Cheap Talk

We’re not all economists at the Continental Telegraph, but some of us are. We’re one. Of course, we don’t have the stature of Tim. But we’re having a go at commenting on recent developments we spotted in the news. This headline from the Financial Times amuses:

McDonnell rejects capital controls under Labour

For those of you who don’t come from the august shores, you have to understand that John McConnell is our (former, on his own admission, like a reformed alcoholic) Marxist shadow chancellor and is promoting alternative economic policies under Labour, the major opposition party that is panting for an election and getting to form the next government.

None of these policies are economic liberalism (like reducing taxation, regulations, freeing up people’s animal spirits). Oh no. It’s something really new. Government spending to re-energise the economy. And taking assets (think railways) into public ownership. That sort of thing.

But these are just good ol’ fashioned tax ‘n’ spend. We’re not really interested in the details here, really. They’re not new or alternative in any innovative way having been tried and tested elsewhere, a bit like a crash dummy being obliterated. But hey, McDonnell’s a politician and as a class they have to have something to appeal to suckers (sorry, I meant to say, voters).

It’s the old bait ‘n’ switch trick. Lovely government spending. Hurrah! Vote for this and we’ll deliver.

Ops! Forgot to mention the cost to you.

Well, McConnell is quoted in the paper as saying in response to grave doubts about Labour’s economic plans if they get elected:

In each of the various discussions [in the City] I have had, because it keeps coming up in the media, I get asked what happens with capital controls?”

And he replies to his own question, thus:

I want to make it explicit that we will not introduce capital controls.”

OK, guys (and that includes the galls as we’re an equal opportunity sarcy economics commentator here), we need a little bit of that dismal science, the one that pours cold water on politicians’ aspirations and, here, their utterances.

Those city financiers are concerned by ye olde bait ‘n’ switch. Sucker ‘em in and then: smack-bang, they change the rules. At the moment, the City manages a lot of lovely money most of which comes from abroad for which they get paid. It’s one of Britain’s bright spots apparently. Certainly, London does appear affluent, as it should given all this lovely dosh being pushed around. For this to work smoothly, they need to be able to move it anywhere. Capital controls would kind of ruin their business model.

You can see why they are worried.

Along comes our shadow Chancellor and says, nope, nothing to fear here. Move on. Next question.

Ah but!

Alas, there’s a lot of “Ah but!” in economics.

What McDonnell is saying is just “cheap talk”. In game theory—a little branch of that dismal science—cheap talk doesn’t affect the outcome of the game. Not one jot. Nada. It has no effect.

McDonnell isn’t changing anything. He can still bait ‘n’ switch. A promise not to is not a commitment not to.

Worse, he’s just one lonely very misunderstood shadow Chancellor with an economics agenda to peddle to the money men. Whatever he promises, he can’t necessarily deliver. Now, while we’re not about to cast a cloud over his future prospects, if the red team win the next election (whenever), he’s not the only party here. There’s the “shadow prime minister” (in more ways than one—but I digress badly here) and the “party” (read “momentum”). Therefore, whatever he promises, he can’t be sure of delivering.

And there’s those nasty things called “events. Dear boy, events” that come between the dream and the actuality. There could be that fateful run on sterling (the British pound to those who think I’m referring to a certain Scottish city) or the family silver (For non-Brits reading this, it’s a bit of an in-joke I won’t explain).

Can he do anything about this?

Indeed, but it would mean him commissioning a standby assassin who would pop him and anyone else who’s on his list if capital controls are introduced. This is called making a commitment. If I do X (that’s fancy economics nomenclature for that promise) I’ll accept Y consequences (that is, I [McConnell] will be eliminated by said assassin). By not doing X, I stay alive.

It’s no longer cheap talk. With a commitment like that, McConnell will have skin in the game.

What’s not to like?

If we get capital controls, we don’t have McDonnell (plus rest of said list).

Perhaps we can crowdfund the assassin?

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