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“Ricardo, Ricardo, that wonderful guy”: innovation, job losses and living standards

Posted by on June 19, 2014 in Capitalism, Economic Theory, Employment, Markets | 0 comments

“Ricardo, Ricardo, that wonderful guy”: innovation, job losses and living standards

Here is your starter for ten. What do the Uber app and David Ricardo have in common? Ricardo, I hear you ask. Scarcely known outside academic economics, he ranks equal with Adam Smith and Keynes as the greatest ever British economist. His classic Principles of Political Economy was published in 1816. He made millions of pounds on the stock market, at a time when a million was a vast amount of money.

Ricardo addressed highly practical issues. A crucial one at the time was how to understand the stupendous changes which were taking place in Britain in the early decades of the Industrial Revolution. It was by no means clear to his contemporaries, for example, that these developments would be permanent.

One of his main concerns was whether the rapid technological innovations which were taking place were a Good Thing. How would the workers and their standard of living be affected? The question is highly relevant in the early 21st century. The Uber app threatens to deskill taxi driving and to make many cabbies redundant. Airbnb threatens the same to many hotels and their staffs. There was no easy answer, and even Ricardo struggled. In the first edition of his Principles, he concluded that innovation was good. In the second he changed his mind. In the third and final edition he decided that it all depended on the particular circumstances, though his reasoning was more subtle than the standard caricature of the modern economist saying ‘one the one hand, but on the other’.

When a technological innovation comes along, the immediate losers are easy to identify, whether they are the Luddites or taxi drivers. But with the benefit of 200 years of hindsight, we can now see that it is precisely the ability of the Western economies to innovate which has caused the enormous increase in living standards since Ricardo’s time. The standard of living of a country ultimately depends upon its ability and willingness to adopt new ways of producing goods and services. Eventually, everyone gains.

The question becomes just how disruptive a new technology is at any point in time. The technology of the internet has the potential to cause it on a massive scale. For example, global market research companies like Nielsen and GFK may soon come under threat. Advanced maths algorithms sweeping the web can not only gather socio-economic data on consumers much more cheaply than standard survey methods, but can obtain information on things like their psychological state, which existing techniques find hard to glean at any price. Whole swathes of professionals will find themselves deskilled.

In the long run, Britain will benefit. But as Keynes remarked, in the long-run we are all dead. Market-oriented economies are the great strength of the West, the basis for our prosperity. But markets take time to react to major shocks, and we may need to re-think the potential role of the state as a co-ordinating agency in what may be very turbulent times.

As published in City AM on Wednesday 18th June

Psychology, not hard line maths, tells us why Osborne’s strategy is working

Posted by on June 12, 2014 in Economic Policy, Economic Theory, Financial Crisis, GDP, Government Spending, Markets, Politics, Public Policy, Recession | 0 comments

Psychology, not hard line maths, tells us why Osborne’s strategy is working

So, International Monetary Fund, wrong again! At the end of last week, the IMF abandoned its criticism of the UK government’s economic strategy. Christine Lagarde, the IMF chief, said her organisation had ‘underestimated’ the strength of the recovery in Britain. The IMF now believes that the UK will be the fastest growing of any major economy in 2014.

In complete contrast, Olivier Blanchard, chief economist at the IMF issued dire warnings in early 2013. George Osborne, he pronounced, was ‘playing with fire’. Unless austerity policies were abandoned, the UK economy risked a triple dip recession.

Both Blanchard and the IMF have got form on these matters. In early 2013, Blanchard and his colleague Daniel Leigh published an IMF Working Paper on the size of the fiscal multiplier. The multiplier, a theoretical concept invented by Keynes in the 1930s, is the most fundamental concept in the whole of macroeconomics. It measures the eventual impact on the economy as a whole, GDP, of a sustained increase, or decrease, in public spending. An increase in such expenditure brings more people into work, they in turn will have more to spend, the companies whose products they buy will have more revenue, and will employ even more people. The initial impact is multiplied through the economy. Sounds simple. But there are many potentially offsetting factors to take into account. Some of the extra spending will be on imports, for example, which does not boost domestic output at all. The bigger public deficit which the extra spending creates may lead to higher interest rates.

Economists have struggled for decades to arrive at a consensus on how big the multiplier really is. Whilst still being far from agreement, there is a general view that it is low. Indeed, a fiscal expansion, once all the other feedbacks are taken into account, may even lead to GDP rising by less than the size of the stimulus. Blanchard and Leigh argued, in contrast, that in the current circumstances, it is large and positive. So a fiscal contraction, the basis of the Chancellor’s policies, will lead to the opposite, to a sharp reduction in GDP. Events have shown this to be wrong.

The IMF duo cited approvingly other estimates, derived from the exotically named dynamic stochastic general equilibrium models (DSGE), that the multiplier is large. These models have been all the rage in both top academic circles and central banks. Blanchard eulogised them in an MIT discussion paper published three weeks before the collapse of Lehman Brothers in September 2008. Great progress had been made with DSGE models in understanding how the economy really worked. The state of macroeconomics, he declared, was ‘good’.

An inescapable problem for these highly mathematical models is that they do not take into account sentiment, the narrative which emerges around policy changes. Osborne’s fiscal contraction has gradually created a positive narrative across companies, so they are willing to create jobs and invest. Psychology rather than hard line maths is needed to tell us what the multiplier really is in any particular situation.

As published in City AM on Wednesday 11th June 2014

Exciting times at the Office for National Statistics: the value of drugs and prostitution

Posted by on June 5, 2014 in Economic Theory, GDP, Markets | 0 comments

Exciting times at the Office for National Statistics: the value of drugs and prostitution

The Office for National Statistics (ONS) has just increased the size of the British economy by nearly £10 billion, a figure equivalent to around 0.7 per cent of the economy as a whole. George Osborne has not waved a magic wand. We have not suddenly become more productive. The reason is that, for the first time, estimates of the value added by drugs and prostitution have been included. These activities are included in an economic sector called ‘miscellaneous goods and services’, which, as an indicator of its diversity, already contains things like life assurance and post office charges.

All the member countries of the EU are being encouraged to include the value of drugs and prostitution in their estimates of GDP. Italy led the way. But the impact on the estimated size Italian economy pales into insignificance compared to the event known as ‘il sorpasso’. In 1987, the Italian government announced that their economy was now bigger than that of the UK. The simple reason for this was that GDP estimates had been upgraded by nearly 20 per cent to allow for the substantial amount of black market activity in Italy.

It is easy to be cynical about such revisions to data. In a fundamental sense, nothing changes. The Italians did not suddenly become 20 per cent richer. All that happened was that the estimates of how much income the country generated were revised to try and give a more realistic picture.

The ONS has already been criticised for the size of its estimates of drugs and prostitution. Its task is even trickier than might be imagined. What matters for national accounts, for the estimate of GDP, is not the total amount of sales in any particular market such as prostitution, but how much value is added in that particular market. In other words, the revenue of the suppliers minus all the costs they incur in providing the service. Perhaps an apprehensive member of the ONS was assigned to go and visit Miss Whiplash to form a view on the value of her equipment.

National accounts statisticians such as those at the ONS face challenging decisions every day. The economy cannot simply be put onto a pair of scales and weighed, as in a scientific experiment. A whole series of judgements is required in order to estimate GDP, and the ONS often has to exercise considerable imagination and creativity to work out the contributions of a wide range of factors.

The more one delves into how the ONS arrives at its numbers, the more incredible it becomes that they have any meaning at all. Yet they do. GDP is a rough and ready measure, but it works. When the ONS estimate that it is falling, as it did in 2008 and 2009, employment falls and people feel the squeeze. When it is rising sharply, as in the mid-2000s, the mid-1990s and during the Nigel Lawson boom of the mid and late 1980s, almost everyone feels well off. Respect to the staff of the ONS!

As Published in City AM on Wednesday 4th June 2014

Obama allies lead the way on a positive approach to climate change

Posted by on May 29, 2014 in Economic Policy, Energy, Politics, Public Policy | 0 comments

Obama allies lead the way on a positive approach to climate change

The fracking debate continues apace, with the announcement by the British Geological Survey that there are over 4 billion barrels of oil in the shale rocks of the South of England. The government has proposed new rules of access to land in order to speed up the exploitation of this oil, with payments of £20,000 being made to those living above the land where fracking takes place.

Opinions are highly polarised. In part, they reflect differences of views on climate change, with scepticism being much more widespread amongst the population as a whole than it is amongst scientists. But, perhaps paradoxically, the strongest opposition to fracking seems to come from those who are most vociferous about the potential threat which climate change poses to the planet. Many environmentalists appear to relish the idea of wearing the hair shirt, of making sacrifices to deal with the issue. They do not like the idea that technology might solve the problem.

In America, a much more pragmatic consensus is emerging, as Michael Shellenberger of the Breakthrough Institute in California points out. Shellenberger and his colleagues have argued for a long time that United Nations climate treaty efforts were doomed. Caps on emissions and other efforts that make fossil fuels more expensive would fail in world where competitive alternative fuels do not exist, and where billions of people need to consume more, not less, energy.

Two powerful allies have emerged in the shape of former senators Tim Wirth and Tom Daschle, close liberal and environmental allies of President Obama. Shellenberger draws attention to their recent essay in the widely-respected environmental magazine, Yale Environment 360. Wirth was lead negotiator for the Kyoto treaty, which was centrally focused on limits. Yet Wirth and Daschle now call for a completely different approach.

They argue that there should be a move away from global targets and restrictions to encouraging bottom-up measures to build cleaner and more prosperous economies. It is much easier to persuade electorates to adopt climate-friendly policies when they benefit from them, than when the policies impose costs. As Wirth and Daschle say “such a shift would change the psychology of the climate change issue from one of burden to opportunity, and change the likely outcome from one of hand-wringing about failure to excitement about tangible action to build a better world”.

In contrast, many green activists in the UK and the rest of Europe adopt a deeply reactionary stance, which denies the ability of innovation to solve climate problems, and which relies on the failed approach of global bodies trying to impose targets on individual nations. One of the worst offenders is the current Lib Dem Energy Secretary Ed Davey. As Shellenberger points out, major advances have come from polices inspired within countries, shaped in the national interest, and which bring direct benefits to electorates. The recent shift in America from coal to gas, the French programme of building nuclear power stations, increased resilience to tropical cyclones in India, these are all examples of this positive theme.

As published in City AM on Wednesday 28th May

Two cheers for the global recovery, but doubts remain in the Euro zone

Posted by on May 22, 2014 in Debt, Economic Theory, Euro-zone, Financial Crisis, GDP, Recession | 0 comments

Two cheers for the global recovery, but doubts remain in the Euro zone

Worries are growing about some of the countries in the Euro zone slipping back into double dip recession. By convention, a recession is when national output (GDP) has fallen for two successive quarters. But this is far from being news. In a substantial number of economies, output is lower than it was not just two quarters ago, but three whole years ago, at the start of 2011.

The quarterly numbers have wobbled around up and down over this period, but they are now unequivocally below the 2011 figure in Greece, Ireland, Italy, Portugal and Spain. No surprises there. But the list goes on to include Finland, the Netherlands and the Czech Republic.

An article in the latest American Economic Review by Reinhart and Rogoff puts the events into a longer historical perspective. These are our old friends, one of them a former Chief Economist at the IMF, who declared that when the ratio of public debt to GDP above the 90-100 per cent range, the likelihood of a financial crisis rose sharply. There turned out to be a mistake in their calculations. But this time round, their numbers seem sound. They take 100 examples of financial crises, across time and countries, and look at the subsequent recovery path of GDP. In no fewer than 45 per cent of cases, there was a double dip recession. So the current situation is somewhat better than this across the developed world.

From a historical perspective, there is more good news. Reinhart and Rogoff calculate that on average, following a financial crisis, it takes no less than eight years for GDP to regain its previous peak levels. The median, the figure where half the examples are below it and half above, is six and a half years. The difference between the average and the median is accounted for by a small number of very long recessions, which push up the average.

The latest estimates of GDP in the developed countries now suggest that in most countries the peak level of output was reached in the first half of 2008. By the time of the collapse of Lehman Brothers in September of that year, the West was already in recession. The falls in GDP were pretty sharp, but by the autumn of 2009, growth had resumed almost everywhere. In early 2014, some six years on from the GDP peaks of early 2008, output is now higher in the majority of OECD countries.

The recent financial crisis and the Great Recession of the 1930s are the only examples of truly global crises in well over 100 years. Yet, tentative though it has been, the pattern of recovery seems better than the historical average, despite the dramatic nature of the crash. A key reason is that policymakers did learn from the 1930s, and outside the Euro zone carried out expansionary monetary policies. Without a change of heart by the Euro’s monetary authorities, experience suggests the recession will simply continue, especially in the Mediterranean countries where GDP remains far below the 2008 peak.

As Published in City AM on Wednesday 21st May 2014

Forget the hype. Capitalism has made the world a more equal place

Posted by on May 15, 2014 in Asian Economies, Capitalism, Economic Theory, GDP, Inequality, Markets, Politics, Socialism | 0 comments

Forget the hype. Capitalism has made the world a more equal place

Metropolitan liberals love to be able to criticise Western society. Recently, their lives have been brightened by the extensive discussion on the rise in inequality since the 1970s, especially in the Anglo-Saxon economies. There is a danger that this essentially anti-capitalist narrative will come to dominate the media, paving the way for increased regulation and the sorts of failed statist interventions in the economy which were a consistent theme in British political economy for nearly four decades after the Second World War.

On a global scale, in terms of the degree of inequality which exists between nations, the past 50 years have seen a huge movement towards a much more equal world. And it is precisely the institutional structure of capitalism, of companies motivated, at least in part, by profit, operating in a market-oriented system, which has brought this about. A system which England introduced to the world in the late 18th century with the Industrial Revolution.

Until then, over the whole span of the millennia of organised human society, in terms of difference in living standards between regions, the world had been a very egalitarian place. Most people lived for most of the time on the brink of starvation. A summary measure of inequality which is widely used is the so-called Gini coefficient. In a completely equal society, the Gini coefficient is zero – no inequality – and in a society in which one person has all the income it is 100. So the higher the value, the more unequal the society. For most of human history, the Gini coefficient between regions of the world seems to have been between 10 and 15, a far more equal distribution than currently exists within any individual country.

The dramatic subsequent success of capitalism in certain parts of the world led to a marked widening of the degree of world inequality. Growth did not stand still in, say, Latin America, but it was much faster in Western Europe, North America and Australasia. By the middle of the twentieth century, the world Gini coefficient was just under 50, its peak level. The club of prosperous nations which had formed by 1870 was essentially the same in 1950.

Japan forced its way in, with absolutely spectacular growth in the 1950s and 1960s, closely followed by other East Asian countries such as South Korea and Taiwan. More recently of course, China and, to some extent, India, have adopted capitalist principles of economic organisation and have boomed as a result. In the former Soviet bloc, those countries which oriented themselves to the West and have prospered and others, like Russia itself, have floundered. Even in Africa, which went backwards following independence in the 1960s, there are very encouraging signs of recent progress.

In terms of differences in per capita income levels between countries, the world is now much more equal than it was in 1950, and probably at around the same level that it was in 1850. And it is capitalism which has brought this about.

As published in City AM on Wednesday 14th May 2014

A Different View of World Trade: Why National Accounts Can Be Exciting

Posted by on May 8, 2014 in Asian Economies, Economic Theory, Euro-zone, GDP, Inequality, Markets | 0 comments

A Different View of World Trade: Why National Accounts Can Be Exciting

Imagine that, for some reason, you were forced to choose between having to read a long, turgid novel like Westward Ho or Middlemarch, or a book on the methodology of the national economic accounts. Most people, however reluctantly, would plump for the former. But the latter can at times be very exciting. A recent paper uses national accounts concepts to revolutionise the conventional view of world trade.

Robert C Johnson of the National Bureau of Economic Research has a long article in the latest issue of the top ranking Journal of Economic Perspectives, entitled ‘Five Facts about Value Added Exports’. He uses the fundamental national accounting distinction between gross value and value added. International trade data record the gross value of goods and services as they cross borders. The value added measure subtracts from the gross value of, say, American exports, all the imports into the United States which have been used to produce the exports. Like it says on the tin, the value added measure tells us how much value has been added to the American economy by the exports from that country to the rest of the world.

The measurement of GDP is based on the principle of value added. A company may, for example, produce a car for £10,000. But the value added by that company is not the gross figure of £10,000. It is what is left when the value of all the materials and other inputs bought by that company have been subtracted from the sale price of the car.

Until recent decades, it was reasonable to assume that there was a not a vast difference between the gross value of exports and their value added. But the rapid rise of global supply chains has altered this dramatically.
Johnson’s most spectacular finding has important implications for the UK and the debate about our place in the world. On the conventional measure, manufacturing accounts for some 70 per cent of gross exports across the world, and services for 20 per cent (the rest is basically agriculture and mining). Using the value added measure, manufacturing and service exports are very similar in size, at around 40 per cent of the global total of exports. There are two reasons for this. Manufacturing firms buy substantial amounts from domestic service sector companies, and manufacturing exports in general contain a higher import content. The UK, of course, is very strong in service exports, but apparently less dominant than we believe.

The value added approach can also lead to different conclusions in terms of evaluating exchange rate movements. Strikingly, Johnson finds that the real value of the Chinese currency in these terms is 20 per cent higher than suggested by the conventional approach, so the Chinese exchange rate is not all that misaligned. But intra-EU rates are more misaligned, especially for the peripheral countries which are currently in trouble. So the problems of the Euro zone are worse than is perceived.

Yes, national accounting conventions can certainly be more gripping even than The Killing!

As Published in City AM on Wednesday 7th May 2014

New ideas are needed in economics, but not the tired old statist one

Posted by on May 1, 2014 in Debt, Economic Policy, Economic Theory, Employment, Financial Crisis, GDP, Government Spending, Politics, Public Policy | 0 comments

New ideas are needed in economics, but not the tired old statist one

The annual Institute for New Economic Thinking (INET) conference was held in Toronto earlier this month. INET was created by George Soros in the autumn of 2009 in response to the economic crisis. Mainstream economics bears a heavy responsibility for creating the intellectual climate prior to the crash that the problems of boom and bust had been solved forever. New ideas were needed. Certainly, INET has funded lots of interesting projects which orthodox funding bodies would have rejected.

But a striking feature of the discussions, both formal and informal, at the Toronto meeting was a mood of pessimism. The recovery since the recession has been too weak, and more expansionary policies are required. The state needs to take a more active role in promoting prosperity. A similar note was struck just over a year ago when Olivier Blanchard, the chief economist at the IMF, visited the UK. Unless austerity was abandoned, he warned, the UK faced a triple dip recession. Since then, of course, the British economy has recovered strongly through the efforts not of the public sector, but of the private sector.

The same story describes the progress of the economy in America since 2009. The facts are in direct contradiction to the tone of the Toronto meeting. The latest economic data now suggest that the peak level of GDP in the US prior to the crash was reached in the fourth quarter of 2007. Output the fell steadily until the second quarter of 2009. In the final quarter of 2013, the latest date for which we have GDP data, it had risen by no less than 11 per cent since the trough, and was 6.3 per cent above its previous peak.

The American recovery has been driven by the private sector. Since early 2009, for example, government spending, both federal and local, has fallen by over 7 per cent in real terms. In contrast, capital expenditure by companies has risen by 25 per cent.

The same theme is reflected in the employment statistics. As is usually the case in recessions, employment continued to fall after GDP had started to rise again. For a period during a slump, firms are not sure that the drop in output has stopped, and continue to lay people off. The low point was reached in December 2009. By March 2014, total employment had grown to a level almost 8 million higher. But in the public sector, employment had fallen by 640,000. The private sector in the US has created the best part of 9 million new jobs.

Of course, public policy has played an important role in the recovery. But this has emphatically not been of the interventionist, naive Keynesian public spending kind. To repeat, the public sector has contracted. Rather, it has been expansionary monetary policy and quantitative easing which has created the framework in which recovery could take place. New thinking in economics is certainly needed. But it needs to be consistent with empirical evidence. More public spending and rising public debt are not the answer to recessions.

As published in City AM on Wednesday 30th April 2014

Supply-side growth, not inflation, is the cure to the debt overhang problem

Posted by on April 24, 2014 in Asian Economies, Debt, Economic Theory, Euro-zone, Financial Crisis, Markets, Politics, Recession | 0 comments

Supply-side growth, not inflation, is the cure to the debt overhang problem

In the year to March 2014, consumer prices in Sweden fell by 0.4 per cent. This has prompted the central bank, the Riksbank, to abandon the normally cautious language used by such institutions. Over the same period, inflation was negative in a further seven European countries, such as Greece, Portugal and Spain. In eight other countries, inflation was still positive but very low, running at an annual rate of less than 0.5 per cent.

The Riksbank argues that these very low, often negative, rates of inflation are caused by a ‘very dramatic tightening’ of monetary policy. There is a definite risk of a slide into a prolonged depression similar to that of the 1930s.

Surely low inflation is a good thing? Well, up to a point, Lord Copper. The current batch of policy makers, scarred by the double digit inflation rates of their formative years in the 1970s and early 1980s, have been obsessed with controlling inflation for at least the past twenty years. They seem to have succeeded. The highest rate of inflation in Europe is currently that of the UK, at a mere 1.6 per cent a year. Thirty years ago, it was well in excess of 20 per cent a year.

The problem with low inflation is that debts, both public and private, retain their real value. A classic way in the past to cure a large debt overhang was to allow inflation to erode its value. Immediately after the Second World War, for example, the British government appeared virtually bankrupt. Public sector debt was 250 per cent of GDP, compared to its current level of around 80 per cent, a figure which still gives cause for concern. But the debt was fixed in nominal terms. Anyone who bought a government bond for £100 and held it to maturity would get £100 back. Inflation ensured that £100 was not worth what it used to be.

Under the long period of Conservative rule from 1951-64, inflation was low, with an annual average of 3.3 per cent. Even this was sufficient for prices to rise nearly 60 per cent. £100 in 1951 was only worth £64 in 1964. Inflation plus strong real economic growth, which expanded GDP considerably, wiped out the problem of public debt.

The real question is whether policy makers can do anything to increase inflation. The fact is that they did not collectively, across the developed world, suddenly become geniuses over the past two decades and learn the secret of inflation control. Inflation fell everywhere, despite, until the crash at least, steadily falling unemployment. The single most important reason for this was the integration of India and China into the world economy, and the huge increase in competitive pressure which this brought. This has not gone away.

We seem to be stuck with very low inflation for a considerable period. Instead of trying to put prices up, policy makers should encourage growth. Not by irresponsible increases in public spending, but by tax cuts and encouraging the entrepreneurial culture.

As published in City AM on Wednesday 23rd April

Maybe We Need More Markets and Fewer Regulators

Posted by on April 17, 2014 in Economic Theory, Executive Pay, Markets, Networks | 0 comments

Maybe We Need More Markets and Fewer Regulators

Economics provides us with a really big insight into how the world works. People respond to changes in incentives. A great deal of public policy is based on this principle. You want fewer people to drive into Central London? Introduce a congestion charge and make it more expensive. It works.

In practice, of course, estimating exactly how much any given change in a particular incentive alters behaviour can be a difficult problem. Indeed, changing incentives can sometimes have unforeseen consequences, which may appear perverse.

A couple of months ago, a school in Milton Keynes proposed to fine parents £60 if their child was late more than 10 times in a term. We do not know yet how this has worked out. But a similar scheme in a day care centre in Israel seemed to backfire. After the fine had been introduced, there was a rise, not a fall, in the number of parents delivering their children late. People now knew the price – the fine – for being late. They could then make judgements as to the value of the effort required to arrive on time compared to the cost of being late. Previously, they had only incurred the displeasure of the teacher. A recent book by the Harvard political philosopher Michael Sandel cites this as an example of the intrinsic limits to the use of markets. Social norms, not incentives, matter. His book has metropolitan liberals both here and in America gurgling with pleasure.

But the problem essentially arose not because of the limitations of markets, but because there were too few markets. Without a market, the disapproval could not be priced transparently. Parents just had to guess what this was worth, and they clearly placed on average a higher price on it than the level of the fine set by the school. The school was also at fault for not increasing the fine by trial and error steps until it started to do its intended job.

More challenging is the study carried out by the Frameworks Institute in America on public attitudes towards global warming. The document, ‘How to Talk About Global Warming’, reported that substantial numbers of people, when faced with how they respond to more extreme weather, choose to buy an SUV to help them cope, rather than to support increases in fuel-efficiency standards.

The instinctive response of a regulator to this finding would be to say that these individuals only had access to incomplete information. With more and better information, they would then respond to incentives so that they made the ‘correct’ choice. But more information does not necessarily help. Al Gore’s 2006 film about global warming, ‘An Inconvenient Truth’, received enormous publicity. But the number of Americans telling Gallup that the media was exaggerating global warming has grown from 34 per cent then to 42 percent today.

A popular policy for avoiding a financial crisis is to restrict bankers’ bonuses, giving them different incentives. It may work. But understanding exactly how incentives operate in practice does not always have a pat solution.

As published in City AM on Wednesday 16th April