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It’s impossible

The election won’t live up to such expectations for the simple reason that the politicians – aided by the media – have set the bar too high. Investors know better than most that reality rarely matches overhyped expectations. What applies to company bosses seeking shareholders in a flotation equally applies to politicians in search of votes.

Besides which, political hyperbole takes no account of what is labelled ‘Arrow’s impossibility theorem’, so named after a Nobel Prize-winning economist, Kenneth Arrow. Essentially, the impossibility theorem is a mathematical contrivance that shows that voters cannot arrive at a choice that would satisfy a majority even when as few as three choices are available. When the choices exceed three, the chances of majority acceptance become even more remote.

Granted, just because mathematically this can be the case, it does not mean that democracy is bound to fail. As Mr Arrow, who died in 2017, said: “Most systems are not going to work badly all of the time. All I proved is that all can work badly at times.”

Such times as now, for instance. After all, it’s not as though there is a shortage of choices to satisfy. It’s not just a choice between leave or remain in the European Union. In Scotland, there is also the little matter of whether to leave or remain in the longer-running union – and, actually, not all Scots who want to leave the UK want to remain in the EU and vice versa. That multiplies the choices. Across the UK there are more choices to be made – big state versus a smaller state, higher taxes paid by someone else versus slightly higher taxes for all, closed borders versus staffing the NHS and so on.

Choices – and priorities – abound. No one will be completely happy with the outcome – that’s the underlying point of the impossibility theorem. As a result, compromise is more necessary than ever. But that necessity coincides with a period when the willingness to compromise – the readiness to accept the notion that a second choice acceptable to many may be better than a first choice demanded by a minority – is trumped by a self-entitlement that is contemptuous of compromise.

To explain, let’s start with a detour to the US primaries, the state-wide elections whereby voters – sometimes restricted to party members, sometimes not – indicate their preferences among a list of candidates. Time was when the presidential primaries got scant attention from leading contenders for party nominations because power lay with party bosses behind the scenes. By and large that system worked because bosses knew who were the capable candidates and who were the mad, bad and dangerous. Sure, it produced Richard Nixon, but it also produced Eisenhower and Kennedy.

Times change, however, and voters’ expectations change with them. As the imprimatur of remote party bosses became a sign that the chosen candidate was a stooge, voters demanded – and got – more power for the primaries. That had unforeseen consequences.

It meant more candidates, since interest in the primaries had to be drummed up. It also meant more diversity among candidates – more views and more policies, yet less emphasis on a track record of actually having governed. It encouraged extremes – great for television, great for interest in the primaries, not so good for sensible policies. Increasingly, the primaries looked like a game show – small wonder then that the Republican nomination for 2016 was won by a game-show host who had spent most of his adult life as a Democrat.

The process that helped Donald Trump snaffle the 2016 Republican nomination – what we might label the ‘democratisation’ of the primaries – encouraged candidates who easily stood out from the crowd and who had the resources to promote themselves. Simultaneously, it made choosing a sensible candidate more difficult since – apropos Mr Arrow’s impossibility theorem – voters, who have better things to do than mug up on policy details, were bamboozled by choice. The result is that bad choices are made. Voters end up opting for candidates and policies they don’t actually want and all in the name of – maybe not democracy – but democratisation.

Which neatly brings us back to the UK’s general election, which is suffering similar ill effects. In particular, it brings us to Labour’s obsession with democratisation. For every ill that besets life in the UK – especially anything concerning the economy – Labour has a democratic solution. Its manifesto bursts with the intention to give power to the people – new commissions on every conceivable issue, from working hours to pensions, from health to animal rights. And let’s not forget the biggest, a constitutional convention advised by a citizens’ assembly. Closer to investment – and much publicised – is the promise to create inclusive ownership funds, which will be run by employees’ committees and hold 10 per cent of a company’s equity.

As a means of conveying the appearance of democracy, it would work a treat. Yet much like the corruption of the US primaries, it would be democratic more in form than in substance. It might become what a 19th century French politician and writer, Alexis de Tocqueville, labelled “sweet despotism” when he surveyed the young US. At that time – the 1830s – the US led the world in its pursuit of democracy, yet de Tocqueville spotted that, out of a combination of convenience and misunderstanding, electorates could allow themselves to be captured while still believing themselves to be free.

Perhaps it was ever thus. With Labour in power, even in a coalition, it may be more likely since Jeremy Corbyn’s tool of choice is rule by activists. This would be one more reason for Investors Chronicle readers not to vote Labour next Thursday. The chief reason, however, is contained in the tables and chart, which show the inflation-adjusted returns to labour (ie, wages) and to capital (ie, London share prices) since 1945, split between the eight alternating periods of Labour and Conservative rule.

Workers v investors, the big picture
PeriodAdministrationReal share pricesReal wages
Inflation-adjusted annual growth rate during each administration Source: Bank of England, ONS


Interesting though the tables may be (click below to access an expanded version of the table above), they have limitations. Getting continuous data since 1945 meant pasting together data series from the Bank of England’s wonderfully useful spreadsheet, 1,000 years of English Economic Data. That might create distortions, although the obvious shortcoming is that share price returns take no account of dividends paid. Factor those in and returns to capital – while remaining volatile – would be much closer to labour’s returns.

Yet the clear message is that labour has done much better under Labour administrations and capital has done better under Tory ones, which, in a way, is how it should be. In only three periods has capital outperformed labour and each of those was during Conservative rule. Similarly, all four periods of Labour rule produced better returns to wages than to shares. The exception was Edward Heath’s administration (1970-74) when the performance gap in favour of labour – 7.9 percentage points a year – was the widest of all periods of office.

So those readers more concerned about their income from employment than their investment returns – maybe not that many – will reasonably expect to do better with Jeremy Corbyn in No. 10. What they should not expect is that the quality of democracy will be best served – although that observation applies to whoever is in power. Remember what Kenneth Arrow’s theorem tells us, when the choices get too diverse, it’s impossible.