Category: Politics

Comments on the Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry

October 26, 2018

  1. The following remarks are informed by discussions during a by-invitation-only roundtable on October 19 that was organized by the UNSW Business School research networks on Cyber Security and Data Governance and Behavioural Insights for Business and Policy. It was attended by a judicious mix of 14 legal academics and (behavioural, experimental, and financial) economists as well as representatives of behavioural insights units from government and firms in the banking industry. The roundtable took part under the Chatham House Rule and was meant to facilitate an open discourse about the issues identified in the Royal Commission’s Interim Report, especially its chapter 10 and therein pages 327 – 342 and pages 345 – 7, as well as other chapters (namely 1, 8 and 9).
  2. While my comments draw on those discussions, the following comments reflect my opinion only. Importantly, my opinion below does not necessarily reflect my employer’s view.
  3. Kudos first to Commissioner Hayne and the senior counsels assisting (namely Rowena Orr and Michael Hodge) for a job well-done in uncovering plenty of misconduct when, in the run-up, representatives of the government du jour repeatedly argued, and strenuously so, that there was nothing to see here, that the call for a Royal Commission (RC) was a populist whinge, and that an RC would endanger economic growth by undermining trust in the banks, superannuation providers, and the financial services industry more generally. It seems obvious now that these claims were made despite better knowledge. It seems important to recall this fact, as the implementation of effective solutions – even if evidence-based – is likely to encounter considerable opposition and attempts to water them down. Strategic dishonesty is a thing and it is at the heart of the problems so competently ferreted out by the RC.
  4. Kudos also to ASIC – much maligned these days – since it clearly has provided a considerable portion of the relevant systematic evidence under not always favourable conditions (e.g., the substantial reduction in its resources announced in the 2014 budget; the fact that some of these resources were restored in 2016 cannot distract from the fact that any such disruption is counterproductive).
  5. For an economist who knows the empirical (including the experimental) evidence on the effects of market power, incentives (especially those in social dilemma situations), and on human actors’ frequent failure to be ethical (honest) and in violations of existing norms of conduct, there is nothing surprising in the Interim Report. Likewise, the failure of the regulators to interfere effectively was hardly surprising, although the discussion of effective remedies among economists is likely to be more robust than on the other topics.

5.1. We know for example that market power begets socially suboptimal outcomes (e.g., Huck et al. JEBO 2004, or any textbook on Industrial Organization worth its cost).

5.2. We know, for example, that incentives, especially when in conflict with organizational or societal welfare, lead to undesirable outcomes (e.g., the huge literature on trust games reviewed in Ortmann et al. EE 2000, or more systematically in Johnson & Mislin JoEP 2011)

5.3. We know, for example, that, even for low stakes, there is a considerable amount of people that will always be unethical, with many more people being easily tempted by dishonest behaviour as the stakes increase (e.g., Rosenbaum et al. JoEP 2014; Abeler et al. JPublE 2014; Kajackaite & Gneezy GEB 2017; Capraro JDM 2018; Heck et al. JDM; Abeler et al. ECMTA forthcoming). People’s susceptibility to norm violations has been documented since Adam Smith wrote his The Theory of Moral Sentiments. For more recent evidence, see some of the evidence from psychology and related behavioural sciences in Gentilin (2016; for a critique of that evidence see Ortmann CE 2016 and references therein).

5.4. The question of effective remedies is a more complicated one. It touches on numerous mechanism design issues, although even there one can tap into a considerable empirical (and experimental) literature that addresses questions such as the relative efficacy of self-regulation (possibly under the threat of government intervention; see Van Koten & Ortmann 2017), certification, and other institutions such as independent standards boards that administer ethical culture surveys and whiste-blower protection, and provide pools of principal integrity officers, as suggested in Dennis Gentilin’s submission. More on these issues below under 7.

  1. That breaches were so many and so widespread will, especially in light of the significantly larger stakes at stake, not surprise any economist who knows the literature on the negative effects of market power, poorly designed and calibrated incentives, and many human actors’ tendency to be economical with the truth, and in violation of norms (especially if the chance that they are found out is minimal – see Dana et al. ET 2007)). Pages 268 – 270 of the Interim Report get it exactly right: “There being little threat of failure of the enterprise, and there being little competitive pressure, pursuit of profit has trumped consideration of how the profit is made. The banks have gone to the edge of what is permitted, and too often beyond that limit, … because they can; and because they profit from the misconduct that is described in this report.” (p. 269)

7. So what needs to be done to prevent the conduct from happening again?

7.1. It seems obvious that extant law be applied to lay charges for unconscionable acts such as charging customers fees for advice they did not receive. (While it is laudable that ASIC has secured hundreds of millions in refunds for affected customers, it has come through enforceable undertakings which let the perpetrators of criminal actions off the hook.) Other potentially criminal offences have been committed and they should be pursued under current law wherever possible. Unfortunately, the current state of affairs has considerable reputational spill-over effects and contributes to the wide-spread decline of trust in key institutions.

7.2. It seems clear that the light-touch approach of ASIC, and APRA, has not served the community well although it is hard to tell from the outside whether tough cops – such as Allan Fels and Graeme Samuel – alone can do the trick (Irvine SMH September 22, 2018).

7.3. It also seems abundantly clear that Commissioner Hayne’s assessment of the sorry state of internal compliance assessment and reporting within CBA and NAB (and possibly other banks) justifies immediate action (p. 10 of Interim Report).

7.4. I do agree with Fels that structural separation of banks from their financial advisory arms is the way to go (Irvine SMH September 22, 2018). The same applies in my view for superannuation providers. The conflicts of interest are just too obvious to ignore and some proposed remedies (such as disclosure of conflicts of interests) seem to have counterproductive effects (e.g., Taguchi & Kamijo 2018, for a recent review of the literature).

7.5. Relatedly, the whole commission business has to be reconsidered. See also the relevant discussion on the broken model of broker remuneration in the Productivity Commission’s June 29 report on Competition in the Australian Financial System (pp. 21- 23) Financial advisors are effectively glorified salespeople and incentivizing them through commissions is a recipe for disaster under the best of circumstances.

7.6. Relatedly, the variable-remuneration provisions for accountable persons according to BEAR have to be rethought. I endorse fully Recommendation One and Two in Dennis Gentilin’s submission on the RC’s Interim Report.

7.7. I also endorse fully Recommendations Four through Eight of Dennis Gentilin’s submission on the RC’s Interim Report and the rationale they are based on. What exactly the relation of an Independent Standards Board would be to Treasury, APRA, ASIC, and possibly ACCC, is as worthy of a good discussion as is a discussion of appointment procedures to that Board. See also the discussion of “a competition champion” in the Productivity Commission’s June 29 report on Competition in the Australian Financial System (pp. 15 – 19). Preferably the appointment of the Chair of some such Board would be consensus-driven and not partisan. (The sorry partisan transition from the first to the second ACNC Commissioner is not a recommended template.) I believe that Mr. Gentilin’s Recommendation Six – to have the proposed Independent Standards Board oversee the recruitment and appointment of Principal Integrity Officers to designated ADIs — is a brilliant one that will be key in guaranteeing the independence of Principal Integrity Officers. With Mr. Gentilin (specifically Recommendation Eight and its rationale), I believe that the establishment of a Whistleblowing Protection Authority is an indispensable and complementary step if indeed reducing misconduct in the banking, superannuation, and financial services industry is a serious concern and not just public posturing.

7.8. Last but not least, I would urge the Royal Commission – rather than adding more regulation that then is likely not enforced – to explore ways to let reputational feedback systems (e.g., Bolton et al MS 2013; see also systems such as TripAdvisor or Serviceseeking.com.au) work their magic. Considerably more transparency, and data, should be provided to the public to let interested researchers identify anomalies and developments that might be otherwise go unnoticed too long. Take the fascinating Figure 3 in the Productivity Commission’s April 2018 draft report on Superannuation: Assessing Efficiency and Competitiveness. Making that data available in a timely fashion would do wonders for the alignment of incentives. No traditional regulatory action I can think of would have the same effect.

References

Abeler et al. (2014), Representative evidence on lying costs. Journal of Public Economics pp. 96 – 104.

Abeler et al. (forthcoming), Preferences for truth-telling. Econometrica forthcoming.

Bolton et al. (2013), Engineering Trust: Reciprocity in the Production of Reputation Information. Management Science pp. 265 – 85.

Capraro (2018), Gender Differences in lying in sender-receiver games: A meta-analysis. Judgement and Decision Making pp. 345 – 55.

Dana et al. (2007), Exploiting moral wiggle room: experiments demonstrating an illusory preference for fairness. Economic Theory pp. 67 – 80.

Gentilin (2016), The Origins of Ethical Failures. Lessons for Leaders. Routledge.

Heck et al. (2018), Who lies? A large-scale reanalysis linking basic personality traits to unethical decision making. Judgement and Decision Making pp. 356 – 71

Huck et al. (2014), Two Are Few and Four Are Many: Number Effects in Experimental Oligopolies. Journal of Economic Behavior & Organization pp. 435 – 46.

Irvine (2018), ‘Stop being bastards’: how the royal commission could reform banks. Sydney Morning Herald 22 September.

Johnson & Mislin (2011), Trust Games: A Meta-analysis. Journal of Economic Psychology pp. 865 – 89.

Kajackaite & Gneezy (2017), Incentives and cheating. Games and Economic Behavior p. 433 – 44.

Ortmann et al. (2000), Trust, Reciprocity, and Social History: A Re-examination. Experimental Economics pp. 81 – 100.

Rosenbaum et al. (2014), Let’s be honest: A review of experimental evidence of honesty and truth-telling. Journal of Economic Psychology 181 – 96.

Taguchi & Kamijo (2018), Intentions behind disclosure to promote trust under short-terminism: An experimental study. Kochi University of Technology working paper.

Van Koten & Ortmann (2017), Self-regulatory organizations under the shadow of governmental oversight: An experimental investigation. In: Deck et al. (2017), Experiments in Organizational Economics, Research in Experimental Economics 19, 85 – 104.

Comments welcome.

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Kalle and me. Schumpeter, too.

[One of my intellectual heroes, Karl Marx, had his 200th birthday (May 5) this weekend. So I decided to reflect on his influence.]

My first encounter with Kalle was when I was still in (the equivalent of) high school. Things were heating up in (West) Germany around that time: students started marching against a “system” that had allowed atrocities abroad (Remember Vietnam, that last and long-lasting proxy battle of the Cold War?) and also at home where the old Nazis (Remember “Silver Tongue” Kiesinger?) were still very much in power and, it seemed, had adopted the Social Democrats (being themselves quite an old-boys network, although of another kind) via a Grand Coalition with him and his.

The suffocating stuffiness that still hung over Germany in the early sixties soon fell by the wayside, culturally as much as politically, and by the late sixties Kiesinger was gone and in the fall of 1969 that “traitor”, Willy Brandt, was German chancellor. People like Udo Lindenberg, and a number of the Krautrock and Schneeball groups, started to sing in German and it was not embarrassing. Alles klar auf der Andrea Doria! Keine Macht fuer Niemand! (Of course, all of these German bands had to fight the onslaught of bands from Great Britain and the United States … .) There were charismatic figures such as the informal leader of the extraparliamentary opposition, Rudi Dutschke, the Kommune 1 with its fun guerilla faction, and the no-fun guerilla of the Red Army Faction (Baader, Ensslin, Mahler, Meinhof, et al.) which soon after went from agitating to murder and brought about, in 1977, The German Autumn. There was also an emerging environmental movement in the seventies that did its fair share, and then some, to change the policy discourse in Germany for decades to come. All of this happened against the backdrop of a divided Germany, in a key theatre of the Cold War, where one part called itself the German Democratic Republic but was hardly that.

Around the same time (ca 1967 – 1970) my parents fought hard a battle of the roses that saw my (younger, by three years) brother’s life derailed (and him dead of an overdose a decade later) and me dropping out of school, leaving “home” prematurely, moving to the big city (well for me, that was what Bielefeld was then), and becoming part of the proletariat at age 18, working for about a year as warehouse worker and delivery driver for Thyssen-Schulte, before — after a few months of hitch-hiking through Europe -, I joined the army. I spent much of the next two years deep in the heart of conservative and catholic Bavaria (1972 – 1974), much of it in an alpine communication unit. Quite an experience it was.

After the years in the military, I entered an experimental college back in Bielefeld, studying political economy, math, Russian, and Portuguese during 1974 – 1978. I also spent a couple of weeks in Oberhof, Thuringia (then part of the German Democratic Republic), on an all-expenses paid trip where I was taught the Socialist way of thinking in the morning and got to ski in the afternoon, with enough space left for plenty of drinking and carousing in the evenings. Paid by the Konsumgenossenschaft, the trip was the East-German Communist Party’s attempt to pry away from the West promising young things. I was not quite persuaded and did not take it up on the invitation.

It was during that first year in Bielefeld, and way before my trip to Oberhof, when I started reading Marx. In reading groups we slugged our way through The Communist Manifesto (quickly) and then (way more slowly) through Das Kapital, volume one. Never quite finished it from what I vaguely recall. Not even close. And, frankly, we all got quite bored reading it and had trouble buying into the promises of the discussion leaders that, in the end, it all would make sense. It did get me interested enough though that — when I entered that experimental college in Bielefeld — political economy was my choice of major, together with math. And it was there that I studied Marx’s work more carefully. And I was not the only one … several fellow students and teachers were into it … (a couple of the teachers being true armchair Marxists who thought that interpreting the world on a decent salary was good enough after all.)

I read a lot those years, often sitting in my small rented basement room in the Von-Ossietzky-Strasse until deep in the wee hours, sipping cheap Moroccan red wine, popping Adumbran to be able to sleep, with good old Brecht looking over my shoulder from a huge poster. Among the things I read – I can tell because I still have the marked-up copy — was Wygodski’s book, published in East Berlin in 1976, on how Das Kapital emerged from Marx’s early writings. Wygodski’s books were remarkable in that they showed how early some of Marx’s (and Engels’s) theories about society, economics, politics, and culture were fixed. There are interesting parallels here to how the ideas underlying Adam Smith’s Wealth of Nations emerged over decades of thinking about them. I also read Theorien über den Mehrwert, often called the fourth volume of Das Kapital which demonstrates that Marx knew his stuff and was indeed a first-rate historian of thought to start with. But of course, he was much more: Philosopher, sociologist, economist, political scientist, activist, agitator, …

As I progressed in my career, I lost sight of the insights to be found in Marx’s writings. With the fall of socialism, in the USSR and its satellite states in Central Europe, the evidence seemed to suggest that certain realizations of Marxian ideas (or what some people considered them) had overstayed their welcome. Of course, Marx’s ideas do live on these days in China where Xi Jinping just recently made clear the importance of The Communist Manifesto. Marx’s ideas havea also lived on in some academic branches such as sociology. The authors of the Wikipedia entry on Kalle seem to assert correctly that he is typically cited as one of the principal architects of modern social science. Even that curmudgeon of a historian, Schumpeter, who thought little of Adam Smith but can hardly be accused of having communist sympathies, was surprisingly positive about Marx, calling him a “first-rank economist” (History of Economics Analysis p. 224), among other laudatory names. It was no coincidence that Schumpeter featured Marx prominently in Ten Great Economists. In contrast, Smith did not make the cut. Go figure.

Here are some selected excerpts from Schumpeter’s History of Economic Analysis (Perlman edition), for your easy perusal:

p. 370 Any economist who wishes to study Marx at all must resign himself to reading carefully the whole of the three volumes of Das Kapital and of the three volumes of Theorien über den Mehrwert.Fn

Further, there is no point whatever in tackling Marx without preparation. Not only is he a difficult author but, owing to the nature of his scientific apparatus, he cannot be understood without a working knowledge of the economics of his epoch, Ricardo in particular, and of economic theory in general. This is all the more important because the necessity for it does not show on the surface. Again, the reader must be on his guard against being misled by traces of Hegelian terminology. It will be argued below that Marx did not allow his analysis to be influenced by Hegelian philosophy. But he sometimes uses terms in their specifically Hegelian sense, and a reader who takes them in their usual sense misses Marx’s meaning.

Fn. The Communist Manifesto is also indispensable, of course. But for any purpose short of becoming a Marxologist, I think that nothing need be added except the Class Struggles in France, articles written in 1848–50, published as a book, with an introduction by Engels in 1895. Only the Marxologist need go into Marx’s correspondence.

p. 366 … nobody will ever understand Marx and his work who does not attach appropriate weight to the erudition that went into it—the fruit of incessant labor that, starting from primarily- philosophical and sociological interests in his early years, was concentrated increasingly on economics as time went on, until his working hours were all but monopolized by it. Nor was his the kind of mind in which scholarly coal puts out the fire: with every fact, with every argument that impinged upon him in his reading, he wrestled with such passionate zest as to be incessantly diverted from his main line of advance. On this I cannot insist too strongly. This fact would be my central theme were I to write a Marxology. Perusal of his Theorien über den Mehrwert suffices to convince one of it. And, once proved, it serves to establish in turn another fact and to solve a much discussed riddle: it serves to establish that he was a born analyst, a man who felt impelled to do analytic work, whether he wanted to or not and no matter what his intentions were; … our information warrants the statements that he was very much a philosopher dabbling in sociology and politics (as do so many philosophers) until he went to Paris; that there he quickly made headway and found his feet as an economist; and that by the time he and Engels wrote the Communist Manifesto (1847; published 1848); that is to say, at the age of 29,7 he was in possession of all the essentials that make up the Marxist Social Science, the only important lacunae being in the field of technical economics. For the rest, the main line of his intellectual life may be described as a series of efforts to work out that Social Science and to fill those lacunae—tasks which, I believe, Marx did not expect would involve any insurmountable difficulties, though he did expect that a great deal of further work would be required to straighten out and co-ordinate everything that was to find a place within the vast structure.

p. 33 Half a century before the full importance of this phenomenon [ideological bias, AO] was professionally recognized and put to use, Marx and Engels discovered it and used their discovery in their criticisms of the ‘bourgeois’ economics of their time. Marx realized that men’s ideas or systems of ideas are not, as historiography is still prone to assume uncritically, theprime movers of the historical process, but form a ‘superstructure’ on more fundamental factors, as will be explained at the proper place in our narrative. Marx realized further that the ideas or systems of ideas that prevail at any given time in any given social group are, so far as they contain propositions about facts and inferences from facts, likely to bevitiated for exactly the same reasons that also vitiate a man’s theories about his own individual behavior. That is to say, people’s ideas are likely to glorify the interests and actions of the classes that are in a position to assert themselves and therefore are likely to draw or to imply pictures of them that may be seriously at variance with the truth. … Such systems of ideas Marx called ideologies.4 And his contention was that a large part of the economics of his time was nothing but the ideology of the industrial and commercial bourgeoisie. The value of this great contribution to our insight into the processes of history and into the meaning of social science is impaired but not destroyed by three blemishes, …

p. 20 … an economics that includes an adequate analysis of government action and of the mechanisms and prevailing philosophies of political life is likely to be much more satisfactory to the beginner than an array of different sciences which he does not know how to co-ordinate—whereas, to his delight, he finds precisely what he seeks ready-made in Karl Marx. An economics of this type is sometimes presented under the title Political Economy. …

p. 363 The difficulty is that in Marx’s case we lose something that is essential to understanding him when we cut up his system into component propositions and assign separate niches to each, as our mode of procedure requires. To some extent this is so with every author: the whole is always more than the sum of the parts. But it is only in Marx’s case that the loss we suffer by neglecting this2 is of vital importance, because the totality of his vision, as a totality, asserts its right in every detail and is precisely the source of the intellectual fascination experienced by everyone, friend as well as foe, who makes a study of him. Marx figures in this book only as a sociologist and an economist. Of course, that creed-creating prophet was much more than this. And his creed-creating activity, on the one hand, and his policy-shaping and agitatorial activity, on the other hand, are inextricably interwoven with his analytic activity. So much is this the case that the question arises whether he can be called an analytic worker at all. This question may be answered in the negative from two very different standpoints. …

p. 364 My answer to our question is, however, in the affirmative. The warrant for this affirmative answer is in the proposition that the bulk of Marx’s work is analytic by virtue of its logical nature, for it consists in statements of relations between social facts. For instance, the proposition that a government is essentially an executive committee of the bourgeois class may be entirely wrong; but it embodies a piece of analysis in our sense, acceptance or refutation of which is subject to the ordinary rules of scientific procedure. It would be absurd indeed to describe the Communist Manifesto, in which this proposition occurs, as a publication of scientific character or to accept it as a statement of scientific truth. It is not less absurd to deny that, even in Marx’s most scientific work, his analysis was distorted not only by the influence of practical purposes, not only by the influence of passionate value judgments, but also by ideological delusion. Finally, it would be absurd to deny the difficulty that in some cases rises to impossibility of disentangling his analysis from its ideological element. But ideologically distorted analysis is still analysis. It may even yield elements of truth. …

To sum up: … we simply recognize him as a sociological and economic analyst whose propositions (theories) have the same methodological meaning and standing and have to be interpreted according to the same criteria as have the propositions of every other sociological and economic analyst; we do not recognize any mystic halo.

p.367 The ‘pieces’ divide up into two groups, one sociological and the other economic. The sociological pieces include contributions of the first order of importance such as the Economic Interpretation of History, which, as I shall argue, may be considered as Marx’s own, quite as much as Darwin’s descent of man is Darwin’s own. But the rest of Marx’s sociology—the sociological framework that, like every economist, he needed for his economic theory—is neither objectively novel nor subjectively original. His preconceptions about the nature of the relations between capital and labor, in particular, he simply took from an ideology that was already dominant in the radical literature of his time. If, however, we wish to trace them further back, we can do so without difficulty. A very likely source is the Wealth of Nations. A.Smith’s ideas on the relative position of capital and labor were bound to appeal to him, especially as they linked up with a definition of rent and profits—as ‘deductions from the produce of labour’ (Book I, ch. 8, ‘Of the Wages of Labour’)—that is strongly suggestive of an exploitation theory. But these ideas were quite common during the enlightenment and their real home was France. French economists, ever since Boisguillebert, had explained property in land by violence, and Rousseau and many philosophers had expanded on the subject. There is, however, one writer, Linguet, who, more explicitly than others, drew exactly the picture that Marx made his own: the picture not only of landlords who subject and exploit rural serfs, but also of industrial and commercial employers who do exactly the same thing to laborers who are nominally free, yet actually slaves.This sociological framework offered most of the pegs that Marx needed in order to have something upon which to hang his glowing phrases. And since historians are primarily interested in these, no matter whether they admire them or are shocked by them, it is difficult to gain assent to what is the obvious truth about the nature of thepurely economic pieces of the Marxist system. This obvious truth is that, as far as pure theory is concerned, Marx must be considered a ‘classic’ economist and more specifically a member of the Ricardian group. Ricardo is the only economist whom Marx treated as a master. I suspect that he learned his theory from Ricardo. But much more important is the objective fact that Marx used the Ricardian apparatus: he adopted Ricardo’s conceptual layout and his problems presented themselves to him in the forms that Ricardo had given to them. No doubt, he transformed these forms and he arrived in the end at widely different conclusions. But he always did so by way of starting from, and criticizing, Ricardo—criticism of Ricardo was his method in his purely theoretical work.

p.369 … admit that Marx could ever grow out of date in any respect. However, in order to drive home a point that seems important, I have strictly confined myself in the preceding paragraph to Marx’s theoretical technique. But there are two features of Marxist theory that transcend technique. And these were not period-bound. The one is his tableau économique. In his analysis of the structure of capital, Marx developed Ricardo once more. But there is an element in it that does not hail from Ricardo but may hail from Quesnay: Marx was one of the first to try to work out an explicit model of the capitalist process. The other is still more important. Marx’s theory is evolutionary in a sense in which no other economic theory was: it tries to uncover the mechanism that, by its mere working and without the aid of external factors, turns anygiven state of society into another.

p.408 … the period’s great performance in the field of political sociology stands in the name of Karl Marx. … I wish merely to say by way of anticipation that Marx’s theories of history, of social classes, and of the state (government) constitute, on the one hand, the first serious attempts to bring the state down from the clouds and, on the other hand, the best criticism, by implication, of the Benthamite construct. Unfortunately, this scientific theory of the state, like so much else in Marxist thought, is all but spoiled by the particularly narrow ideology of its author. What a pity, but at the same time, what a lesson and what a challenge!

p.413 [Marxist Evolutionism] I have just adverted to the possible implications for sociology that a despiritualized Hegelian philosophy might harbor. This suggests that here we have after all more than a phraseological influence of Hegel upon Marx. If, nevertheless, we maintain substantive autonomy of Marx’s so-called Materialistic Interpretation of History as against Hegelism, and if we list it as a separate type of evolutionism, we allow ourselves to be guided by two considerations. First, Marx’s theory of history developed independently of Marx’s Hegelian affiliation. We know that his analysis started from a criticism of the current (and apparently immortal) error that the behavior that produces history is determined by ideas (or the ‘progress of the human mind’), and that these in turn are infused into actors by purely intellectual processes. To start with this criticism is a perfectly sound and very positive method but has nothing to do with Hegelian speculation. Second, Marx’s theory of history is a working hypothesis by nature. It is compatible with any philosophy or creed and should therefore not be linked up with any particular one—neither Hegelianism nor materialism is necessary or sufficient for it. What remains is, again, Marx’s preference for Hegelian phrasing—and his own and most, though not all, Marxists’ preference for anything that sounds anti-religious.

p.414 Both the achievement embodied in that hypothesis and the limitations of this achievement may be best conveyed by means of a brief and bald statement of the essential points. (1) All the cultural manifestations of ‘civil society’—to use the eighteenth-century term—are ultimately functions of its class structure.8 (2) A society’s class structure is, ultimately and chiefly, governed by the structure of production (Produktionsverhältnisse), that is, a man’s or a group’s position in the social class structure is determined chiefly by his or its position in the productive process. (3) The social process of production displays an immanent evolution (tendency to change its own economic, hence also social, data). To this we add the essential points of Marx’s theory of social classes, which is logically separable from points (1) to (3) that define the economic interpretations of history but forms part of it within the Marxian scheme. (1′) The class structure of capitalist society may be reduced to two classes: the bourgeois class that owns, and the proletarian class that does not own, the physical means of production, which are ‘capital’ if owned by employers but would not be ‘capital’ if owned by the workers who use them. (2′) By virtue of the position of these classes in the productive process, their interests are necessarily antagonistic. (3′) The resulting class struggle or class war (Klassenkampf) provides the mechanisms—economic and political—that implement the economic evolution’s tendency to change (revolutionize) every social organization and all the forms of a society’s civilization that exist at any time. All this we may sum up in three slogans: politics, policies, art, science, religious and other beliefs or creations, are all superstructures (Überbau) of the economic structure of society; historical evolution is propelled by economic evolution; history is the history of class struggles.

This is as fair a presentation of Marx’s social evolutionism as I am able to provide in a nutshell. The achievement is of first-rank importance although the elements that enter into it are of very unequal value or, rather, unequally impaired by obvious ideological bias. … … the economic interpretation of history … . If we reduce it to therole of a working hypothesis and if we carefully formulate it, discarding all philosophical ambitions that are suggested by the phrases Historical Materialism or Historical Determinism, we behold a powerful analytic achievement. Points (1) and (3) may then be defended against objections, most of which turn out to rest upon misunderstandings. We have reached a point of vital importance for a proper understanding of Marx’s work. … we can now visualize his unitary Social Science, the only significant all-comprehensive system that dates from this side of utilitarianism: we see the manner and the sense in which he welded into a single homogeneous whole all branches of sociology and economics—a venture that might well dazzle the modern disciple even more than it dazzled Engels, who stood too near the workshop. .. Here I wish only to insist on the greatness of the conception and on the fact that Marxist analysis is the only genuinely evolutionary economic theory that the period produced.14 Neither its assumptions nor its techniques are above serious objections—though, partly, because it has been left unfinished. But the grand vision of an immanent evolution of the economic process— that, working somehow through accumulation, somehow destroys the economy as well as the society of competitive capitalism and somehow produces an untenable social situation that will somehow give birth to another type of social organization—remains after the most vigorous criticism has done its worst. It is this fact, and this fact alone, that constitutes Marx’s claim to greatness as an economic analyst.

Some of Marx’s insights have stayed with me,. Here is a list of ten great insights and phrases, straight from the horse’s mouth. Memorable, and still rather pertinent.

10. “The philosophers have only interpreted the world, in various ways. The point, however, is to change it.” [These words are also inscribed upon his grave]” (Eleven Theses on Feuerbach)

9. “There is no royal road to science, and only those who do not dread the fatiguing climb of its steep paths have a chance of gaining its luminous summits.” (Capital, Vol 1: A Critical Analysis of Capitalist Production)

8. “The tradition of all dead generations weighs like a nightmare on the brains of the living.” (The Eighteenth Brumaire of Louis Bonaparte)

7. “In the social production of their existence, men inevitably enter into definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the development of their material forces of production. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the general process of social, political and intellectual life. It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness. At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an era of social revolution. The changes in the economic foundation lead sooner or later to the transformation of the whole immense superstructure.” (A Contribution to the Critique of Political Economy)

6. “It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness.” (A Contribution to the Critique of Political Economy)

5. “The ideas of the ruling class are in every epoch the ruling ideas, i.e. the class which is the ruling material force of society, is at the same time its ruling intellectual force. The class which has the means of material production at its disposal, has control at the same time over the means of mental production, so that thereby, generally speaking, the ideas of those who lack the means of mental production are subject to it. The ruling ideas are nothing more than the ideal expression of the dominant material relationships, the dominant material relationships grasped as ideas.” (The German Ideology)

4. “The history of all hitherto existing society is the history of class struggles.

Freeman and slave, patrician and plebeian, lord and serf, guildmaster and journeyman, in a word, oppressor and oppressed, stood in constant opposition to one another, carried on an uninterrupted, now hidden, now open fight, that each time ended, either in the revolutionary reconstitution of society at large, or in the common ruin of the contending classes.” (The Communist Manifesto)

3. “Modern bourgeois society with its relations of production, of exchange, and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer, who is no longer able to control the powers of the nether world whom he has called up by his spells.” (The Communist Manifesto)

2. “Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win. Workingmen of all countries unite!” (The Communist Manifesto)

1. “Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is the opium of the people.” (A Contribution to the Critique of Hegel’s Philosophy … )

Why Blockchain has no economic future

When Bitcoin went public in 2009 it introduced to the world of finance and economics the technology of blockchain. Even the many who thought Bitcoin would never make it as a major currency were intrigued by the BlockChain technology and a large set of new companies have tried to figure out how to offer new services based on blockchain technology. It is still fair to say that very few economists and social scientists understand blockchain, and governments are even further behind.

I will argue that blockchain has no economic future in the regular economy. I will give you the bottom-line, then describe blockchain, discuss its key supposed advantages, and then take it apart as a viable technology by giving you a much more efficient alternative to the same market demand opportunities.

The bottom line for those not interested in the intricacies of blockchains and public trust

The essence of my argument is that a large country can organise a much more trustworthy information system than a distributed network using blockchain can, and at lower costs, meaning that any large economic role for blockchain is easily displaced by a cheaper and even larger national institution.

So in the 19th century, large private companies circulated their own money, in competition with towns and princedoms. In that competition, national governments won, as they will again now.

The reason that the tech community is investing in blockchain companies is partially because some are in love with the technicalities of blockchain, some hope to attract the same criminal and gullible element that Bitcoin has, some lack awareness of the evolution and reality of political systems, and some see a second-best opportunity not yet taken by others. But even in this brief period of missing-in-action governments, large companies will easily outperform blockchain communities on any mayor market. Except the criminal markets, which is hence the only real future of blockchain communities. Continue reading “Why Blockchain has no economic future”

I guess I can’t run for Australian Parliament

I’m not sure if anyone was hoping I might return to Australia one day and run for Parliament. I certainly never thought about it. But it had never occurred to me that I might be prohibited from doing so. After all, I am an Australian citizen, was born in Australia, and right at the moment am not, to my knowledge a citizen of another country. I did know — thanks to the experience of my long-time co-author, Andrew Leigh, that if I wanted to run for Parliament I could not do so while holding a position at an Australian University as that would make me a government employee. But at least there was something I could do about it.

For those who don’t know, my brother — Jeremy — is a law professor at the University of Melbourne. That hasn’t really impacted on my life although he has lamented the inability to get the coveted ‘j.gans’ username there and previously at UNSW. He mostly writes about criminal stuff and even has a popular book out on some ridiculous jury laws in the UK. But over the past few months he has become somewhat obsessed with s44 of the Constitution which has now caused several MPs — including the Deputy Prime Minister — to be booted out of Parliament with perhaps more to follow. I have been waiting for all this to get on John Oliver but apparently it is still way down the list of Australian craziness.

Anyhow, in the wake of the High Court decision, he went on a rant about how ludicrous it was. The High Court basically decided that, in order to ensure that potential MPs did not shy away from checking whether they are beholden to a foreign power, they had better interpret the Constitution not as some sensible person might but as a strict rule that if you are potentially a citizen of another country — that is, they would be nice to you if you had nowhere else to go — then you had better make sure you have renounced your citizenship so that you cannot be tempted to be their agent in the future. I know that isn’t the legal interpretation but that is the way I read it.

Now Professor Jeremy’s rant — despite a surprising tie in with Gilbert and Sullivan — is mostly legal stuff and is kind of long so I didn’t notice until now this part:

I’m fortunate to have never contemplated nominating for elected office. But, like many Australians, the recent debate has caused me to ponder my own status under s44(i). Despite being born in Sydney and long assuming that I was exclusively an Australian citizen, my eligibility for election to my own nation’s Parliament proves to be quite a puzzle.

The simplest half of the puzzle is my father’s birth as a German citizen in Frankfurt in the 1930s. Thanks to Adolf Hitler, whose 1941 Eleventh Decree to the Law on the Citizenship of the Reich stripped my Jewish father of his citizenship years after he arrived in Australia, I am certain I’m no German.

But there is a complication: Article 116(2) of Germany’s Basic Law provides that people in my father’s position ‘and their descendants, shall on application have their citizenship restored’. Although I haven’t applied, it seems arguable that I am nevertheless ‘entitled to the rights or privileges of a subject or a citizen of a foreign power’ (a phrase that the current High Court says is part of the same ‘limb’ as s44(i)’s ban on foreign citizens.) This interesting legal question can only be tested if someone like me is first elected as an MP and then has her eligibility challenged in the Court of Disputed Returns.

The trickier part of the puzzle is my mother. She was born during World War Two somewhere on the Soviet side of the front. However, precisely where in the former Union she was born (and hence her potential current foreign citizenship in a former Soviet Republic) is something that only my long-dead grandparents know for sure. My mother obviously can’t confirm her birthplace with any certainty. Her earliest memories are crossing countless borders as a war refugee. (My grandparents themselves were very vague about the details and timelines of their respective wartime ordeals. It is obvious that they were awful.) While none of these facts concern me at all, every single detail would be crucial to determining my current eligibility under s44(i).

The current High Court’s judges (some of whom would also be my future electoral executioners) saw fit to smugly declare:

“It is necessary to bear in mind that the reference by a house of Parliament of a question of disqualification can arise only where the facts which establish the disqualification have been brought forward in Parliament. In the nature of things, those facts must always have been knowable. A candidate need show no greater diligence in relation to the timely discovery of those facts than the person who has successfully, albeit belatedly, brought them to the attention of the Parliament.”

But, if I was ever elected to a very narrowly divided parliament, then there would be a good many people with much better resources and motivation than me to solve the mystery of my citizenship. Somewhere, there may be an old Soviet record, or a wartime refugee camp form, or a surviving acquaintance of my grandparents, or a genetic link to some ‘atomic globule’ in Central Asia, that could belatedly confirm me as a citizen of one of a potential dozen or so nations, each with their own highly complex and shifting citizenship laws. My own ignorance of these matters (no matter how diligent my personal search) would be absolutely irrelevant to my future eligibility,. So holds Re: Canavan.

And for me to do my constitutional ‘homework’ would, at a minimum, be punishingly expensive, much more so than the truly ridiculous sums that Sam Dastyari had to pay to (probably) rid himself of his Iranian citizenship. Worse, there is every likelihood that I would be unable to ever be sure that I wasn’t a foreign citizen, much less satisfy any party contemplating nominating me. The likely result of any ‘serious reflection on the question’ of my eligibility is that nominating me would not be worth the risk. And I am hardly an unusual case (outside of the ‘came with the First Fleet‘ set, that is.)

Hang on a second I thought as I read this. Jeremy’s mother and father are my mother and father too — sometimes it takes a minute for the ball to drop on that. That means all this crap applies to me!

And not just my but prominent MPs like Josh Frydenberg and several other Jewish MPs.

So I don’t see how I could ever run for Parliament. Well in Australia. If I become a Canadian citizen — and no, they don’t care how many other citizenships I hold in order to do that (phew!) — then I could run for Parliament here. In other words, I am potentially barred — forever! — from running for Parliament in Australia by the High Court decision but can actually do so elsewhere.

But there is another thing. While Malcolm Turnbull and the current government I know did not agree with the High Court’s decision as they put forward an argument that would not have led to this if they had adopted it, I do now wonder what the Opposition’s position really is. From my reading, they have been playing politics in criticising the Government and now taking seriously the idea of contesting the new by-elections etc. That sounds like they accept that interpretation. If that is so, am I to read that they also believe that immigrants and children of immigrants should never run for Parliament in Australia? I think we all deserve an answer on that one.

[Update: it gets worse for Jewish people in Australia. They may all be prohibited. A High Court test case on this is urgently needed.]

EU plans for VAT taxation are doomed to fail. Again.

Taxation is the potential downfall of the EU as an institution. The reason is that within the EU, several member states are making money from the tax evasion in other member states, a situation akin to having a wife slowly murdering her husband with poison. Unless this stops, a divorce becomes inevitable.

Luxemburg, the Netherlands, Ireland, Lichtenstein, Austria, London, and several others are at it: they help large corporations avoid their taxation responsibilities. They either make deals that allow companies to hide their tax obligation, have idiosyncratic definitions under which there are less tax obligations, provide re-labelling services such that head-offices can be a mere post-box, etc.

These tax-avoidance enablers have also systematically frustrated all attempts over the last 30 years to harmonise taxation and reverse the damage they have done to the integrity of the other nation states in the EU. Whenever the issue of tax evasion was in the public eye, for instance during the GFC, they stalled by insisting tax evasion should be solved internationally and should include all other tax havens. Predictably, these were impossible demands. They have also made life difficult inside committees and government forums.

The EU bureaucracy has just put out a new set of proposals regarding VAT on large international corporations (like Google and Amazon), impact evaluated and all. I have read them and predict they will not be implemented, nor would they work anyway.

For one, the EU commission has no power to enforce new tax rules, and these proposals are in a long line of ignored prior proposals. To become law they would need the unanimous backing of all EU members. They hence need the cooperation of about 5 countries that would lose billions if they complied. Fat chance, even with Brexit reducing the political clout of London.

Secondly, the proposals repeat the main mistake of the past: they advocate a rules-based administrative system of taxation which is cumbersome, highly-complex, and easy to game. I explain how over the fold. Continue reading “EU plans for VAT taxation are doomed to fail. Again.”

Adverse Action Lawyer wanted in Frijters versus UQ case

I am seeking a lawyer to run an Adverse Action case connected to the recent Fair Work Commission verdict that found systematic breaches of procedures and procedural fairness in the University of Queensland’s actions against me following my research on racial attitudes in Brisbane. I first raised these breaches late 2013, but they were never addressed, with lots of new ones added to them as the case dragged on. The VC of the university was also personally informed of these breaches in April 2014, publicly denying there was anything wrong about UQ’s action in February 2015. He was again informed in March 2015, consistently failing to rectify breaches of procedure brought to his attention. I wish to bring an Adverse Action case to claim back my considerable costs.

I expect the case to be worth at least a few hundred thousand dollars in terms of damages (legal cost, value of my time, etc.), and for it to be potentially one of many others because the FW case uncovered widespread breaches of procedures in UQ’s handling of misconduct cases. So there might well be many others who are now looking to bring Adverse Action cases against UQ.

I offer a pay-for-success contract wherein the first part of any awarded damages would go to the lawyer, but after a threshold payment I want 50% to go to the successful lawyer and 50% towards Vanavil, which is a school for orphaned victims of the 2004 Tsunami flood in India. I feel that helping the poorest Indians will go some way to nullify the damage that the managers of UQ did when they suppressed evidence of adverse treatments of Indians (and Indigenous peoples) in Brisbane and made it harder to research these things in general. And I want to feel that I haven’t wasted my time these last three years on fighting mindless bureaucracies, but that my efforts ended up helping people in need.

Negotiations on the offered contract are possible. Please contact me on email if you are interested or have a good suggestion for a good adverse action lawyer ( p dot frijters AT uq dot edu dot au).

[Ps. The VC of UQ was still making inappropriate claims last week on the UQ media about his lack of involvement and has refused to retract his claims this last week when I pointed his errors out to him.]

Top Trump: The Game theory of the Trump endgame

For those of us outside the US, the Trump entry into the US Presidential race so many months out from the actual election has been entertainment heaven. Sure, he is destroying the fabric of a great nation by bring horrific stereotypes and misinformation to the fore, but sometimes that is the price to pay for depravity.

But there is a strong sense that this will come to an end. There is no one who believes he will be the Republican nominee, let alone President. Our favourite prediction markets have the odds of the former at 7% and the latter at 3%; both actually higher than the priors of most. The real question is how long will he last. To be sure, as viewers our interests are in him lasting some time, but when we put our rational heads on, what prediction do we get?

To apply game theory to all this, we need to make some assumptions:

1. The GOP will not nominate Trump

2. For Trump, running and losing has more disutility than not running. I don’t know this for sure but I am willing to go with it. Trump doesn’t strike me as someone who wants to be tested.

3. For Trump, losing as a third party candidate involves less disutility than losing as the GOP nominee.

4. Trump could not stand to be at an event without being the centre of attention.

5. Trump is not really able to “work for it.” In other words, coming from behind isn’t in him.

That should do us to get some predictions.

First of all, let’s consider the actual primary race that starts early next year. The Iowa caucuses aren’t really that critical for leading candidates but New Hampshire is. The chances are, the field will have shrunk enough by then that, whomever is the alternative to Trump, will actually poll higher than Trump in New Hampshire. Thus, being at that race for Trump means losing.

Second, given this, he won’t run in that race. He has two options. First, to pull out for the GOP race prior to that and run as an independent. Second, to pull out of the race entirely for that citing medical reasons. This last one is appealing as a prediction as it satisfies Trump’s preference assumptions. If this is the case, however, he will want to do this when it was still the case that he had a chance in New Hampshire. That way he can claim “I was going to win, but what can you do?” Effectively, the Republican equivalent of Bobby Kennedy although with a healthier degree of endogeneity to the decision.

Third, what this means is that running as an independent isn’t likely to happen. When we get to just the point where the medical exit or mexit is feasible, the mexit option will be taken. So there will be no opportunity for the independent run at that stage.

Fourth, which brings us to now. The first Republican debate is next week. Trump and nine others will be on the stage for a couple of hours. Think about that for a moment. Trump will be on stage with nine other people presumably with rules that will require him to spend 80 to 90% of the time listening to others speak. We are all tuning in to watch it. But to be sure, we are doing so because we don’t think that can happen.

Fifth, in addition, there is a strategy available to the other candidates. We can term it “Top Trump” or alternatively the “Quayle Fail.” Remember when Quayle stood there like a stunned mullet against Lloyd Bentsen. If one of the other candidates can get that reaction or sometime equally embarrassing from Trump, not only will Trump be out of the race but that candidate will become the leader. Basically, the “vanquished Trump” title is a game winner. But it will take something big and if someone can do it, they deserve kudos up the wazoo.

Sixth, just before you get too excited, the game theorist in me has to tell you that Trump will surely know about the “Top Trump” possibility. He’ll be watching for it. Obviously, if someone can do it, it is too late for him.

Seven, points 4 – 6, suggest that there is a reasonable probability that Trump will pull out of the debate or, at the very least, be off the stage early to destroy it. He’ll claim “why am I on a stage with all you losers” and that will be it. It is a clear win-win for Trump. A debate does him no good and carries risks — especially at this stage.

Will that mean that he forms a third party then and there or that he pulls out altogether shortly after with a mexit? Sadly, this is as far as my game theorist’s predictive lens will take me. My point is: I hope I’m wrong but our entertaining run seems like it will come shortly to an end.

An MYEFO mystery: what’s with the resource tax?

It’s the time of the mid-year Economic Fiscal Outlook (MYEFO) and we’re told that we’re about 11 billion deeper in the red this financial year than we thought, with the treasurer blaming the dropping iron price and the reduced wage growth. I have gone over the MYEFO documents (which are an exercise in obfuscation if ever I saw one), found that wage growth and the dropped iron ore price would ‘only’ cost us 2.3 billion each in this financial year (2014-2015), noted that this was far short of the 11 billion headline, and thus went looking for the ‘real story’.

This threw up the mystery of the resource tax. Here is what it says on table 3.2:

Table 3.2: Impact of Senate on the Budget (underlying cash balance)
Estimates Projections
2014‑15 2015‑16 2016‑17 2017‑18 Total
$m $m $m $m $m
Impact of decision taken as part of Senate negotiations(a)
Repeal of the Minerals Resource Rent Tax and related measures -1,684 -2,334 -1,670 -947 -6,634

which seems to means that the repeal of the minerals resource rent tax (and related measures) is costing us around 2 billion per year. Yet, in the ‘Overview Part’, the MYEFO says “The repeal of the Minerals Resource Rent Tax and other related measures will save the budget over $10 billion over the forward estimates and around $50 billion over the next decade.”.

What is going on?

Update (thanks Chris Lloyd): it seems to be a language issue. Part of the story seems to be that the MYEFO is counting the repeal of the mining tax, which was an election promise, as something the Senate inflicted on the budget, so the 2 billion a year is ‘revenue foregone’. So the MYEFO is blaming the Senate for the outcome of an election promise, using an odd formulation to say that the repeal will save us 50 billion when it seems to imply it would cost us 50 billion. Weird.

Remembering Whitlam

Gough Whitlam was the first prime minister I was aware of. Actually, I recalled yesterday that I had seen every Australian Prime Minister since (up until the current one) in the flesh. What other country is that possible?

I saw Whitlam for the first time, in the flesh as it were, when I was 5 year’s old. It is one of my earliest memories. We were at Coogie Beach. I thought we were there for the clown show but, in fact, we were there to hear Whitlam speak. I remember him shouting at the crowd — that is what one of his speeches sounded like. It is clear in my mind today as I thought about it ever since.

A year or so later, he was part of another very early memory. I remember a newspaper on November 12th 1975 with the headline “Dismissed.” I asked my father what that was about and he told me that the PM had been sacked. I asked why and he said that he had lied. My parents, you might guess, were not Whitlam supporters.

Fast forward another 7 years or so later and I watched the wonderful ABC Mini-series, The Dismissal. It was before the Hawke election. There is a moment in many people’s lives when their political leanings are set. I personally think there is a large element of choice to that — especially for people who have not known personal suffering in their childhoods. That series was my moment. It made me left leaning and pro-economy at the same time. The Whitlam government was both (think pipelines not saving rainforests). I softened each of these since then (in fact, on the environment, I flipped from my 14 year old days). But that series was the moment and I was outraged that it had happened. Suffice it to say, I was no fan of Fraser; at least, not until recently when he joined Twitter and became the voice of reason in Australian politics.

Everyone has a politician that is formative to them. For me, Whitlam was that person at a ridiculously young age. He may have been PM for only 4 years of his 96 but what a 4 years it was.

[Update: my parents tell me that they voted for Whitlam on at least three occasions. So I guess I was wrong about my inference there.]

Scottish independence: a good idea or a bad idea?

Today the people residing in Scotland can decide whether they want to see an independent Scotland or to have Scotland remain in the UK. The betting markets concur with the opinion polls and favour the status quo: the markets give roughly 20% chance that the ‘yes’ vote will win and that Scotland will become independent.

The majority of economists talking about the referendum have focused on whether or not the Scots would be financially better off with their own country, debating things like North Sea oil revenues and currency unions. I think that is a distraction: looking at small and large countries in Europe, you would have to say there is no noticeable advantage or disadvantage to being a small country and that the Scots are hence unlikely to be materially affected in the long run by independence.
Independence is more about self-image and identity than it is about money. Even though the push for independence might well come from politicians and bureaucracies that gain prestige and income if they ruled an independent country, the population deciding on the vote will probably vote on emotional grounds, not economic. Young male Scots appear overwhelmingly in favour of independence; females and old people prefer to keep things the way they are. The latter groups are bigger and are expected to sway the day.

Personally, I have two related reasons to oppose the breaking up of larger countries in Europe into smaller ethnically defined states, not just Scotland, but also Catalonia, the Basque region, the Frisian province, Bavaria, and all the other regions of Europe:

  1. These independence movements are ethnic and hence by definition exclusionary. This is a big concern: large nation states have slowly moved away from the story that they exist for people of the ‘right’ bloodlines and with ancestors who lived in the ‘right’ place. The UK, the US, France, Australia, and even Germany and Spain have moved towards an identity based on stories about what it means to be British, American, French, Australian, etc., rather than a ‘blood and earth’ ethnic nation state story. Speaking tongue-in-cheek, the Brits have an upper lip story, the Americans have an exceptionalism story, the French have been convinced they like reading Proust, the new Australians are told in their citizenship exams that they believe in a fair go, etc. These stories contain treasured national stereotypes, complete with imagined histories. The key thing is that are inclusive, ie any newcomer from another place can participate in such stories. The Australian national anthem is a beautiful example of this super-inclusive attitude as it, almost uniquely, mentions neither ethnicity nor religion as a basis for being Australian. The ethnic stories of the independence movements are, in contrast, exclusionary and hence harmful to the self-image of any migrant. It is a move to a past that we have little reason to be proud of, as it marginalises current and future migrants. The story surrounding Scottish independence is thus not that the Scots are people who like to wear kilts and enjoy haggis, but that they make up the people who have suffered 700 years of oppression by the English. What is a recent newcomer from, say, Poland to do with such a self-image but conclude that they do not really belong there?
  2. The mixing of populations inside the UK due to factors like work, marriage, and retirement, now means that large parts of the ‘Scots’ live elsewhere and large parts of the population living in Scotland come from elsewhere. So there are reportedly close to a million Scottish-born people living elsewhere in the UK, and half a million people living in Scotland who were in fact born in England. Becoming independent from those ‘evil English that oppressed us for 700 years’ means marginalising both the 10% of the resident Scottish population actually born in England and putting a traitorous label on the million that decided the supposed oppressors were people you could marry and work with. If we consider the fractional heritage that nearly every UK citizen has, with some ancestors from Scotland and some from elsewhere, nearly every UK citizen will then almost arbitrarily be ‘forced to choose’ whether their fractional Scottishness counts as 1 or as 0. This is a problem: the roughly 5% of my ancestry that is probably Scottish does not want to be alienated from the 45% that comes from other parts of the British Isles!

These two reasons amplify each other: the damage that an ethnic-story based independence movement does gets amplified if the mixing is very large and is somewhat less of a factor when there is very little mixing.

What goes for Scotland goes doubly for many other regions in Europe: for instance, I believe some 40% of the people living in Catalonia are born outside of Catalonia and in other Spanish regions. The population mixing between regions of France and Germany is similarly large. The reality of a joint national economy is that the populations have internally mixed and artificially going ‘back’ to supposedly ethnically pure groups that define themselves in terms of adversity to the others is a regression.

It is of course these mixed populations that provide a counter-weight to any break-away movement, and they provide clear policy prescriptions for those who want to keep their countries intact: mix the population around to emasculate those who want to pull any geographic ethnicity card.

So I will be hoping that the betting markets are right, that mixing populations over the last few decades has done its integrative job, and that the ‘No’ vote wins.