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Matthew Elliott is Chief Executive and Co-Founder of the TaxPayers’
Alliance
.

Compassionate Economics: The social foundations of economic prosperity by Jesse Norman (Policy Exchange/University of Buckingham Press, 2008)  is available on Amazon.co.uk or can
be downloaded free of charge through www.compassionateeconomics.com
.

Jesse himself outlined the book’s main themes on ConHome’s Platform last week.

Picture_10Over the summer, when the Conservatives had a steady double-digit poll lead and Labour was flirting with regicide, public affairs companies across London started printing glossy brochures forecasting what a Cameron Government would do. Most of these brochures were a load of tosh, with “exclusive insights” cribbed from ConservativeHome and “in-depth analysis” which could have read directly at the Spectator’s Coffee House blog. Now we are officially in recession, people wishing to spend their money more wisely and gain a real insight into David Cameron’s Conservatives should read Compassionate Economics by Jesse Norman.

The main objective of the book is to reclaim economics as a discipline which recognises the wider social context in which people operate. Traditionally, economists recognised this. As well as writing the Wealth of Nations, Adam Smith also wrote The Theory of Moral Sentiments, which highlighted “pity and compassion” as key drivers of individuals. As Friedrich Hayek – himself a lawyer and political philosopher as well as a Nobel Prize winning economist – once remarked, nobody can be a great economist who is only an economist. This is why Jesse Norman turns his fire on modern, mathematics-obsessed economists.

The third chapter of Compassionate Economics opens with a wonderful quote from Kenneth E. Boulding: “Mathematics brought rigour to Economics. Unfortunately, it also brought mortis.” Traditionally, economists used the notion that people were perfectly rational utility-maximisers operating under perfect information as simply an assumption with useful predictive powers. The problems started, according to Jesse Norman, when it was transformed from an assumption into a description of how people operate in the real world.

A good example of the danger of “rigour mortis economics” being applied
directly to public policy is the failure of Tax Credits. To remind
readers, tax credits are essentially means-tested payments geared to
the recipients’ income. As income changes, under-or overpayments will
occur. With tax credits being paid in advance, overpayments are common
place, with disastrous results. The Public Accounts Committee found
that the Government had overpaid £6 billion in the first three terms of
the systems operation, a massive blow to some 1.9 million families who
had to pay the money back. All this heartache was generated, according
to Norman, by a simplistic belief that people would understand and be
able to operate “rationally” under a complex system which even tax
experts have difficultly explaining. Tax credits were rigour mortis
economics at its worst.

The conclusion of Jesse Norman’s book is that policymakers should put
compassion back into economics by recognising the subject’s wider
social context. First, people should be considered as more than just
walking economic calculators. Second, the social foundations of
economic prosperity – independent institutions, the right balance of
competition and co-operation, and widespread entrepreneurship – should
be nurtured. Compassionate Economics is not a mushy prescription for
public policy; it is an attempt to update Adam Smith for the 21st
Century. Norman himself describes this and his previous book,
Compassionate Conservatism, as “distant, modest but direct descendents”
of Adam Smith’s work.

Being a conservative, Jesse Norman will agree that all humans are
flawed, and there are, like in any book, a few small errors in this
book. Tax revenues in 2007-08 were £545 billion, not the £450 billion
mentioned on page 85. John Locke’s “mixing labour” metaphor for the
establishment of private property does not limit the right of ownership
to “only so much as [a person] can directly cultivate” – the existence
of gold in the state of nature removes the natural constraints on the
accumulation of property.

Personally, I would have been less dismissive of rational choice
theory. Rational expectations don’t require that everyone be a perfect
little counting machine, and not many economists really think the world
works that way. As a theory, it provides the good starting point for
research into how bounded rationality affects decisions – you start
from perfect rationality and see where the limitations are. And it is
undoubtedly a much better assumption than that of old-school
Keynesianism, which relied on people systematically failing to see what
Government was up to and adjust their decisions accordingly.

In fact, some would argue that UK public policy over the past ten years
has been weakened by too little reliance on rational choice theory.
Time after time politicians have set targets without thinking through
how someone might rationally respond – welfare is a good example. And
the past ten years has been a case study of the rational choice
explanation for ever expanding bureaucracies. It could be said that we
need the insight of rational choice theorists more than ever. But these
are small flaws and differences of opinion in what is otherwise a gem
of a book.

What does Compassionate Economics mean for the future public policy in
Britain? For the past three years, Jesse Norman has provided David
Cameron with intellectual ballast and he is one of the academic brains
behind Policy Exchange, the most influential think-tank in the
Conservative Party. For this reason alone, his book deserves to be
widely read. The fact that he is also a Conservative parliamentary
candidate in Herefordshire and will sit on the green benches of a David
Cameron government – most probably the front bench – is a second
reason.

But the most important reason to read, highlight and make detailed
notes from this important work is that he has “Frank Luntzed” Adam
Smith. Luntz, the US pollster and strategist who famously predicted
Cameron’s election, wrote an important book called Words that Work. In
Compassionate Economics, Jesse Norman has given people on the centre
right the words that work when discussing economics. With economics now
being the number one policy debate in Britain, every politico on the
left, right or centre of British politics should read this book over
Christmas.

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