Democracy's positive feedback and moral hazard

There is dangerous positive feedback and moral hazard present in modern democracy, under which far too many people “demand" ever bigger government but contribute only sloth and indolence

Time to end the culture of treating hard workers as cash cows
Charles Crawford
On 8 November 2011 13:09

As George Orwell described, decay of language is both caused by and causes decay in thought. Nowhere is this more obvious than in the British civil service.

One especially egregious modern example is “positive feedback". It sounds pseudo-scientific and therefore breezily clever: “I put round my draft submission. Hey, it got some really positive feedback".

In its correct meaning, of course, positive feedback is highly dangerous. It refers to “cumulative causation" in a loop system in which the system responds to perturbation in the same direction as the perturbation.

In other words, movement in one direction creates further movement in the same direction, which creates even more movement in the same direction and so on, to a potentially calamitous conclusion. The classic example is, indeed, a nuclear explosion.

“Negative feedback" sounds bad but is good: the system stays controlled (eg it has a safety valve).

Readers of this website will be familiar with some of the work of historian Niall Ferguson (for example his justly praised observations on the “killer apps" of Western civilisation). Earlier this year I had the pleasure of briefly meeting him in his office at the LSE, and was mightily impressed by the way he quickly zeroed in on some of the darker subtleties of Balkan history.

Because Professor Ferguson is smart, imaginative and (unforgivably) good-looking, he is noisily denounced by progressive forces as glib, reactionary and provocative. If you have not watched him in action, try this video of a presentation he gave in May last year about the history of Fiscal Crises and Imperial Collapses. His presentation starts after some 9 minutes. The accompanying slides are here.

What's really impressive about this presentation is its sweeping breadth and insight. After explaining how major debt crises are essentially political and not economic events (ie they are directly caused by irresponsible leaders or policies), he looks at the options available to national governments as they try to dig themselves out of deep debt holes.

In practice, he argues, they boil down to three: raising taxes, cutting spending; printing money, inflation; default - in all its luxuriant forms.

Now comes the key passage (around the 40-minute mark). Prof Ferguson says that the only historical example he can find of any country extricating itself from a massive debt burden without these brutal measures was the United Kingdom following the Napoleonic Wars.

Even this took many decades of tight monetary management and the turbo-boost of the Industrial Revolution, but eventually those debts were paid off without printing money or any default.

And how were these impressive results achieved? As Professor Ferguson shrewdly notes, in part because Britain had a “non-democratic franchise". The political system was skewed towards favouring property ownership. Steady, “responsible" policies could be pursued more or less independently of the clamour from the poorer classes who nonetheless saw huge improvements in their lot over the 19th-century.

Now, the point.

What we are seeing across the Western world are the accumulating contradictions of democratic positive feedback. Since everyone has the vote, politicians must appeal to everyone.

The best way to appeal to poor people is to give them something they don't have, such as money. It turns out that there is only so much money to be extracted from richer voters. So governments start to borrow money to pay for more and more elaborate welfare schemes. These schemes grow and grow and can never be abolished, so governments borrow more money, then more, then more.

Worse, as New Labour so spectacularly demonstrated, when the economy is going relatively well the government is tempted to splash out even more money to try to satiate voters' greed, rather than pay off debts. Which means that when the economy dips down, even more money has to be borrowed - in adverse conditions.

In short, more borrowing leads to more borrowing which leads to more borrowing, and even more borrowing. Costs and debts spiral out of control. Thus the current debt explosion and the risk of dramatic economic downturns, not just in Europe but far beyond. Greece is bad, Italy is worse, the USA itself is heading fast in the same direction. True positive feedback, in real-time action.

This is the system working to perfection. It’s not a failure of ‘capitalism’ or ‘greedy bankers’. If everyone in a bus compels the driver to go faster and faster round mountainous hair-pin bends, the ensuing crash shows that the bus was designed to do exactly what it was told.

Bewildered panic-stricken Eurozoners in vain look for a safety valve. They find one in Jin Liqun who heads China's massive sovereign wealth fund. Unfortunately this particular safety valve has a view of its own:

"If you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of their worn-out welfare societies. Labour laws are outdated. The labour laws induced sloth, indolence rather than hard-working The incentive system is totally out of whack… A welfare state society should not induce people not to work hard"

Blimey. Are you listening to that, Polly Toynbee and all you feckless Guardianistas and lumpen Occupiers?

Yesterday I had the great pleasure to meet for the first time one of the regular readers of my own website. He made a striking point about reforming the House of Lords. Why not have an elected second chamber, but with the weight of each voter’s vote calculated according to how much tax that voter had paid in the preceding period?

Well, why not?

A system like this would bring balance back into the political process by linking policies much more closely to the system’s capacity to afford them.

Yes, “richer" people would tend to pay more taxes and therefore have a heavier weighted vote. Unfair! But it’s also unfair (and worse systemically stupid) to treat those who work hard and pay plenty of taxes as cows available for endless milking.

No doubt a voting system like this would not appeal to the Chinese leadership in its substantive democratic content. But it should win their approval for taking a small step towards incentivising rational policies.

Alas we’ll probably need a systemic crash to force ourselves to accept reality. Only a ghastly convulsion will bring us to tackle at long last the dangerous positive feedback and moral hazard present in modern democracy, under which far too many people “demand" ever bigger government but contribute only sloth and indolence.

Charles Crawford was British Ambassador in Sarajevo, Belgrade and Warsaw. He is now a private consultant and He tweets @charlescrawford

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