Today, Nick Clegg decided to declare war on nepotism. He wants to ‘stop a lot of the informal advantages which are helping certain people to hoard opportunities at the exclusion of others’ and ensure that no-one should get an unfair advantage because their parents have ‘met somebody at the tennis club or the golf club’. It is what you know not who you know that should determine how you get on in life, Clegg suggests.

As somebody whose parents were middle class but not well connected I have no particular axe to grind for either side. But, the first thing to note that both ‘who’ you know and ‘what’ you know are, to a degree, determined by luck. Good judgement and hard work can enhance what you know but hard work can also enhance your social networks. There is no particular theory of ‘desert’ that puts what you know (as a result of a good genetic inheritance) as being more deserving of reward than who you know. Furthermore, it is impossible for the state or anybody else to work out what combination of luck and hard work determined either what you know or who you know. It is also worth noting that there are whole range of ways that our parents help us (or maybe hinder us) which do not fall into the categories of determining either ‘what you know’ or ‘who you know’ and which affect our abilities to get good jobs – why just focus on the one perceived problem of the advantages gained from parents by as a result of who they know?

Secondly, taking decisions about who to hire is difficult. You need information about a whole range of qualities many of which are quite subtle. Do people have the right skills? How well do they communicate? How honest are they? How hard working are they? And so on… It is incumbent on employers to do what they can to find out about the skills and attitudes of their potential employees. Preventing them from using some mechanisms will cause them to take bad hiring decisions, risky hiring decisions or make it less likely that they will take hiring decisions at all (self employment is booming…).

But government could do two things to help those who know a lot but who do not know many well-connected people. In the nineteenth century the City was quite upper class dominated (not especially the land-owning class, however) and the professions were pursued by those who were clever but were not so well connected. Certainly local connections might well have been important in getting one’s son (as it normally would have been) solicitors’ articles but the deep social networks of the City seemed to be much stronger and dominated by the upper class. It is interesing to think why this might have been so. Trust was absolutely crucial in the City – hence the motto ‘my word is my bond’. The transactions costs people would have had to suffer to find out the trustworthiness of their counterparties if the social networks had been less deep would have been huge. If the use of ‘who you know’ in hiring decisions had not been possible the development of the City might not have happened. The budding professionals signalled their qualities in different ways – by passing exams and submitting themselves to the discipline of professional codes (in many cases sadly reinforced by statutory monopolies). So the first thing that government could do is to keep its nose out of the qualifications systems which has been so dumbed down so that, once again, we can have worthwhile qualifications at several levels that allow people to signal their hard work and aptitude.

The second thing we can do is to make the employment of somebody we do not know much about less risky – in other words reduce employment regulation. Employment regulation increases the risks of employment when we have relatively little knowledge about somebody: the natural response to that problem is to use social networks to find people that we trust.

There is another problem for Clegg with this approach. Does he actually want a ‘big society’ with deep social networks? If he does, then certain consequences follow. People get on because of those networks. Sometimes this happens to the well connected at the golf club. Sometimes it will happen because somebody doing prison visiting work has met a prisoner who really deserves a second chance and the visitor wants to employ them – but they may not be inclined to employ people who are straight out of prison more generally. Networks matter, but the government could make them less important by getting out of the way in other respects. Sadly, this is never what politicians have in mind when they preach about such things.

Philip Booth 154x154

Academic and Research Director, IEA

Philip Booth is Academic and Research Director at the Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary's University, Twickenham. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. Previously, Philip Booth worked for the Bank of England as an advisor on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs and on the editorial boards of various other academic journals. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

1 thought on “‘Who you know’ and ‘what you know’ – what does Nick Clegg know?”

  1. Posted 05/04/2011 at 14:06 | Permalink

    Let me quote from Hayek’s famous 1946 essay ‘The Meaning of Competition’:
    “Especially remarkable … is the explicit and complete exclusion from the theory of perfect competition of all personal relationships existing between the parties. In actual life the fact that our inadequate knowledge of the available commodities or services is made up for by our experience with the person or firms supplying them — that competition is in a large measure competition for reputation or good will — is one of the most important facts which enables us to solve our daily problems. The function of competition is here precisely to teach us WHO will serve us well …”
    Thus, for example, the very word credit stems, of course, from the Latin word for ‘believe’. One of the reasons why London could manage for many years with far less regulation than New York was that people in London did know each other (and each other’s families), and therefore had confidence that they could be trusted, whereas in New York nobody really knew where most people came from. Not for the first time, Clegg is trying to emphasise ‘fairness’ even at the expense of something that actually works.

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