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Anyone for England? The World Cup and business stardom are both games of luck

Anyone for England? The World Cup and business stardom are both games of luck

The 2018 World Cup in Russia kicks off tomorrow.

This time, at least, there is little feeling that our boys will emerge victorious.

And yet. There is a great deal more randomness in the outcome of soccer games than is generally appreciated.

A striking feature of games in the World Cup is that they are low-scoring affairs. Leaving aside the penalty shoot-outs, the average number of goals per game in the 2014 finals was just 2.75 – and this includes the memorable semi-final in which Germany overwhelmed Brazil 7-1.

In the 2010 finals, the average number of goals per game was even lower, at 2.25. This range, between 2.25 and 2.75, has been the experience of all finals since 1962.

Clearly, in low-scoring games, chance has a great potential to influence the outcome.

No fewer than 45 per cent of all games in the 2014 finals were decided by a single goal. A further 21 per cent ended in a draw.

We might expect greater disparities in the qualifying phases of the World Cup, where the skill levels of the teams may differ much more.

True, in the European qualifiers, only half of all games ended in a draw or victory by a single goal, compared to two thirds in the 2014 finals. But countries such as Gibraltar, Lichtenstein, Andorra, and San Marino were involved.

In the African qualifying rounds, where there are less obvious disparities between the countries, again two thirds of all games were either drawn or won by just one goal.

Football reflects the broader world. It is not always the fittest, to put it in Darwinian terms, which come out best in any given situation. There is more pure chance involved in success than many would care to admit.

A classic example of the impact of chance is Windows. The first two versions, way back in the mid-1980s, struggled to gain acceptance with consumers. Marlin Ellers was Microsoft’s lead developer for graphics on Windows, and he gives a fascinating account of the times in his 1998 book, Barbarians Led By Bill Gates.

Before Windows 3 was released, Microsoft announced that it would carry out no further development of the system. The operating system of the future, it believed, would be something else called OS2, being developed in partnership with IBM.

To everyone’s surprise, Windows 3 sold two million copies in six months. The rest is history. Had the company given up one iteration earlier, Windows might never have taken off.

All this said, quality or skill is not completely squeezed out. In all the World Cup finals since 1930, 77 teams have participated, but only 12 have ever made it to the actual final game, and a mere eight countries have won. Just three – Brazil, Italy, and Germany – have won 13 out of the 20 tournaments between them.

Amazon and Google, Brazil and Germany, all develop a tradition of excellence, which is hard for others to overcome.

Hard but not impossible. In any process which involves innovation, whether evolution itself, business or team sports, the potential is always there for an outsider to triumph. Anyone for England?

As published in City AM Wednesday 14th June 2018

Image: FIFA World Cup by By Isak Aronsson is licensed under CC2.0
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Artificial intelligence will dominate every aspect of our lives, but it won’t replace us

Artificial intelligence will dominate every aspect of our lives, but it won’t replace us

Guess which of the 964 jobs listed in the widely used Occupational Information Network online database is the least susceptible to replacement by artificial intelligence (AI).

The unsurprising answer is that of “massage therapist”.

This is one of the findings of a paper in the latest issue of the American Economic Review by Erik Brynjolfsson and colleagues at MIT’s Sloan School of Management.

But, while this answer might seem obvious, the study itself is a serious and innovative attempt to analyse the potential impact of AI on occupations across the economy.

A key point is that AI technology itself is going through a period of revolutionary progress.

The success of Google’s Deep Mind team in defeating the world champion at the immensely complex game of Go received wide publicity.

Unlike the algorithms which vanquished chess some years previously, the latest AlphaGo programme – improved since its annihilation of the Go champion less than two years ago – does not simply rely on pure computing power to outperform humans. The algorithm starts by knowing absolutely nothing about the game. It becomes stronger by playing against itself and learning as it goes along.

In short, it teaches itself, remembering both its mistakes and its successes. This type of algorithm is very new, and is known as deep learning. The programmes automatically improve their performance at a task through experience.

Brynjolfsson and colleagues regard this as so significant that they describe deep learning as a “general purpose technology” (GPT).

GPTs are technologies which become pervasive throughout the economy, improve over time, and generate further innovations which are complementary.

Historically, they are few and far between. Steam and electricity are examples. If they disappeared tomorrow, we would rapidly be driven back to the living standard which existed several centuries ago.

Deep learning will take years – or even several decades – before anything like its full effects are realised. But we will then look back and find that it is just as hard to imagine a world without deep learning as it is a world without electricity.

What will that look like? The authors analyse 2,069 work activities and 18,156 tasks in the 964 occupations. From this, they build “suitability for machine learning” (SML) measures for labour inputs in the US economy. They find that most occupations in most industries have at least some tasks that are SML. Pretty obvious. But few, if any, occupations have all tasks that are SML.

This latter point certainly is surprising – and from it the MIT team derives a positive message: very few jobs can be fully automated using this new technology.

A fundamental shift is needed in the debate about the effects of AI on work. Instead of the common concerns about the full automation of many jobs and pervasive occupational replacement, we should be thinking about the redesign of jobs and reengineering of business processes.

Economics is often described as the dismal science. But Brynjolfsson’s paper certainly provides very positive food for thought.

As published in City AM Wednesday 6th June 2018

Image: Robots by By Kai Schreiber is licensed under CC2.0
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Mark Carney has bigger things to worry about than meaningless Brexit forecasts

Mark Carney has bigger things to worry about than meaningless Brexit forecasts

The governor of the Bank of England, Mark Carney, is up to his usual tricks.

Last week, he claimed in front of the Treasury Committee of the House of Commons that British households are now more than £900 worse off after the vote to leave the EU.

The figure was obtained by comparing a forecast made by the Bank in May 2016 on the assumption of a Remain victory with the situation as it actually is today.

In other words, the so-called evidence cited by the governor consists of the difference between where the economy stands right now, and a forecast made by the Bank two years ago.

It is no exaggeration to say that this has no scientific standing at all.

Predictions of the economy are notoriously unreliable. The Survey of Professional Forecasters in the US publishes a 50-year track record of one-year-ahead predictions of the growth of the economy. The correlation between the forecasts and what actually happened is – literally – zero, with no sign of it improving during the course of the five decades. And this is just looking one year ahead, not two.

The UK does not have such an impressive body of evidence to assess forecasting accuracy, but the studies which have been published show that the track record of our economists is no better than that of the Americans.

It is worth pointing out time and again that the Project Fear forecasts, also made in May 2016 like the Bank’s ones referred to by the governor, were for the next six months, not the next two years. Yet they were shown to be completely wrong.

Far from the predicted rise in unemployment of half a million by the end of 2016 on a Leave vote, unemployment has fallen almost continuously ever since, and now is lower than it has been since the mid-1970s.

We might usefully recall one of Carney’s first public pronouncements after taking up the post of governor in July 2013.

Interest rates, he said, would not be raised until unemployment fell from its level of 7.8 per cent to below seven per cent. He stated that this process would take three years. In fact, unemployment dropped to below seven per cent just six months later, at the start of 2014.

Rather than grandstanding about Brexit and currying favour with the global liberal elite, there are more pressing issues to occupy Carney’s time.

The primary concern of the Bank of England should be the stability of the financial system. Yet there has been a worrying rise in the amount of debt in the economy.

Figures from the Bank of International Settlements show that total credit to the private non-financial sector – the debts of households and companies in everyday language – peaked at 196 per cent of GDP in 2008, the year of the crash. This had fallen to 163 per cent by 2015. But it has now risen to 170 per cent.

This is by no means yet another crisis, but this – not Brexit – is where the governor’s mind should be focused.

As published in City AM Wednesday 30th May 2018

Image: Mark Carney by Bank of England is licensed under CC2.0
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Brussels elites who fiddled while Rome burned may soon get their comeuppance

Brussels elites who fiddled while Rome burned may soon get their comeuppance

The new Italian government looks set to cause shock waves across Europe.

The two parties promise mass deportations of immigrants and huge increases in public spending.

Both the social and the economic policies of the Italian coalition clash directly with those of the European Commission, and Germany and France. They represent a decisive break with the consensual approach of the past.

The performance of the UK economy since the financial crisis of the late 2000s has been disappointing. But it has positively boomed in comparison with that of Italy.

Italian GDP, according to the OECD’s database, peaked in the first quarter of 2008. By the spring of 2009, it had collapsed by eight per cent. There was a feeble recovery, before it started to fall again in late 2011. Even now, GDP remains over five per cent below its value of 10 years ago.

It not only looks dramatic – it is dramatic. The failure of the Italian economy to recover for a whole decade breaks all records, not just in Italy itself, but across the western economies as a whole.

Angus Maddison spent many years at the OECD constructing estimates of GDP in the western economies going back to 1870. His database puts the recent performance of the Italian economy squarely in the spotlight.

Some capitalist economies have experienced truly devastating collapses: Austria, for example, when it was overrun by the Red Army in 1945, and Japan when it was subjected to massive nuclear and conventional bombing attacks in the same year.

But leaving the World War years and their immediate aftermath aside, we can identify, prior to the recent financial crisis, 191 instances of peacetime recessions in the western economies since 1870 from the Maddison database.

Across some 20 capitalist countries, GDP has fallen for a year (the data is annual) 191 times.

Out of these 191 examples, on 113 occasions GDP bounced back above its previous peak value the following year. Two years after a fall, the peak had been regained no less than 151 times. So most recessions are very short. Capitalism is a very resilient system.

The previous longest recession on record across the west as a whole was that of the United States. The collapse during the Great Depression of the early 1930s was so severe that, even with a boom later in the decade, it took until 1939 to recover the peak 1929 level.

That is the context in which we should view Italy’s decade-long recession. It is hardly surprising in the circumstances that the Italian electorate has supported parties which are pledged to overthrow the status quo. If they do what they say they will, the impact will be greater than that of Brexit.

Greece and Portugal are in the same position as Italy, with GDP in both economies still being below pre-crisis levels. But they are small.

The bureaucrats in Brussels, aided by Germany, have allowed Italy to be crushed by the longest peacetime recession in the history of capitalism. No wonder they may now get their comeuppance.

As published in City AM Wednesday 24th May 2018

Image: Vatican Sunset by Giorgio Galeotti is licensed under CC Attribution 4.0
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The Windrush scandal and police failures show the dangers of bureaucratic targets

The Windrush scandal and police failures show the dangers of bureaucratic targets

The Windrush scandal still bubbles away.

The bureaucrats at the Home Office are being condemned for their harsh behaviour. But it is scarcely their fault – they are simply reacting in a way entirely compatible with the economic theory of rational choice.

It emerged during the saga of Amber Rudd’s resignation that targets had been set within the Home Office for the number of illegal immigrants to be deported each year.

The relevant officials could have spent a lot of time and effort, for example, tracking down members of eastern European criminal gangs.

Instead, they focused on the much easier task of deporting elderly people who have lived in Britain for decades. Many of these immigrants, understandably, regarded themselves as British and had never bothered to hunt down and fill in the complicated forms which would have guaranteed their residency.

The bureaucrats reacted to targets exactly as rational choice theory predicts, seeking to meet them in a way which minimises the costs and effort to them. The problem lies not with the individuals trying to meet the targets, but with those who set the targets in the first place.

A great deal of the behaviour of the police can be accounted for in the same way.

You could try to tackle knife crime, at personal risk to yourself. But it is much easier and safer to investigate and “solve” hate crimes, such as when Tony Blair himself was interrogated for allegedly abusing the Welsh.

An interesting new Princeton University book by the American historian Jerry Z Muller provides many such examples from the United States. The Tyranny of Metrics is about the unintended consequences which often follow when targets are set to measure performance.

More precisely, it is about the adverse effects which can be created when standardised measures of performance are substituted for personal judgement based on experience.

Unsurprisingly to economists, if the rewards which agents receive become dependent on meeting quantitative targets, they will game the system to try and achieve them.

Muller’s book was inspired by the excellent TV series The Wire, set in Baltimore and based on real life. A central theme was the baleful influence which targets to cut crime had on the police department. They spent a lot of time arresting low-level drug dealers instead of going for the top villains.

A key point which Muller makes is that a decline in trust leads to an increased demand for measured accountability. A lack of trust can work two ways, with both the governors and the governed becoming suspicious of each other’s abilities or motives.

For example, it was under Margaret Thatcher that the first of a disastrous series of exam performance targets was introduced into British schools, because teachers were seen as being hopelessly and uselessly left-wing.

It is easy to introduce a target. It is much harder to generate a culture within an organisation in which everyone is trusted to do a good job. But, ultimately, it is the latter which works.

As published in City AM Wednesday 16th May 2018

Image: Home Office by Steve Cadman is licensed under CC BY-SA 2.0
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