Events | 2009.08.28
If Cameron takes his cues from Black Swan man, the Tories are in trouble | Larry Elliott
A pick-and-mix approach to economics, embracing the idea of banks\' creative destruction, hardly befits a future prime minister
On Tuesday night David Cameron warned that Labour\'s mismanagement of the public finances meant Britain might default on its debts . Yesterday he pledged that the Conservatives were now the party of the NHS because only they were prepared to deliver real increases in health spending in the next parliament.
The opposition has been allowed to get away with this egregious opportunism for far too long. Labour has taken plenty of flak in the last two years – much of it deserved – but the Tories have been given an absurdly easy ride. Cameron could be prime minister in nine months\' time, but we know precious little about what he would do, or even what he really thinks.
Over the past few months, the Conservatives have claimed to be the party of progress and berated Gordon Brown for failing to hit Labour\'s child poverty targets. On the other hand, they have pledged to take the axe to the budget deficit and reduce the size of the state. The Conservatives believe in market economics yet want to clamp down on City bonuses. They want to hand financial regulation to the Bank of England but are opposed to breaking up the banks. They want a bigger state when it suits, and a smaller state when it doesn\'t. They want to both concentrate power and devolve it. This is not a policy; it is an incoherent mishmash of ideas designed by focus group.
The debate over public spending is a case in point. Cameron is right to say that the public finances are in a dreadful state: yesterday\'s dire figures showed the deficit on course to hit £200bn this year. The opposition leader is also right when he says Labour was too profligate in the years before the crunch. But the logic of Cameron\'s position is that spending should be cut across the board, with no exemptions for health and international development, the two departments that have seen the most generous settlements under Labour. As a recent study by the King\'s Fund and the Institute for Fiscal Studies showed , a ring-fencing of health will inevitably mean deeper cuts elsewhere – in education, in transport, law and order and defence – or it will mean tax increases.
The economic rationale for this approach is questionable: the long-term interests of the country might, for instance, be better served by greater investment in education and skills rather than health. But Cameron\'s approach has little to do with economics and everything to do with decontaminating the Conservative brand. This process was put at risk by last week\'s comments from the Conservative MEP Daniel Hannan that the NHS was a 60-year mistake; hence Cameron\'s subsequent clarification .
The opinion polls suggest that voters remain unconvinced by all this. To be sure, the public is fed up with a government that for the last 13 years has seemed keener on controlling individuals than on controlling high finance. But it is suspicious of Cameron, and is right to be suspicious. The opposition has an identity crisis: does it want to be a traditional one-nation Conservative party based on paternalism, patriotism and support for the mixed economy; a radical free-market party that believes in privatisation, globalisation and a small state; or – in the spirit of Tony Blair\'s third way – a bit of both?
Nowhere is the intellectual confusion more apparent than in Cameron\'s source of economic ideas. A few months ago the buzzword was "nudge", a reference to a book co-authored by the economist Richard Thaler , which argued that with help from government and private organisations, individuals could be persuaded to make better lifestyle choices. Cameron\'s championing of Thaler was meant to show that there was a softer alternative to Labour\'s big state approach to every problem.
That was then. Now the phrase du jour is Black Swan, the title of a book by Nassim Nicholas Taleb. Cameron shared a platform with Taleb earlier in the week and said the book "confirmed his own prejudices". We can only speculate on which prejudices these might be, since they have a distinct pick\'n\'mix quality. Taleb is an interesting thinker, but he has an entirely different view of the world to Thaler and would not last five minutes in the new, soft-focus, all things to all people Conservative party.
Taleb\'s argument is that the world can be turned upside down by events that lie outside the realm of what people expect but which have an explosive impact. The internet was one such Black Swan, the 9/11 attacks another. The reason we are in this mess, Taleb says, is that the old mixed ecology of small and individualistic financial institutions has been replaced over the last 20 years by a small group of highly concentrated mega-banks dominated by group-think. All used the same models and behaved in the same way, resulting in "gigantic, incestuous, bureaucratic banks" that fall like dominoes when one fails.
In the UK, the Tories were responsible for the development of this dangerous monoculture. Financial deregulation, Big Bang, the decimation of manufacturing and the encouragement to building societies to turn themselves into aggressive banks resulted in the economy being soaked in debt and driven by an over-mighty financial sector. This was the Tories when they were dominated by a radical Thatcherite faction which remains a powerful force in the party.
To be consistent to this tradition, Cameron should now accept Taleb\'s solution – firmly in the tradition of the Austrian school – and allow banks to go to the wall. "We would be far better off if there were a different ecology, in which financial institutions went bust on occasions and were rapidly replaced by new ones, thus mirroring the diversity of internet businesses and the resilience of the internet economy," Taleb says in The Black Swan.
The idea that the banks should be subject to "creative destruction" is an honourable intellectual position, but as a political proposition it\'s a non-starter. The US authorities dabbled with creative destruction when they allowed Lehmans to fail last September, and the upshot was that within a month the entire global banking system was on the point of collapse. The practical consequence of the government allowing RBS or HBOS to go bust would have been that consumers would have been unable to withdraw money and businesses would have been starved of credit.
Would Cameron countenance that? Clearly not. Would he go for what Taleb would probably consider the next best option – breaking up the banks so that they are no longer too big to fail? Apparently not. The opposition leader believes in Progressive Conservatism, value for money, extra investment in the NHS, discipline over public spending, less consumer debt and tougher City regulation. If he wants people to take him seriously as a potential prime minister it is time he fleshed out what all this means. Otherwise, heaven forfend, they might suspect he is a charlatan.
For more information, please visit
http://www.guardian.co.uk/commentisfree/[...]lack-swan-theory-david-cameron
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