This Is How Prejudice Can Hinder the Economy

It's the idea that the economics profession, or the study of economics, the field of economics is missing something fundamental or perhaps could be applied in a different way to, I guess, achieve a better outcome for human well being. Is that a good way of putting it? Go further?

I mean, yes, but go further? Um. Well, so, I think in the aftermath of the financial crisis, there was a lot of criticism trained on economists that not only had they missed this massive imbalance that ended up nearly taking down the financial system, but also that economics had somehow lost its way in its actual purpose. If you think about economics as the sort of studies of resource

allocation and the decisions that go into making them. The ultimate goal should probably be making people better off than they would be otherwise. And I think there was a sense that economists and their sort of white tower in their academic bubble had forgotten that aspect of it, or at least had hadn't paid as much attention to it

um as they should have. I think it's right. I mean, I think like if you look at now, especially with this crisis, first ten years ago, there's a lot more focus on like exactly what you say, what is the purpose of economics, and what problems are people really trying

to solve? And I think that like before the Great Financial Crisis and the aftermath of the Great Financial Crisis, there was a lot of focus on the beautiful, the beauty of models and getting everything into bulibrium and optimal balance and all this stuff, and I don't know, but sort of forgetting it's like, no, the point is human well being and improving the sort of situation for humans. And I think, I don't know, I feel like probably always economists would recognize that that was the goal, but

it got obscured. And I think like that you see the difference now and this sort of more clear focus on that when people say no, just just giving people money, And I think that like, that's part of this idea, Like it a lot of the solutions that get bandied about now in post COVID times or in the middle of COVID is like just give out more money. And I think part of the reason that some of these ideas have become more game, more currency is because of

this increased clarity of what other problems we're trying to solve. Yeah. Absolutely, and I think your mention of the models there is absolutely correct. There was this idea that an economic or an economy imbalance was a goal in and of itself, but people kind of forgot the reason they were targeting that, which was eventually to um create better conditions for their citizens.

So all right, so today we're going to be talking about, I guess, the more lofty ideals of the economic profession, but we're going to be doing it with someone who was actually writing and thinking about this again even before twenty way back in two thousand eleven. We're going to be talking to Paul Donovan. He's the chief economist at UBS Global Wealth Management, and he wrote a book that came out in November called Profit and Prejudice The luod

out of the Fourth Industrial Revolution. And I should just mention that this book was written in a personal capacity by Paul, but with the full support of his employer UBS. It's a really interesting read and it gets to some of the topics we just mentioned in the intro. So, without further ado, why don't we bring on Paul. Paul, it's great to have you, thanks for a hart for

having me on. So I guess the clue is in the title here, right, But Profit and Prejudice there's an intimation there that prejudice has some sort of impact on profits. Why don't you go ahead and tell us your your thesis on on what that actually is. Well, I'd love to say credit for the thesis, but I mean this, this comes out of Gary Becker's work in the fifties and countless economists since then. Basically, prejudice is bad for profit at a at the corporate sense, and it's bad

for economic well being in a in a macro economic sense. Essentially, the whole point about allocating your resources efficiently and getting everything working is you need the right person in the

right job at the right time. That's it. Now, prejudice is irrational discrimination where you are rejecting a person not on rational grounds, not on reasonable grounds, but because you don't like their race, or their sexuality, or their gender, or their hair color or whatever it is, doesn't matter if it's irrational, you're rejecting somebody from the possibility that they could work for you, and that then gives you a situation where you're not employing the right person in

the right job, and that is enormously destructive, particularly so as we are going through the upheaval and the changes of the Fourth Industrial Revolution, because it becomes even more important to get the right people in place in order to maximize profits and gains at the moment. Still explain that last part. What is the connection between the sort of economically corrosive aspect of prejudice and why it's particularly pronounced after in the week of the Fourth Industrial Revolution?

And while we're talking about that, what is the Fourth Industrial Revolution? So the Fourth Industry Revolution is the latest period of economic upheaval. So this is about artificial intelligence, robotics, automation, the Internet of things, changes in communication, all of that. Now, the point about a revolution, not to state the blindingly obvious, is its revolutionary. So actually it's not the technology that matters.

It's it's how we use the technology, and that has the power to change society, to change how we work, where we work, how we live, what we consume. All of these things change through application of technology. That's the critical thing, the application. So it becomes critically important in this period of upheaval and success that you apply the technology appropriately and how do you apply technology appropriately? Or that's coming down to good old people because they're the

ones who are using the thing. And so that's why the getting the right person the right job is so so absolutely critical. But there's a fatal flaw in any period of structural upheaval is that the uncertainty, the shifting social positions that an industrial revolution creates also tend to encourage more prejudice. So the Fourth Industrial Revolution as the seeds of its own destruction within the changes that it's bringing.

M Are there previous Well, obviously there are previous industrial revolutions, But are there any that engendered the type of prejudice or you know, parallel prejudices to what we might be seeing now that that we can kind of learn from. Yes, So I mean basically all three previous industrial revolutions went

through periods of prejudice. So the First Industrial Revolution you saw the introduction of factory systems mechanization in the UK in the mid and late eighteenth century, and that led to the Luddites who were who were going around and smashing up the equipment because the equipment was destroying their jobs. But it wasn't just equipment that was being destroyed. You were attacking Catholics. You were attacking Methodists because they were different.

And if you've lost your job, and if you've lost your social status, you couldn't really understand why you've lost your job in social status, because it was the complex forces of the universe that had led to this situation as not as you were concerned. You were doing your job as well as you've always done it, and you know as efficient these have always done it, So why

were you losing it? And so you you search around for this simple solution the scapegoat economics and it's well, there's a group and they seem to be doing quite well. It must be their fault. So it's all the fault of the Methodist. It's it's all the fault of the Catholics. They're the ones who've cost me my job. Um. And then in the Second Industrial Revolution we see exactly the same thing. And I talked in the book about my

own family history. My family were dock workers in East London in the nineteen twenties and nineteen thirties, and of course the chaos and disruption of the Second Industrial Revolution cause them to lose their jobs of cause to be part of the mass unemployment, and some of my family appeared to turn to fascism because they were being told no, no, no, it's not your fault. Everything is the fault of the of the Jewish immigrants. And you know, they are the

ones that have cost you your job. You're great, They're the ones that have taken your double away from you. This is the black shirt movement in the UK. Is that right? It is? Which you know a lot of people tend to see the black shirt movements as being you know, some some middle class movement. It wasn't. It was working class and it was deeply rooted in the East End of London because this was the area where people were losing their jobs and couldn't understand why it

was happening. And it was very reassuring to be told no, no, no, you're better than they are, and they've somehow stolen your job from you. It's not just the the the desired to have a skategoat's also the desire to be told you're better. And and we've got a simple solution which if we follow, if we ban immigration or whatever it is, we will go back to this wonderful golden era where everyone is happy. It's all complete nonsense, of course, but

you can see why. It's a compelling story in the chaos of change, and as recently as the nine seventies, the til end of the Third Industrial Revolution, which is all about computers and technology. I mean, if you go back and look at advertise newspapers from that time, Yeah, a lot of the blame them was on women. Women are daring to work and they're costing men jobs, and therefore we just need to stop women working and everything

will be wonderful again. And I mean, it's just this remarkable, bizarre, but obviously very simple narrative. And it's that simplicity which is so appealing and so dangerous. So this gets too I think a question about you know you mentioned in the beginning of this idea of irrationality, and in the current age, prejudice, racism, other forms of discrimination extremely costly from an economic standpoint, extreme cost of this sort of

irrational choices. Where does the rationality lie, however, I mean you talk about these sort of past periods like say the light out opposing increased mechanization and so forth. Were they being irrational given the information at hand, or does the irrationality precede them in some other sort of meta matter. I mean, they can't see the big picture. So I think it's definitely the letter that you you're you're getting fake news. And this was I mean a whole lot

like movement, um. I mean, the UK had had plenty of uprisings and revolts in the past. Well made the situation in the late eighteenth century so unusual was that it was branded. There was a common brand, there was a common theme, and there was this pamphleteering, and you got to a stage where quite a large part of the population could read. And so they were reading I think, well, good,

they're better informed. Well only if they're reading well in for documents preferably written by economists, of course, but they weren't. They were reading propaganda. They were reading pamphlets which we were lying and you know, you get the Gordon riots in in the UK, which is the anti Catholic riots in the late seventeen hundreds coming out of complete nonsense being spread around, and then exactly the same thing with fascism,

the National Socialism, the Britis Union and fascists, etcetera. In the nineties and of course in the United States, and very often what we find is that irrationality exploits new means of communication. So back in in the First Industrial Revolution, the irrationality wars through pamphleting and printing and the fact that you've got a literate artisan class and pamphlets were suddenly,

you know, the Twitter of their day. In the nineteen thirties, there was a Catholic priest who was preaching over the radio in America who was more popular than the president was, and he was viewing at this this extreme racist, anti Semitic view of the world to an enormous audience. But because he was very good at adapting the new media, and of course we see this today the technology and the communications that we have now also of how fate

news and the dissemination of prejudice. Technology is very very much a double edged sword in this this whole fight against prejudice. So the suggestion, as you mentioned previously, is that prejudice ultimately cost the economy and cost people in various ways. Could you maybe explain how we actually judge

the opportunity cost of irrational decisions? I understand you know, maybe, um, maybe in the first Industrial Revolution, if the Luddites were smashing equipment, you could go around and taught up the cost of all these destroyed machine and maybe you could try to estimate a lost productivity for the economy. But as economies grow more complex, and as we enter this Fourth Industrial Revolution, how do you actually go about estimating that opportunity cost? So this is where things become very

very difficult to put a precise figure on it. We can, we can construct the narrative which explains clearly where the costs come through. And essentially the costs come in two ways. Firstly, if you've got prejudice, you're not employing the right person, the right job at the right time. You're not maximizing productivity. But secondly, also your decision making is flawed because if you've got a monoculture sitting around a table and making decisions.

If if all of your decision makers are white, middle aged bald Anglo Saxon men. Not that I've going against the middle aged bald Anglo Saxon men, being one myself, but if they're all the same, you're not going to get a well rounded view of the world. You're gonna miss things you've and miss opportunities, and worse, you're going to miss risks. So those are your two costs, wrong people in the job and bad decision making, particularly when you're turning the world upside down. So how can we

quantify this? Well, the problem we run into is that people don't admit to being prejudiced. They lie about it. It's it's owns the Bradley effect after a political candidate in the United States who was African American, who always was pulling far higher in opinion polls than the votes he actually received when he ran for office. Um, And it's because people don't want to admit to other people that they are racist. But in the privacy of a voting booth they are happy to act on their their

principles as it were. What you get is and under reporting of the level of prejudice. And of course you also have difficulties in that some forms of prejudice can be invisible. So, for example, sexuality is a very good case where people may not be out at work, they may hide who they are at work and said, well,

that's fine, they're not subject to prejudice. But they are because if they're hearing homophobic jokes or slurs around them, or if they're having to think twice before they speak in any kind of social occasion, if they're constantly having to edit themselves, that was an enormous strain on them and it is clearly damaging for productivity. But trying to identify that, you can't go around with a clipboard and say, okay, which category do you fall into and how does that

affect your productivity? So very very goodle to quantify. What we can do is we can look at some markers like race, which give us some hints. These are obviously race tends to be a more visible form of prejudice,

as does gender. Not always, but they are generally more visible forms of prejudice, and we can look at the costs that have come through from that, or we can look at times when we've seen changing behavior and see what's what's come about as a result of that to get a sense of the economic cost of prejudice, So to give two quick egg armples. In the United States, you can compare racial diversity in different states by different professions.

And there's been some work done on this by academics, and what they've shown is that there is a significant increase in productivity in more creative roles that are more diverse. So by creative I mean things like financial services, where you need people who are thinking around problems in complex ways. If you've got a diverse firm, if you're in a diverse state, the productivity of financial service employees in that area is significantly higher than in a state which is

relatively monoculture. Another study that I looked at is in Saudi Arabia. So Saudi Arabia has recently lifted some of the restrictions on women being entrepreneurs, made it easier for women to set up their own businesses. They don't need on male guardian to to support them, and so on and so forth. And what you have seen there is an explosion in the number of women setting up businesses

and contributing positively to the economy. I mean, it's sound irregular is leading the world in female business creation at the moment because these restrictions have been lifted. But what that's telling you is just how much economic activity was being lost when they had these restrictions in place in

the previous years. Let me ask you a question about the sort of upshot of your work or the consequences, because it's all well and good to say things like um, prejudice, discrimination are costly that firms that don't make an effort to change their ways and suffering. But you know, to me, this sounds or this could sound a little bit like a sort of I don't I don't know exactly the

term a little bit. Uh. You know, I remember this sort of like heavy optimism of the late nineties where we thought that like free markets and if we reduced barriers to trade and deregulate and everything, could help all this world peace and stuff because people would find that it was you know, the incentive was to trade instead of go to war. And then they didn't really pan

out like people expected. Other policy upshots that followed them from your work in terms of the government or regulators stepping into correctness imbalance, or is it in your view that of firms were more aware of the profit potential of making better decisions or having better decision makers would get better out. So um, I think the issue here is that there is a split. I believe that large

global businesses get this. They understand the issues around prejudice, they understand the damage that it does, and as a result, they are playing a more active role in fighting prejudice. For example, so fairly early on in my Welcome Prejudice, I was writing on the economics of marriage equality because UDS was filing amarcust briefs before the U. S. Supreme Court, saying yes, we want marriage equality because you know it

will mean that we will be a better business. Plus you know obviously it's morally the right thing to do. But the point was we were taking a clear stance on this. And so I think global firms understand this because they're dealing with multicultural employees, because they are looking to profit maximize, because they're always looking at ways to make the employees more productive. Where I think the real danger is is that with smaller firms this is not

necessarily always so obvious. That you may be in a relatively homogenized community, or you think the relatively comodernized community, and you may miss out on the upside. You may not realize that this upside exists. And if there isn't an imperative to sort of push you in this direction, then you may continue to make bad business decisions which have managing to the economy, which are managing to your

business damaging to society at large. So the US actually has a very good example of this from from baseball, which, as I understand it is a sort of inferior form of cricket that's quite popular in the United States, and I knew that was coming. What what happened is in the Nies, baseball was segregated. Teams were segregated on racial lines,

which is just insane. And then it desegregated and a relatively small number of teams became integrated racially, and over the next decade those teams outperformed in every possible way. They played better, they won more games, they have more spectators, and consequently they made more money. But it still took over a decade after you could voluntarily desegregate for the

racist teams to start to become actually integrated teams. They continued with racist recruitment policies for years even it was blinding the obvious that it was doing damage to their business. So I think that there is there's a there's a mix here that you've got the profit motive and the profit incentive and so on, and that's clearly going to be very useful, but then there is also a need,

I think, for government to take action. And after all, when we're talking about government taking action, what we're talking about here is treating everybody the same, saying no one group in society is less than another group. That's all we're talking about. It's not a huge ask, frankly overall, and if you've act, you're guiding principle, and I think that there is a need for government to nudge in

that direction. So there's a broader economic implication here as well, which is that if you think about the past ten years or so, the global economy has really been marked by this sluggish productivity, which has in turn fed into low inflation and relatively low GDP growth. The implication is, I understand it, is that if you do away with prejudice, then you might end up boosting productivity and generating economic growth in one of the few ways that are sort

of left to us, Is that right? I think so. I mean, there's there's actually two possibilities here. One is that as we become more efficient, we create more growth. The alternative is that as we become more efficient, we stop using environmental credit environmental resources in an unsustainable way. Um And I think we'll probably end up with a

mix of the two. That we will end up becoming more environmentally efficient, which doesn't necessarily mean more growth, but it means we maintain our existing standard of living without doing so much environmental damage, or alternatively, we we create

a amount more growth in terms of living standards. Now, I think it's certainly the case that that g d P, which is widely regarded in the economics profession as are rather outdated statistic, may not capture everything that we're talking about here in terms of the efficiency and the changes. And this is something that we've known about for some time, that your GDP is not well suited to the century. It was designed to maximize wartime production in the nineties,

it's not really suited where we are now. UM So we may not necessarily see this in the GDP data, but we would end up with people having a higher standard of living in the future. If we minimize prejudice,

we're never going to get rid of it. I mean, everybody is prejudiced, but we can try and minimize it as much as possible and make people aware of it as much as possible, and by doing that we we do create a more efficient society which maintains or improves our living standards whilst doing less overall damage to the to the planet. I'm curious what you think about I'm not actually sure over there, like how the Bank of

England has thought about this question. But obviously here the Federal Reserve in the last several years has taken a keener interest I would say on the unemployment gap between different races and this idea that sort of late in the expansions we started to see the benefits of an economic recovery spread out too previously marginalized groups. And you know, prior to COVID we saw started to see a real

acceleration in the lack unemployment rate in the US. Do you see uh implications uh and benefit It's from policy makers, including central bankers, taking a more expansive view of the benefits of full employment and how to define employment and so forth. Um by thinking more concretely about these gaps when setting policy or when say, thinking about went to titan went to tighten interest rates. Well, at the risk of sounding like a traditional economist, yes and no um

so yes, clearly unemployment matters. We know that if you've if you've got a better household income UM, your particularly children in that household, will have better opportunities education wise, and things like that extraordinarily important. But to focus just on income is actually misguided because what we tend to find is that prejudice, and particularly more extreme forms of prejudice, it's not really about income and relative income, it's about

social status. Now, for income and social status are tied together, um varies from countries to country, perhaps more closely tied in the United States than in the United Kingdom, but they are tied together. But there is a difference here. And what we tend to find is that if you're seeing big shifts in terms of relative income, then you'll get a bias towards what a European would call social

democratic policies, so center left policies, redistribution policies. But if you've also got a loss of social status, the income doesn't offset the loss of social status UM, and people then turned more extreme forms of politics, and that's where you get either extreme left or extreme or right or

populism for want of a better word. So I think that center rights can do quite a lot in this regard in terms of trying to mitigate the damage, and certainly for the longer term, where things like equality of opportunity, um, getting the right education, that can be a very very big thing. But central bank policy is not necessarily that well equipped to deal with social status over time UM. And so that I think is going to be one of the challenges that that he's going to be thrown

up over the next few years. You know that if you're a lawyer's clerk, for example, who's worked hard at school and studied to get to that position, and your social status is just going down because your employment prospects are going down because your jobs being auginated away. UM. There's a limit to what the Federal Reserve can do.

What Paul are absolutely fascinating topic. And I mentioned in the intro that this was actually something you were paying attention to many many years ago, back in two thousand eleven, and you've followed through on it to write the new book, So thank you very much for joining Joe and myself to talk about it. Thanks Paul, that was great. So Joe, I know there's UM, I know, there's sometimes a tendency to to think about prejudice or I guess diversity initiatives

as the sort of corporate fluff. But I think Paul does lay out a very compelling, um, you know, rational argument for why companies and economies should be looking at this and in particular this idea that most of our future growth is probably going to become come through productivity improvements. And one of the ways we can improve productivity is by being more efficient with our human labor capital in

addition to our you know, machine based capital. And by the way, I'm very I'm aware that calling people human abert capital is a terrible thing, So forgive me for doing that people people. UM No, I mean I think that's right, and I think, yeah, I've been thinking about economics for too long. I think, you know, Paul's arguments

and his historical analogies. UM, they're super interesting and compelling and sort of like thinking about like the sort of irrationality of people who only have access to part of the picture is um A sort of very useful frame. But I think, like, you know, I'm still like hung up on the solutions or like what the upshot is because it doesn't seem like enough to just acknowledge that

or for like more companies to quote get it. I think that like, you know, there's there's still a good argument for like yes, but in the meantime, you know, give people money, you know, sort of going back to the original question or or or more explicitly, you know, sorted my question about like the foot of reserve. It's like they're all kinds of issues. Like I guess we can't um solve prejudice. It's never going to go away. There's more things to life than employment and income. But

also employment income are really good. M yes, um, but you know what I'm saying. Yeah, But also I mean I think we can agree that probably, you know, fifteen or twenty years ago, we wouldn't have been having a conversation about economics and prejudice and what a central bank can do to diminish social injustice. Like that just wouldn't

have happened. So the fact that we're having this conversation conversation already suggests that we've come a long way, or at least we're entering up perhaps the start of a new economic paradigm. Again, what we've been discussing all year, this notion that the events of have really accelerated some shifts that we've already seen in traditional economics. No, I I completely agree, and I think like the fact that's so on many like traditional quarters of the economic world

are talking about this. I think it's huge. And again, like going back to the FED, like this is like a major thing under the pile FED and also under yelling like talking about economic inequality, sharing the benefits of prosperity, and they're being good long term things to come from. When prosperity is shared, I think is like one of the most promising things. And so the fact that it's coming from mainstream courts I think is encouraging. Yeah, the

idea that economics should ultimately improve people's well being? Who knew? Okay, kind of outlandish? All right, let's leave it there. All right, This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and I'm Joe Wisnal. You could follow me on Twitter at the Stalwart, and you should check out our guests book Paul Donovan. He is the author of Profit and Prejudice, The Blood Ends of the Fourth Industrial Revolution.

And here's something special. Listeners to odd Lots can get a discount on the book if they go to the Ruttledge website for the book and use the code o L. That discount applies to either the hardback or the e book version, so check it out and get a discount. Also be sure to UH in the meantime, follow our producer Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast Francesco Levi at Francesca Today, and check out all of our podcasts under the handle at podcasts.

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