April 15, 2019

Until recently, Stian Westlake advised the UK government on the issue. Last week he published what he described as a “4,000 word rant” on Conservative economic thought – or rather the lack of it:

“A weird and disturbing change has come over the Conservative Party.

“I’m not talking about the raging divisions and defections over Brexit, or the fact it seems to be preparing to get rid of yet another leader — after all, civil war over Europe and regicide are longstanding Tory traditions.

“I’m talking about a much more unusual and unprecedented phenomenon: the fact that the Tories, both in government and more generally, seem to have stopped talking and thinking about economics.”

What Westlake goes on to say is certainly much more than a rant – in fact, it’s an essential read (especially if you happen to be a government minister).

Suggested reading
Ten vested interests the Tories failed to tackle

By Peter Franklin

There’s too much in it to unpack the whole thing in one go – so I’ll focus on what I take to be the core argument:

“To the extent that Number 10 has an interest in economic policy, it is the economics of ‘Erdington Modernisation’, that version of self-proclaimed One Nation Toryism associated with Nick Timothy, the PM’s former chief of staff best known for writing the Tories’ self-destructing 2017 manifesto.”

Erdington, by the way, is a working class district of Birmingham – which is England’s second city, and yet so far behind the capital in status that it’s become a symbol of the problem with our London-centric economy. When she became Prime Minister, Theresa May promised “an economy that works for everyone” – the core tenet of the Erdington approach:

“It’s the belief that British economic policy has spent far too much time and money on winners, and that the country would be both fairer and more prosperous if we diverted resources to the Rest…

“To use Nassim Taleb’s characterization, Erdington economic policy argues we should focus on Mediocristan — the average business, the average worker — rather than Extremistan — the upper (and lower) end of the distribution.”

Westlake sees the political sense in this: “most people are by definition normal – that’s statistics”. However, he questions the economics. He thinks we need to focus on the upper end of the distribution – the most successful businesses, institutions and cities. This is where you find the star players, the game changers, the champions who will maintain our relevance in a hyper-competitive global economy. Instead of trying to “fix the laggards, who have always been with us”, we should “help the next generation of world-beaters to grow”.

Westlake makes a powerful case (again, I urge you to read the whole piece.) However, I do think there’s problem with it. For a start, by “Extremistan”, Nassim Taleb does not mean the upper and lower ends of a statistical distribution – nor does “Mediocristan” refer to its middle. Rather, the labels refer to two entirely separate statistical realms.

In Mediocristan, the upper and lower ends are not very different from the middle. Consider, for instance, the distribution of human height – the very tallest people are not even twice as tall as people of middling stature. In Extremistan, however, one or both ends of a distribution deviate hugely from the mean. Personal wealth is a prime example – the richest people having thousands of times more money than the average person.

Suggested reading
Why Antifragile is the perfect read for today's turmoil

By Peter Franklin

In some ways, western economies are becoming more extreme. There’s a long-term trend toward market concentration (i.e. the biggest companies taking a bigger share of their sectors); pay differentials between executives and workers have widened; and the most successful businesses have become geographically concentrated in a handful of global cities (with extreme property prices to match).

You’d think that all this focus on the best and brightest would have resulted in a productivity boost. But, no – the general trend across the West is deceleration among the drivers of growth – a phenomenon which economists call secular stagnation (‘secular’ in this context meaning long-term). Westlake points out that in the UK,  “our disappointing productivity growth… over the last decade has not been the fault of the [long tail of low productivity firms], but of our best firms…”

Some people think that the laggards are holding back the leaders – with ultra low interest rates and government bailouts allowing so-called ‘zombie companies’ to stagger on, thus tying up capital and talent that could be more productively deployed elsewhere. But this is getting it backwards. If the leading companies were doing their job – i.e. developing genuinely innovative products – the laggards would be rendered obsolete. The leaders would do to the zombies what the automobile industry did to the horse-and-cart, or what the PC computer did to the also-ran computer formats of the 1980s. This is how they do business in Extremistan, with risk-taking frontier firms – most of which crash and burn, a few of which change the world.

Unfortunately, this is not the way that most western economies do business. If our leading companies can’t quite shake off a long-tail of inferior competitors, it’s because they’re not that much better themselves. Furthermore, their leading position might be less to do with any innovative edge and more to do with the unmerited benefits of bigness (which I explore here).

Suggested reading
Why low interest rates poison the economy

By Peter Franklin

Of course, it’s not that proper innovation and entrepreneurship have ceased altogether, just that there’s not nearly enough of it. Too often there’s no choice to make between Extremistan and Mediocristan because it’s Mediocristan as far as the eye can see. Simply choosing to back the biggest mediocrities is no way forward.

It would be great if we had politicians willing to face up to this problem. But then again, it’s a rather dangerous thread for them to be pulling on.