Category: Europe

Who is the man….SCHACHT!

I’ve just been re-reading the end of Robert Skidelsky’s biography of Keynes. Here’s something interesting. Skidelsky frames the debates in Whitehall about British proposals for the post-war economic settlement and about the negotiations with the USA as being between two key groups, whom he defines as the multilateralists and the Schachtians. Schachtian, of course, is a reference to German central banker Hjalmar Schacht.

The element of Schacht’s long and variable career that was meant was his work as Reichsbank director for Hitler, during which he established a network of bilateral trade and payments clearing agreements centred on Germany as a substitute for the collapsed multilateral trading system, that also had the major advantage of conserving Germany’s very limited reserves of foreign exchange and gold. The Schachtian position was that the UK would come out of the war desperately short of reserves – this was common ground – and that given the political constellation there probably wouldn’t be a successful international settlement – this definitely wasn’t – and therefore the UK needed some other solution. They argued that any solution involving capital controls would ruin the City of London, and more tariffs would wreck industry, so the answer was to go bilateral within a sterling clearing network a bit like Hitler’s. An important feature of a clearing agreement is that it tends to force trade into balance, modulo whatever credit the two parties agree to provide each other.

The multilateralists wanted to dilute the conflict between the UK and the US in a wider global solution, and differed on whether it was more important to preserve free trade in the sense of not having tariffs, or whether protectionism was a price worth paying for a workable financial setup. The issue everyone was dancing around was that whatever solution would need to be acceptable to the Americans, and the American position was self-contradictory. Our problem was that we needed the money; theirs that their conditions for paying it out were mutually exclusive. The US wanted free trade (although not for things it wanted to protect like agriculture), but that implied either substantial currency flexibility or the US supplying the rest of the world with liquidity. The US wanted stable currencies, but those implied either US financing or else either concessions on trade, or clearing restrictions that amounted to concessions on trade. And the US wanted multilateral payments without bilateral clearing, but that implied either US financing, floating currencies, or concessions on trade. It was a preview, really, of the famous open economy trilemma.

An important point was that different bits of the US government cared about different elements of the problem. The State Department cared passionately about free trade but not so much about currencies or payments. The US Treasury cared intensely about currencies and was willing to give ground on trade. Both of these were relatively open to paying into the system. Congress didn’t really care about free trade or currencies, in fact some of it was actively hostile to free trade and formed an alliance with the Vice-Presidency and the Department of Agriculture against it, but it did very much want to limit how much money the US had to chip in.

On the British side, an important feature of the Schachtian vs Multilateralist debate was that the two camps cut across everything else in British politics. The multilateralist camp included hardcore classical liberals like Lionel Robbins of LSE, for whom free trade was really the only issue that mattered. It included people who wanted a multilateral solution because it promised enough international liquidity for the UK to stand off American demands to break up the sterling area and demand unilateral free trade. It included European and world federalists who saw Bretton Woods as a step towards world integration. It included Keynes, who wanted a multilateral solution at this stage because it promised a managed world economy.

On the other hand, the Schachtian camp included imperialists who wanted to break with the US and create a separate imperial economic unit, radical left-wing voices who wanted to do something similar as an exit from world capitalism (and perhaps a prelude to inviting the USSR to join), and some proto-Europeans who wanted to build on the fact many of the European allies were sterling-area countries. Roughly, the Treasury came down on the multilateral side and the Bank of England on the Schachtian.

One way of reading British history since then is that the multilateralists won, but were repeatedly disappointed by their partners’ commitment to multilateralism. What we might call Bretton Woods version 1.0 never really took off precisely because the US didn’t want to finance it until the emerging Cold War forced them to relaunch it with both more European integration and more US money. Later, although the Schachtians were some of the loudest voices against joining the EEC, some of the most influential voices inside government were those of multilateralists who hoped for a worldwide free trade area via GATT and via the special relationship. But this never happened, because nobody (especially not the US) wanted it that much. It did, however, leave a rhetorical legacy of arguments against the European project that seek to characterise it as a Schachtian/protectionist exercise contrasted to world multilateralism.

The interesting thing here is that Schachtian thinking didn’t go away. It continued to exist under the ice of the multilateral hegemony, for example in the late 1970s protectionist turn of left-wing economic thinking that enduringly shaped people like Jeremy Corbyn and John McDonnell. And it shapes the Brexit camp’s understanding of trade, however much they protest their liberal multilateralism. Boris Johnson arrives on a shiny boat with a delegation of dignitaries and signs for a handful of big ticket contracts under a “deal” with a named country. It’s all very Schachtian; very different from the reality of many, many individual transactions between thousands of firms. It’s bilateral, it’s politicised, and it’s heavily biased to big ticket contracts for big business. After all, one of the multilateral criticisms of Schachtianism was precisely that it was part of the so-called managerial revolution.

Somehow, we ended up with multilateralism in charge and trying to justify itself in Schachtian terms against a Schachtian insurgency that justifies itself in multilateral ones.

#Brexit: strategic incompetence for fun and profit

Out funder Peter Hargreaves thinks leaving the European Union would be “like Dunkirk” and would turn us “into Singapore”.

That he mentions two of the most catastrophic disasters in our history is surely Freudian. Dunkirk saw the British Army booted off the continent of Europe, forced to sabotage every bit of its equipment heavier than a Bren gun, let down by a serious failure to prepare adequately. But at least they made good their escape. You couldn’t say that about the Singapore campaign, during which the total means of national power were all comprehensively thrashed, jointly and severally. In this case, there was a strategy, laid down years before, and a huge investment in infrastructure, but it was profoundly unrealistic and poorly thought through. This time, there was no escape.

Does that remind you of anything? It should. People keep saying how much the referendum campaign reminds them of the Scottish referendum campaign. In the Scottish campaign, it became painfully obvious that despite having had 40 years to think about it, the SNP hadn’t managed to answer a question as basic as what currency would circulate in an independent Scotland. In the referendum campaign, it is painfully obvious that despite having had even longer to think about it – right back to the 1950s – the Outs haven’t come up with anything like an alternative. As @Scientists4EU says, with 40 days to go, the SNP had published a 670-page white paper on independence detailing how they planned to unpick Scotland from the UK, and do you see anything like that from the Outs?


No. Instead you either get this sort of swivel-eyed loon newsletter stuff, or vacuous rah-rah like the Vote Leave activist who told me on Saturday that “I’m a democracy guy”. He also spent fifteen minutes telling some poor woman that the EU “is a beast”. And it wasn’t even his leaflet.

Ideas there are. Part of the problem is that they are entertaining quite so many options. Perhaps we could be like Norway, Switzerland, Canada, Singapore, or Albania? Each one comes with a little national flag, a sort of enamel lapel pin, for the sake of easy reference. But they have next to nothing to do with the countries named.

Take Norway. Being like Norway sounds pretty sweet! Anyone for some prosperous, egalitarian Nordic social democracy? It goes without saying that none of the Outs have any intention of, say, legislating that all public companies should have 50% women on their board of directors, or worse, that their boards should include worker representatives. It also goes without saying that there’s no way Brexit would cause more oil to appear in the North Sea.

What “Norway” means here is that we’d leave the EU but stay in the European Economic Area, thus keeping (mostly) tariff-free access to EU markets so long as we respected EU regulations. I say “mostly” tariff-free, because in fact there are nontrivial tariff barriers between the EU and Norway on agricultural products. Actually, one of the main selling-points here is that we could be more protectionist towards farmers and fishermen. On the other hand, we’d still have to pay into the EU budget, respect the rules, and accept freedom of movement for labour. Also, financial firms in the UK would have to get regulatory approval for each EU country where they wanted to do business.

To put it another way, we wouldn’t be much like Norway at all. In fact we’d be so little like Norway we might as well be Switzerland, which has basically the same set-up. Perhaps ski-ing makes you into an Out? Is all the falling over affecting their brains?

What about Singapore? This is the one that really gets on my nerves. A lot of right-wing people imagine that Singapore is a libertarian utopia because the public sector share of GDP is quite low. But this is silly. Singapore doesn’t have big spending ministries, but it does have a huge sovereign-wealth fund that owns major industrial and infrastructure projects in the country as well as financial investments worldwide. Rather than pay welfare benefits out of tax money, Singapore made it compulsory to pay into private insurance, through the so-called central provident fund, a little like a much more comprehensive version of Obamacare. Oh, and basically everyone lives in a council flat.

After independence (from Malaysia, and Britain) the Singaporean political and business class took a joint decision to develop the port as the major regional transport hub, and to take advantage of that to build up industry around it, notably chemicals and computer/semiconductor manufacturing. Their thinking was that economic development in Asia would create a huge opportunity for this role. This worked really well, but it’s worth noting that it was very much a succession of joint decisions by government technocrats, political leaders, and investors rather than some sort of idealised libertarian hands-off process. That is supposedly more true of Hong Kong, but I wouldn’t be surprised if that was a myth too. You’ll note they didn’t start off by creating a new tariff barrier between their massive port facility and the market it serves.

Also, Outers tend to imagine that the Singaporean financial centre is completely unregulated. Financial people find this intensely funny. Anyway, it’s much more accurate to think of Singapore as one of the so-called “coordinated market economies”, like Germany or the Netherlands. Now, does anyone think the Outers have any plan to be more like Germany? Thought not. They want to get Out precisely in order to avoid being more like Germany.

In the end, this shows us two things about Out. One thing is that they have failed – haven’t even tried – to put forward a coherent strategy to avoid their Dunkirk moment turning all Singapore. The second is that, as with the SNP, there are reasons for that.

Sticking with their original plan to join the Euro would have shown up that an independent Scotland might be a lot less nice than they made out, and certainly no haven of protection against recession. Using sterling would mean admitting that independent Scotland wouldn’t be all that independent. Inventing a new currency would mean admitting that the social basis of independence would be a huge bet on the oil price. They didn’t answer the question, because the question threw light on all kinds of other questions they didn’t want asked.

Similarly, the Outers don’t want anyone to ask about their post-Brexit plans because the content of their plans, such as it is, is invariably vastly unpopular. How many people want to turn the country over to Mosseck Fonseca as a libertarian tax-haven? Well, Peter Hargreaves probably does, and he has a billion reasons for that. What is it that first attracted billionaire financier Peter Hargreaves to Brexit? It looks like we found the missing link between Out and ski-ing – money! But let’s not pretend he is normal. Similarly, does anyone want the common agricultural policy but with more farm subsidy? Only people who stand to collect, and they’re a tiny minority.

The answer, then, is strategic incompetence. You can avoid having to answer the difficult questions about your post-Brexit policy by simply failing to have one. That this strategy appeals to Boris Johnson ought to be obvious.

The Hitchens has spoken, and he said “You go first”

This Peter Hitchens post is fascinating. First of all, there’s the massive degree of psychological projection on show. He spends hundreds of words berating literally the whole of the nation for lacking the courage to leap out of the European Union in favour of….whatever it is the Outs are in favour of.

And then he announces that he’s going to abstain, because he doesn’t really think we could do it. In a word, he’s just as scared as he thinks everyone else is. Dare we conclude that when he talks about “so many people, even the ‘Eurosceptics’ in law, business, politics and the media” he actually means “me”? Tous les mêmes. Tous pourris. Même moi!

Secondly, it is of course true that in all the long years of Eurosceptic whining, nobody has ever articulated anything like a coherent policy. Ideas there have been, usually several at a time contradicting each other, never worked out beyond glib cliché. Are we meant to be a libertarian tax-haven, subsidise farmers even more, turn into a big Norway, or somehow revive imperial preference? Why not all four at once, and introduce a uniform for taxi drivers, as the UKIP manifesto once memorably promised? What could be more consistently conservative than to turn down the option of risking everything on this collection of ramshackle utopias?

Thirdly, Hitchens seems to think that the Outs aren’t going to win, and that Euroscepticism is going to disappoint at the polls yet again. He makes the good point that for a movement that constantly claims to be hugely popular, they can’t get elected dogcatcher. This also tells us something about Hitchens, though. Rather than put his back into it, he’s going to slink off and dodge any responsibility for failure that might be floating about.

Fourthly, he complains…well, he never fucking stops, but he specifically complains that after the Ins win the referendum, the issue will be considered closed for years. Well, yes. Elections have consequences. The upshot of this is that he’s going to do nothing at all to help his side win, and when they lose, keep on whining about the EU and pretending the revolution is coming real soon now like nothing happened.

The question, in the end, is whether he ever really believed in it, or whether it was always just a pose. People say this about Boris Johnson, and when you read things like this interview it does look like he’s preparing some sort of face-saving formula to line up behind the prime minister.

Eurolobster: a technical appendix

Over at the Pol, I’ve been trying to answer the question: how long until robots take Brussels lobbyists’ expense accounts? Software. It’s eating the world, they say. You may already have guessed that this is a reprise of Project Lobster, and you’d be right. The inputs are the European Transparency Register, which lists lobbyists and their clients, the Commissioners’ and staffers’ registers of matters (like so), and the survey I administered to readers here. 157 of you responded, for which I am truly thankful.

I used NetworkX, the network analysis library from the great folks at Los Alamos – is that more or less creepy/cool than CreepyDB, sorry, Gaffer? – and a lot of my own work. Having downloaded the transparency register, made it into a two-way hash table, and scraped all the data from the meetings register, I could create some NetworkX graphs and store them. I then wrote a command-line utility to read out key metrics from them.

The metrics I was particularly interested in are as follows:

Weighted network degree. This is just the count of meetings a given node (commissioner, staffer, lobbyist, or lobby) had, multiplied by any weighting applied to reflect the relative importance of meetings. I used the survey results, normalised as percentages of the average result, to weight the different hierarchical ranks (e.g. commissioner, vice-president, member of cabinet) and functional jobs (e.g. competition, transport). I further divided this weighting by the number of lobbies present at the meeting and applied it on a per-edge (NetworkX terminology for a link) basis.

Shortest-path betweenness centrality. This is defined as the fraction of all the most direct routes through the network, using the edge weightings as distances between nodes, that pass through a given node x. What it tells you is how central Mr X is in the network.

Gatekeepership. This is one I invented, and it’s the ratio of the average weighted network degree of people who met node x to the network-wide average – basically, it’s like Value Over Replacement Player for lobbyists, although I was unaware of VORP at the time. It tells you about the extra influence Mr X gives the people they meet relative to the typical node.

Greedy_Fragile. This is the really creepy one, developed by West Point to optimise drone targeting against terrorist networks. It arose from the insight that killing off the most central individuals tended to cause the network to become radically flatter and more decentralised, and therefore harder to target. Instead it might be better to whack lesser power-centres in the network, so as to render it more centralised and therefore, brittle.

It measures how much more or less centralised you make the whole network, being defined as the change in network-wide average centrality if node x is removed. This is why Al-Qa’ida No.3 is such a notoriously dangerous job. The intuition from it is whether someone tends to be an attractor in their own right, or a pillar of the overall structure.

After a lot of hacking painfully about and remembering how much Python I’d forgotten, I got results. Unfortunately, I’d made a seriously unwise assumption, that commissioners and staffers had unique names. Lobbyists do seem to be de-duplicated, but their targets are not. In fact they’re not even up to date or spelled consistently. This resulted in a race-condition: depending on who got scraped first, either all the DG Trade official Jonathan Hill’s meetings would be credited to the Financial Services Commissioner Jonathan Hill, or vice versa.

For a long sad moment I thought I’d discovered something funny. The less important Hill is massively lobbied because people think he’s the more important one! Then I realised the problem, and set about a completely new implementation. I was by this point back in practice, and it took me a day and a half to program it, re-run everything, repeat the data analysis, and rewrite the piece.

The results? Well, you can read them in the Pol. If you’re a masochist you can download all the code here. But if I was a lobbyist I might be thinking about learning to code. It’s the future. They said.

Here’s something about Turkey, and everyone else

So, the urban development that kicked off all the protests in Turkey.

“This is the only place to hang out here,” says Yavuz Selim, 17. “And everything is very expensive. As students we cannot afford it.” His friends agree. “We are quite bored here. There is nothing to do for us.”…

While the municipality has increased local transport over the past year, the last buses leave at 10pm and many of the families living in Kayaşehir cannot afford cars.

“We feel isolated from the city centre here,” Yusuf Sari, 16, points out. “A bit cut off, really.” Analysts say this kind of segregation changes the idea of a city – a space where different parts of society coexist – and will create long-term social and economic problems.

“It is very likely that these will end up like the banlieues in France,” said Adanalı. “Spatial isolation and the social concentration of certain segments of society will create discontent. This discontent, too, is isolated from the rest of society. People start to feel that they cannot escape this isolation, which makes matters worse.”

Actually, then, it’s not an urban development but a suburban development, or perhaps more to the point, an anti-urban development. As Jamie Kenny says:

Historically, the whole thing has a 19th century French feel to it, in the sense of government dominated by a pious, provincial bourgeoisie wanting to tame the big city antinomians. But reading about this stuff it’s amazing how well a certain type of – in this case – Islamic piety dovetails with neoliberal concepts of modernization. Maybe that shouldn’t be so surprising when you look at places like Dubai, but it’s remarkable how exact the comparisons are. The same basic suspicion of ‘urbanity’ in the widest sense of the word, the dislike for forms of life, commerce and culture perceived to be messy or low prestige, the way in which a form of commercial standardization seems to complement or substitute for a repressive moral code and the way in which the only unthreatening secular activity that the economic, political and in this case religious establishment can imagine is shopping.

Or, over here:

They started sinking their teeth into Taksim first by imposing a table ban two years ago: No tables on the streets. This deceptively simple move instantly drained much of the spirit of Taksim, since much of the charm was just walking around in seas of people who felt like your friend simply by virtue of being there, and probably were if you dug deep enough. That shattered the sense of community.

This reminded me of my review of The Spirit Level, and specifically this bit.

The states of the Deep South are reliably terrible. They are highly unequal, and they get the effects – but they are far off to the top right of the trendline. In a sense, their marginal productivity in terms of inequality is unusually high – for every extra point on the Gini coefficient, they manage to produce a sharply higher degree of suffering than the national average.

On the other hand, there’s the importance of being urban. The more metropolitan the state, the less it suffers from the impact of inequality – New York has the social problems of the average, despite being very unequal.

There are good reasons for this. Big cities tend to be unequal because they have some rich people. This does not preclude having a well-funded school system; in so far as the rich want to live there, it may be possible to squeeze some tax out of them. Further, there are limits to how far you can send the people off to the suburbs for the whole thing to work. It is hard to opt out completely in town. You may take a cab to the bank headquarters, but you’ll still curse in traffic.

Pulling this together, people fight over urbanity because it’s a sort of substitute for equality. In some ways, it’s real equality, as the institutions of the city are often open to all. In others, perhaps more important, it’s potential equality – we can all be the minority, we can all fall into the path of a tube train, the mob is out there.

This draws out different responses. One is an intense identification with the city, which turns out to be a latent coalition across all kinds of groups. Another is a deep horror of the mess of it all. Erdogan, like the mayors who went after Occupy, is constantly whining about needing to clean up and vandals and did you know some of them have dogs? Better to move out to somewhere on the motorway.

I met this response back in 2001, on the scene of a long-term occupation protest. Austrians, or possibly more importantly, Viennese who didn’t want Jörg Haider in government had set up a camp called the Concerned Citizens’ Embassy (BBB in German) outside the prime minister’s office in part of the old imperial citadel. Others held demonstrations marching there every Thursday. I remember vividly that on one of these, people carried a blank banner and pulled a projector on a supermarket trolley, throwing a documentary someone made about the campaign itself up on the banner so we could watch it.

Suddenly, the Fortress Captain – that was his title, the guy in charge of the Hofburg, a school friend of the prime minister – discovered that there was some rubbish lying about, it was ugly, there were rats, he had to clean it up, I quote. This completely circumvented the various legal protections of protest. The rubbish, of course, was us. There was stuff, nobody claimed to own it, and the imperial stormtroopers moved in.

We whined and sued and marched harder, but it was the finish. Anyway. We’ve established the motive. Here’s a piece about the characteristic protest style that goes with it. It doesn’t seem to work. Perhaps because the theory of victory for such a campaign is a flash revolution, like something from 19th century France?

And that reminds me of Pierre Mauroy, who died last week. As French prime minister, he insisted on sticking with European fixed exchange rates, but also on (as he said) holding out on the ridge line at 2 million unemployed. Looking back, it seems unsurprising given the first point that he lost the ridge and resigned. He then set about pulling money towards his home town and power base, Lille, specifically through the Euralille megaproject around the TGV station.

I have never seen a grimmer public space. It seemed to symbolise the combination of Euro-austerity macroeconomics and the effort to build shinier things on top of the city, as two halves of the same project. Similarly, the empty neon of Budapest’s EU-membership centre the last time I was there howled with blankness.

interview with a pleasant dinosaur

Runciman x Moore x Thatcher.

Ed Miliband is hoping that it’s 1977 all over again and he can be the one who surfs to power on a sea-change he has initiated in the battle of ideas. He is also, presumably, drawing comfort from the fact that before 1979 no one saw her as prime ministerial material. Cameron and Osborne are hoping it’s 1981 and they can be the ones who hold their nerve at just the point when the economists and intellectuals are all bleating that the austerity experiment has failed and it’s time to try something else. These comparisons are futile: 2013 is a whole new ball game. They also ignore the role that sheer stamina played in her story. Do any of the current lot have that? (Depressingly, I suspect that if any of them does, it’s Osborne.)

I’m not sure about this. Here’s another option: Alternative 1983, without the SDP and the Falklands something-will-turn-up turning up, and perhaps with UKIP playing split the vote on the other side. This would explain why Miliband’s top priority seems to be Labour Party unity and shadow cabinet discipline. Keep buggering on, as someone said.

Meanwhile, here’s a sarcastic piece on the UK’s pro-European campaigns. Which reminded me that when I was a pro-European student doing a degree course designed to make a eurocrat of me, our Eurosoc asked Britain in Europe, then in full tripartisan flight, to send us a speaker.

They sent Sir Anthony Meyer. Obviously it was interesting to shake hands with the stalking horse himself, the man who sacked Thatcher, but it wasn’t the most obviously compelling pick. It got stranger when he explained that his pro-European convictions originated from the influence of Lionel Curtis, who he explained had been one of Lord Milner’s Young Men in the British occupation administration of South Africa immediately after the Boer War and like Milner was convinced of the necessity of federal union with the United States, or at least Germany.

Now I was also taking some British Empire history classes, so this actually meant something to me, but it was still an encounter with a dinosaur.

feeling westalgic yet?

So I was talking about ostalgie kitsch and people sleeping in Wartburgs in north London. What, they cry, is he on about?

Well, let me throw this one out. When the word was invented, the people who felt ostalgic were a pretty well-defined group sociologically – they were the people who had been part of privileged groups in the DDR, but not enough that they could simply retool into the reunited German/European Union elite.

But it didn’t stop there. It became a broader cultural phenomenon, with a specific aesthetic, and something approaching a way of life. The stereotype participant is pretty much an original hipster and almost certainly doesn’t have any direct contact with the DDR, reason to be nostalgic about it, or ideological kinship. This is interesting – people build identities out of bits of other people’s culture all the time, but it’s classically because they aspire to be like them.

I’m fairly confident that not many ostalgie creators or consumers in mid-2000s Berlin were actually hankering to be like a mid-level communist cadre from 1978, because the typical cadre was a highly conventional middle manager in a big company. And if there’s a society that values actual, real highly conventional middle managers and their company cars…well, Germany, we’re looking at you. That you were hanging around the former east in an east German tracksuit implied that you’d rejected that kind of aspiration.

So where are we off to with this? Well, what actually goes into the ragout fin (englished here as “a time-consuming entree”) might be worth looking at more closely. Apart from the calf’s sweetbreads and anchovies and worcestershire sauce and what not.

I would argue that its content is: the look and feel of international modernism, with a bit of British-type indieness and 80s (West) Berlin experimentalism on the music side, the European project but only from a consumer’s viewpoint (it’s awesome to not have borders – yes, we know, but it’s not enough is it?), and the hyperlocal/green/cupcake conservative lifestyle package. One of the things that’s going on here is just the way people pick up and incorporate odd things lying around, of course.

But how did it get attached to something as un-green, un-hyperlocal, and un-European (hey, they built a wall) as East Germany?

Well, I reckon that this isn’t nostalgia for the east. It’s nostalgia for the pre-Euro western Europe. (Which wasn’t that bad, was it?) Much of the iconography is shared, something which is very obvious in Berlin. That was after all the point of modernism. Westalgie, as I’ll call it, is a response to the massive agenda-setting efforts of the 1990s. Because European politics was squeezed down into an argument between the modern thinkers with their serious reforms and the others, while the ideal kept its appeal (even now, with the Greek economy in ruins and the economic integration pulling apart, there is real political support), there was a need for, well, something nicer.

If you like, it’s nostalgia for a future that was put permanently on hold.

What I did on my holidays: a stability pact photo

OK, here’s a photo from my summer.


The car, in front of the modernist building, in the rather dilapidated car park, is an actual product of the DDR, a Wartburg, with Hungarian plates. Where are we, and why?

Obviously, we’re in Archway, N19, north London but not the cupcakey sort. The car park is next to the council gym where I work out – got that, assassins? – and the building is part of the Archway towers complex. By pure serendipity, it might also be the one that used to be Global Witness HQ, where I skulked in back in 2005 or thereabouts to borrow a copy of Alex Yearsley’s Dutch intelligence file on Viktor Bout, including the phone bills that went into this post and this one.

You’ll notice the lack of any jubilation around that Wartburg – if you look really closely you might also notice, like I did, signs that the driver might be living in the car. I’ve noticed, also, a few signs of a Hungarian community around there, like the Bulgarian one down the road where I live. But, eh, people living in Wartburgs. This wasn’t what we signed up for, was it?

At the same time, I was amazed just how often I met people rolling in 1980s kitsch in Berlin, which is about the last place where the 80s are worth romanticising. (There, and West Yorkshire.) You could stick a caricature together – 80s music and look, 60s architecture, with the politics of the 1990s. Everybody thinks it’s Ostalgie, but I suspect it’s really westalgie, and it’s pissing me off to have to look at the EU I spent so much time defending to people and (essentially) studying for a degree that was meant to make me an instant eurocrat, and see an institution more neoliberal than the US Democratic Party (and that’s saying something – but when did you last significantly expand the welfare state?).

There will be more of this. So you may wish to go and read the Viktor Bout posts.

slow-motion procurement failure

Quietly, the Eurofighter project seems to be running into trouble. First of all, Dassault got the Indian contract and the Indians claim that Rafale is dramatically cheaper. Further, they weren’t impressed by the amount of stuff that is planned to come in future upgrades, whose delivery is still not certain. These upgrades are becoming a problem, as the UK, Germany, and Italy aren’t in agreement about their schedule or about which ones they want. Also, a Swiss evaluation report was leaked that is extremely damning towards the Gripen and somewhat less so to Eurofighter.

This is going to have big consequences for European military-industrial politics. So is the latest wobble on F-35.

787: the plane Milton Friedman built, and about as well as you’d expect

This LA Times story about the Boeing 787 Dreamliner (so called because it’s still a dream – let’s get the last drop from that joke before it goes into service) and the role of outsourcing is fascinating. It is partly built on a paper by a senior Boeing engineer which makes among other things, this point:

Among the least profitable jobs in aircraft manufacturing, he pointed out, is final assembly — the job Boeing proposed to retain. But its subcontractors would benefit from free technical assistance from Boeing if they ran into problems, and would hang on to the highly profitable business of producing spare parts over the decades-long life of the aircraft. Their work would be almost risk-free, Hart-Smith observed, because if they ran into really insuperable problems they would simply be bought out by Boeing.

Even in its own financial terms, the whole thing didn’t make sense, because the job of welding together the subassemblies and hooking up the wires doesn’t account for much of the profit involved. Further, the supposedly high-margin intellectual-property element of the business – the research, development, and design of the plane – is only a profit centre after it’s been built. Until they’re done, it requires enormous amounts of investment to get right. The outsourcers were expecting the lowest-margin element of the company, assembly, to carry the costs of developing new products. Whether they were funded with equity or with debt, this implies that the systems integrator model, for aircraft at least, fundamentally restricts innovation.

This is one of the points I’d like to bring out here. Hart-Smith’s paper – you can read it here – is much stronger on this than the LA Times was willing to be. It’s a fascinating document in other ways, too. For a start, the depth of outsourcing Boeing tried to achieve with the 787 is incompatible with many of the best practices used in other industries. Because the technical interfaces invariably become organisational and economic ones, it’s hard to guarantee that modules from company X will fit with the ones from Y, and if they don’t, the adjustment mechanism is a lawsuit at the financial level, but at the technical level, it’s rework. The dodgy superblock has to be re-worked to get it right, and this tends to land up with the manufacturer. Not only does this defeat the point of outsourcing in the first place, it obviates the huge importance of avoiding expensive rework.

Further, when anything goes wrong, the cost migrates remorselessly to the centre. The whole idea of systems integration and outsourcing is that the original manufacturer is just a collection of contracts, the only location where all the contracts overlap. Theoretically, as near to everything as possible has been defined contractually and outsourced, except for a final slice of the job that belongs to the original manufacturer. This represents, by definition, all the stuff that couldn’t be identified clearly enough to write a contract for it, or that was thought too risky/too profitable (depends on which end you look at it) for anyone to take the contract on. If this was finance, rather than industry, it would be the equity tranche. One of the main reasons why you can’t contract for something, of course, is that you don’t know it’s going to happen. So the integrator essentially ends up holding all the uncertainty, in so far as they can’t push it off onto the customer or the taxpayer.

This also reminded me a little of Red Plenty – one of the problems is precisely that it’s impossible to ensure that all the participants’ constraints are mutually compatible. There are serious Pareto issues. There may be something like an economic law that implies that, given that there are some irreducible uncertainties in each contractual relationship, which can be likened to unallocated costs, they flow downhill towards the party with the least clearly defined role. You could call it Harrowell’s U-Bend. (Of course, in the macroeconomy, the party with the least well defined role is government – who you gonna call?)

Anyway, Hart-Smith’s piece deserves a place in the canon of what could be termed Sarcastic Economics.

I suspect that the problems he identifies have wider consequences in the economy. Given that it’s always easier to produce more or less of a given good than it is to produce something different, the degree to which it’s possible to reallocate capital has a big impact on how quickly it’s possible to recover from a negative shock, and how bad the transition process is. I would go so far as to argue that it’s most difficult to react to an economic shock by changing products, it’s next most difficult to react by producing more (you could be at a local maximum and need to invest more capital, for example), and it’s easiest to react by producing less, and that therefore there’s a structural bias towards deflationary adjustment.

Hart-Smith’s critique holds that the whole project of retaining product development, R&D, and commercial functions like sales in the company core, and contracting everything else out actually weakens precisely those functions. Rather than being able to develop new products quickly by calling on outside resources, the outside resources suck up the available capital needed to develop new products. And the U-bend effect drags the costs of inevitable friction towards them. Does this actually reduce the economy’s ability to reallocate capital at the macrolevel? Does it strengthen the deflationary forces in capitalism?

Interestingly, there’s also a presentation from Airbus knocking about which gives their views on the Dreamliner fiasco. Tellingly, they seem to think that it was Boeing’s wish to deskill its workforce as far as possible that underlies a lot of it. Which is ironic, coming from an enormous aerospace company. There’s also a fascinating diagram showing that no major assembly in the 787 touches one made by the same company or even the same Boeing division – exactly what current theories of the firm would predict, but then, if it worked we wouldn’t be reading this.

A question to the reader: 1) How would you apply this framework to the cost overruns on UK defence projects? 2) Does any of this remind you of rail privatisation?