrequent, you have to look to history to find the evidence that answers the question.

To make the case for government intervention as strong as possible, I will focus on markets for long-term assets. Why? Because these are the markets that are most likely to fail disastrously. In 2005 house prices began to collapse across North America and Western Europe, followed in 2007 by a collapse in equity markets. By implication, these markets had got prices wrong; they had become far too high. The correction of this failure, involving large write-downs of important long term assets, led us into the credit crunch and the global recession.

Because financial markets are most likely to fail disastrously, they are also the markets where many people now think someone else is more likely to do a better job.

What's special about finance? Finance looks into the future, and the future is unexplored territory. Only when that future comes about will we know the true value of the long-term investments we are making today in housing, infrastructure, education, and human and social capital. But we actually have no knowledge what the world will be like in forty or even twenty years' time. Instead, we guess. What happens in financial markets is that everyone makes their guess and the market equilibrium comes out of these guesses. But these guesses have the potential to be wildly wrong. So, it is long-term assets that markets are most likely to misprice: houses and equities. When houses and equities are priced very wrongly, chaos results. (And in the chaos, there is much scope for legal and illegal wrongdoing.)

When housing is overvalued, too many houses are built and bought at the high price and households assume too much mortgage debt. When equities are overvalued, companies build too much capacity and borrow too much from lenders. To make things worse, when the correction comes it comes suddenly; markets in long term assets don't do gradual adjustment but go to extremes. In the correction, nearly everyone suffers; the only ones that benefit are the smart lenders that pull out their own money in time and the dishonest borrowers that pull out with other people’s money. It's hard to tell which we resent more.

If markets find it hard to price long term assets correctly, and tend to flip from one extreme to another, a most important question then arises: Who is there that will do a better job?

It's implicit in current criticisms of free-market economics that many people think like this. Financial markets did not do a very good job. It follows, they believe, that someone else could have done better. That being the case, some tend to favour more government regulation to steer investment into favoured sectors. Others prefer more bank regulation to prick asset price bubbles in a boom and underpin prices in a slump. The latter is exactly what the Fed and the Bank of England are doing currently through quantitative easing.

Does this evaluation stand up to an historical perspective?

We’re coming through the worst global financial crisis since 1929. Twice in a century we've seen the worst mess that long-term asset markets can make -- and it's pretty bad. A recent estimate of the cumulative past and future output lost to the U.S. economy from the current recession, by David H. Papell and Ruxandra Prodan of the Boston Fed, is nearly $6 trillion dollars, or two fifths of U.S. output for a year. A global total in dollars would be greater by an order of magnitude. What could be worse?

For the answer, we should ask a parallel question about governments: What is the worst that government regulation of long term investment can do? We'll start with the second worst case in history, which coincided with the last Great Depression.

Beginning in the late 1920s, the Soviet dictator Stalin increasingly overdid long term investment in the industrialization and rearmament of the Soviet Union. Things got so far out of hand that, in Russia, Ukraine, and Kazakhstan in 1932/33, as a direct consequence, 5 to 6 million people lost their lives.

How did Stalin's miscalculation kill people? Stalin began with a model that placed a high value (or “priority”) on building new industrial capacity. Prices are relative, so this implied a low valuation of consumer goods. The market told him he was wrong, but he knew better. He substituted one person’s judgement (his own) for the judgement of the market, where millions of judgements interact. He based his policies on that judgement.

Stalin’s policies poured resources into industrial investment and infrastructure. Stalin intended those resources to come from consumption, which he did not value highly. His agents stripped the countryside of food to feed the growing towns and the new workforce in industry and construction. When the farmers told him they did not have enough to eat, he ridiculed this as disloyal complaining. By the time he understood they were telling the truth, it was too late to prevent millions of people from starving to death.

This case was only the second worst in the last century. The worst episode came about in China in 1958, when Mao Zedong launched the Great Leap Forward. A famine resulted. The causal chain was pretty much the same as in the Soviet Union a quarter century before. Between 1958 and 1962, at least 15 and up to 40 million Chinese people lost their lives. (We don’t know exactly because the underlying data are not that good, and scholars have made varying assumptions about underlying trends; the most difficult thing is always to work out the balance between babies not born and babies that were born and starved.)

This was the worst communist famine but it was not the last. In Ethiopia, a much smaller country, up to a million people died for similar reasons between 1982 and 1985. If you want to read more, the place to start is “Making Famine History” by Cormac Ó Gráda in the Journal of Economic Literature 45/1 (2007), pp. 5-38. The RePEc handle of this paper is http://ideas.repec.org/a/aea/jeclit/v45y2007i1p5-38.html.

Note that I do not claim these deaths were intentional. They were a by-product of government regulation; no one planned them (although some people do argue this). At best, however, those in charge at the time were guilty of manslaughter on a vast scale. In fact, I sometimes wonder why Chinese people still get so mad at Japan. Japanese policies in China between 1931 and 1945 were certainly atrocious and many of the deaths that resulted were intended. Still, if you were minded to ask who killed more Chinese people in the twentieth century, the Japanese imperialists might well have to cede first place to China's communists. However, I guess there is less national humiliation in it when the killers are your fellow countrymen than when they are foreigners.

To conclude, no one has the secret of correctly valuing long term assets like housing and equities. Markets are not very good at it. Governments are not very good at it either.

But the tail risks of government miscalculation are far worse than those of market errors. In historical worst-case scenarios, market errors have lost us trillions of dollars. Government errors have cost us tens of millions of lives.

The reason for this disparity is very simple. Markets are eventually self-correcting. "Eventually" is a slippery word here. Nonetheless, five years after the credit crunch, worldwide stock prices have fallen, house prices have fallen, hundreds of thousands of bankers have lost their jobs, and democratic governments have changed hands. That's correction.

Governments, in contrast, hate to admit mistakes and will do all in their power to persist in them and then cover up the consequences. The truth about the Soviet and Chinese famines was suppressed for decades. The party responsible for the Soviet famine remained in power for 60 more years. In China the party responsible for the worst famine in history is still in charge. School textbooks are silent about the facts, which live on only in the memories of old people and the libraries of scholars.

Mark Harrison : 15 Oct 2012 12:22 |  Tags: China Economics History Politics Recession Russia Stalin |  Comments (0) |  Close comments |  Report a problem