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The Tories should embrace chaos The economy evolves unpredictably

Now what? Credit: Leon Neal/Getty


October 26, 2022   5 mins

Politicians act with good intentions. But they rarely seem to grasp that intentions are not the same as outcomes. The social and economic worlds are both complex and change rapidly. This places inherent limits on our ability to understand them. There are many, many examples to choose from when outcomes differed from intentions. We could select from virtually the whole of human history. But two topical ones will suffice.

Liz Truss and Kwasi Kwarteng took what they believed were good decisions. Their massive energy price subsidy would protect people from the cost of living crisis. They thought that cutting taxes would boost growth and prosperity for everyone. It is easy for people to sneer at the latter after the event. But the plain fact is that no-one has discovered a sure fire plan to deliver economic growth. If they had, running the economy would be easy.

As we now know, the markets took fright at the further proposed increases in government debt. Interest rates on the debt soared and the pound collapsed. The Truss government was wrecked. This had always been a risk, ever since in 2019 the government piled up massive amounts of public debt with the furlough scheme. At some point as government debt rises, confidence really drops and interest rates really do double, or even more. But this point is inherently unknowable in advance. It bears little connection with the objective facts.

For example, interest rates were in the 6-8% range in several Mediterranean Eurozone countries in the mid-2010s. But the amount of government debt relative to the size of the economy in, say, Spain, was lower than it is now in the UK. Even now, the UK’s debt position is much better than that, say, of Italy. But it was the UK which the markets attacked and not Italy.

Many commentators on the Left maintain that all this was obvious in advance, that the Truss-Kwarteng policy was bound to end in rapid and ignominious failure. But we might reasonably ask, if this is the case, why these same commentators are not now enormously rich, having used their insight to short UK government bonds.

All this was anticipated by Keynes, a much more subtle economist than many of his followers grasp. In his magnum opus, the General Theory of Employment, he championed the idea that extra government spending could help keep an economy out of recession. But he qualified this with two key points. When government deficits rise as a result of increased spending, Keynes wrote that: “The method of financing the policy may have the effect of increasing the rate of interest and so retarding investment in other areas.” He went on to suggest that the psychological effect on “confidence” might also depress private sector spending. The psychology, he asserted, was often “confused”, by which he meant it could move in ways entirely contrary to what a rational assessment of the evidence would suggest.

The second example is much less grand, but all the more telling. Intentions and outcomes can differ even on a small scale. To great fanfare, in 2018 Nicola Sturgeon announced a policy of a minimum price on a unit of alcohol. Scotland has a serious alcohol problem, and this seemed a good idea. The policy was praised by the World Health Organisation. Yet the hard-core older drinkers who were the real targets of the policy seemed to have continued drinking. They paid for it by cutting back the amounts their families spent on food and heating — even before the cost of living became the issue which it is now.

Young people in particular do seem to have cut back on high alcohol drinks. They switched to cheap street drugs instead. These are often unreliable and dangerous products, and the drug-related death rate in Scotland is now four times higher than in England. Sturgeon and the SNP intended to do good with their policy, but the outcome seems to have worsened the situation.

If detailed planning really worked, the Soviet Union would have been a great success and not a catastrophic failure. Of course, both governments and firms have to set a vision, a view of where they want to be. But they must never fall into the trap of thinking that the plan is reality. Most of the time, outcomes are different to the intent in the plan. The main risk is that focusing too much on the plan might lead a government or firm to reduce its flexibility, its capacity to respond to surprises, both good and bad. In the old Soviet Union, everything was planned with great precision. No individual enterprise was allowed to fail. But, eventually, the whole system collapsed in catastrophic failure. In the West, individual firms fail all the time, but the system as a whole delivers the goods.

There are worrying signs that, as a result of the furlough scheme, the same Soviet-type mentality is starting to pervade Britain. If a company is in difficulty, some scheme should be contacted so that it is kept alive by taxpayers’ money. The industrial structure should be pickled in aspic. The intention of any such policy would be to do good. The risk is that it simply leads to an economy populated by zombie, low productivity firms.

Sometimes outcomes can be much better than expected. A classic example is Windows. The first releases basically tanked. Microsoft announced that development would stop after the release of version 3.0. In the meantime, they had partnered to develop OS/2 with IBM, the “operating system of the future”. Windows 3.0 sold millions of copies in the first few months and the rest is history.

Coca-Cola spent vast amounts of research testing how people would feel about New Coke, which they launched in the mid-Eighties. The plan said it would be a great success. But it met with a disastrous reception in the real world. Coca-Cola abandoned the product within a few weeks despite the huge sums spent on it. Their actions show the value of flexibility and willingness to discard plans in the face of new evidence. The UK government’s reaction to the emergence of Covid in early 2020 shows the danger of inflexibility. The early data from China suggested that the death rate might be of the order of 3-4%. So it was reasonable to have an initial lockdown to try and assess the situation.

But it rapidly became clear that the death rate was in fact much lower. More importantly, at least 95% of all deaths were in two groups which were small compared to the size of the overall population: the over 85s and those with chronic conditions such as heart disease caused by obesity. For the bulk of the population, there was little serious risk to health. Despite this new information emerging quickly, the government seemed to double down on its plan of lockdown and its message of fear.

The complexity of the world does not mean that nothing can be done, that outcomes are random. But it does mean that governments and firms must be flexible. A further implication is that, as far as possible, decisions should be devolved. The closer to a problem you are, the more likely there is to be local, tacit knowledge which is hard to capture in formal documentation and rules.

In fact, successful institutions evolve organically, indicating that excessive government intervention may be both unnecessary and counterproductive. Consider Greater Manchester. The Mayor and the GM combined authority have relatively few legal powers. These in general still reside with the ten individual boroughs. But the combined authority has evolved “convening powers”. This is soft, informal power. A complex system of interconnected organisations and committees has developed and is continuing to develop. And it seems to work. A genuine, connected city-region is coming into being.

The economy and society are essentially more like a biological system than a complicated machine. No matter how complex, a machine can be programmed and controlled. The economy evolves, often in unpredictable ways. Policy-makers, including the new Prime Minister, need to shed the tick-box mentality and recognise this fundamental feature of reality.


Paul Ormerod is an economist, and the author of Why Most Things Fail.

OrmerodPaul

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Samuel Ross
Samuel Ross
1 year ago

This article is tops. I congratulate the author on an excellent work.

Henry Haslam
Henry Haslam
1 year ago
Reply to  Samuel Ross

I agree. I am reminded of Richard Thaler’s distinction between ‘econs’ and ‘humans’. Econs are the obedient types, who behave as economic theory says they should. Humans make up their own minds and are not necessarily predictable.

D Oliver
D Oliver
1 year ago

Good article. The inability to distinguish between intentions and outcomes when formulating policy is one of the defining features of our time.

Will Will
Will Will
1 year ago

A good piece.
Cancel HS2.

CHARLES STANHOPE
CHARLES STANHOPE
1 year ago

“The early data from China suggested that the death rate might be of the order of 3-4%. So it was reasonable to have an initial lockdown to try and assess the situation.”

No it was NOT. Have you forgotten the old adage “if you see their lips moving, then they are lying “? The Chinese are currently an existential threat to mankind, and everything they say should be instantly discounted.

Thanks to Ancient Greece and Roman ‘we’ are the greatest civilisation ever to grace this planet. Are we really going to throw it all away on the mutterings of Fu Manchu & Co?

Arkadian X
Arkadian X
1 year ago

“Hindsight” is always great.

Anthony Sutcliffe
Anthony Sutcliffe
1 year ago

Great article. I don’t think it undermines the case for government intervention…but it needs to be intervention of the right type. The aim of the intervention must be to stimulate the private sector to set up myriad businesses and allow the market to solve market problems. Government intervention aimed at solving the problems itself means British Leyland.

David Harris
David Harris
1 year ago

“The complexity of the world… means that governments and firms must be flexible.”
Firms usually are flexible and governments not. Why? Because governments spend other people’s money.

Jon Hawksley
Jon Hawksley
1 year ago

Economic outcomes are the product of human behaviour driven by greed and fear and constrained by resources. This article is right in that it is not easy to anticipate collective behaviour, particularly when those outcomes are very different according to whether fear dominates greed or vice-versa. However achieving growth requires resources and throwing money at it when those resources are not available will either lead, with greed, to inflation or, with fear, to saving. The problem is politicians thinking they can just pull levers and make things happen. They need to check whether the train is on the right track and going in the right direction, and when they get that wrong, as the author says, be flexible.

Nicky Samengo-Turner
Nicky Samengo-Turner
1 year ago

the great mass of computer key tapping jobsworthgnomes in nu britn hate, fear and loath risk and the unknown more than anything else: one only has to look at the sorbo rubber backboned attitude and compliance cum coroniaphobia to Covid, the police abuse of the law, and every other Quasi Stasi law passed by Boris, not least the hate crime Orwellianism.

We have a citizenship of a new GDR in waiting… as long as the monthly pay comes in, the Spanish holiday and car to impress the neighbours are not threatened…. actually they would be no different to thos in Germany in the 1930s who sent the authorities to the houses of The Jewish population.

AND… these people make up the majority of the Conservative party and their MPs… but not Rishi, and that is why we are so lucky to have him.

Tom Watson
Tom Watson
1 year ago

“In 2019 the government piled up massive amounts of public debt with the furlough scheme.”
No doubt the author planned to write an article that didn’t contain howling factual errors. A perfect illustration of his point.

Aaron James
Aaron James
1 year ago

”Politicians act with good intentions.”

It started with a utter falsehood, and went down hill from there.

I stopped reading after the Vu-Du economics of Keynes

”All this was anticipated by Keynes, a much more subtle economist than many of his followers grasp. In his magnum opus, the General Theory of Employment, he championed the idea that extra government spending

Give up this unicorn economics and find some reality in Milton Friedman –

”Inflation is Always and Everywhere a Monetary Phenomenon’
Boris and Biden did the insane MMT thing – and now you are well and truly Hoist by your petard

And Sunak is the man who was steering the ship last 2 years as Exchequer – and now he is Captain of the blighted ship Boris before him wrecked on the rocks a hundred times…..

”“Day after day, day after day,
we stuck nor breath nor motion
As idle as a painted ship upon a painted ocean
Water, water everywhere and
all the boards did shrink
Water, water everywhere nor any drop to drink.”
― Samuel Taylor Coleridge, The Rime of the Ancient Mariner”

D Oliver
D Oliver
1 year ago
Reply to  Aaron James

Never attribute to malice that which is adequately explained by incompetence

Tom Watson
Tom Watson
1 year ago
Reply to  Aaron James

“Inflation is always and everywhere a monetary phenomenon” surely needs putting to bed when we’re living through an entire continent having its gas supply switched off. Whatever your take on Keynes (and I’m no expert), he was indeed a much more subtle economist than many of his supporters (and detractors) grasp.