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This year’s Nobel economics laureates have made the world a better place

Posted by on October 16, 2019 in Blog, Nobel Prize | Comments Off on This year’s Nobel economics laureates have made the world a better place

This year’s Nobel economics laureates have made the world a better place

This year’s Nobel Prize in economics, announced on Monday, was a ray of sunshine amid the prevailing media gloom.

The Prize was awarded for the work the new laureates had done on the alleviation of global poverty. This is one reason to be cheerful about it. Another is that Esther Duflo became only the second ever woman to win the prize, along with her close collaborators Abhijit Banerjee and Michael Kremer.

In addition, the winners have made important developments in how economists go about solving problems. These individuals are a key part of the drive to move economics on from an obsession with pure theory towards making it much more empirically-based.

At first sight, the award is very conventional. The laureates retain the basic view of economists: poor people are essentially rational agents, trying to take decisions which are in their own interests.

They may have much more difficulty in accessing relevant information than others, and face many more constraints on their ability to make the best decision. But they are just as rational as everyone else.

The similarity with tradition ends there. For the laureates’ main innovation is to introduce the use of randomised controlled trials (RCTs) into economics.

One hundred years ago, the British statistician Ronald Fisher was revolutionising the principles of statistical analysis. The maths that he developed enabled the testing of new medicines to become much more scientific.

The basic idea is to have a group of people who take the new drug and a group who do not.  The key thing is to assign them into the groups purely at random. This way, any difference in the outcomes of the group which was treated and the group which was not can reasonably be thought to be due to the impact of the drug.

Duflo and her colleagues, along with others they have inspired, have addressed a wide range of real-life policy problems in the developing world using the same approach, with hugely successful results.

Examples include discovering how best to get farmers to use more effective fertilisers, how to increase the uptake of safe water filters, how to improve patient safety in hospitals, how to spread advice most effectively about tuberculosis using community-based counsellors, and how to improve safety in public service vehicles.

The technique of RCT has even been applied in developed world settings. For example, experiments have been carried out with job applications, sending them out with names which strongly imply the ethnic background of the applicant and seeing if the response differs across groups. (It does.)

The approach of RCT is not without critics in economics, even now.  An important issue, for example, is that experiments are typically on a small scale, and there may be issues when they are scaled up.

But Duflo and colleagues, unlike some past economics laureates, have definitely helped to make the world a better place.

As published in City AM Wednesday 16th October 2019
Image: Nobel Prize by Florian Pircher via Pixabay

Forget ‘reparations’, scrapping subsidies is the way to help get Wales back on its feet

Posted by on October 10, 2019 in Behavioural Economics, Blog, Economy, Wales | Comments Off on Forget ‘reparations’, scrapping subsidies is the way to help get Wales back on its feet

Forget ‘reparations’, scrapping subsidies is the way to help get Wales back on its feet

Get ready to put your hands deep into your pockets for the boyos and girlos of the Welsh Valleys.  Adam Price, the leader of Plaid Cymru, called last week for the UK to pay “reparations” to Wales for the crime of reducing the country to poverty. For centuries, Wales has (apparently) been stripped of its natural resources and “deprived of its inheritance”.

Price’s demands are almost beyond parody. But they could become a frightening reality if a coalition government led by Jeremy Corbyn and various nationalist and green parties wins the next election.

The then-Labour leader of the Welsh Assembly, Carwyn Jones, set the new tone of Welsh whingeing the day after the Brexit vote in 2016.  “Wales,” he declared, “must not lose a penny of subsidy”. Wales, of course, had voted Leave.

There, in a sentence, was the economic policy of the Welsh government: hold out the begging bowl.

Wales is the poorest of the economic regions of the UK. Household income per head in 2017 – the latest date for which figures are available – was only £15,754, compared to the UK average of £19,514. The gap with the wealthiest regions is massive – the south east has an income per head 43 per cent higher, and London is no less than 77 per cent ahead.

It has not always been like this. In the early decades of the Industrial Revolution, the valley towns were probably the richest in the world.

Merthyr Tydfil, now a byword for poverty even by the standards of Wales, led the way. It was the first genuinely industrialised town in the history of humanity. In 1831, 96 per cent of its labour force worked in manufacturing and mining.

Many forces are at work in the story of Wales’ decline, but in modern times, it has often not exactly helped itself. The key to a successful economy is a skilled labour force, but in 2001, the Welsh government scrapped the publication of league tables for the performance of schools. This both deprived parents of information, and reduced the incentive for poor schools to improve.

The outcome was predictable. A Bristol University study estimated that it led to a fall of 1.92 GCSE grades per pupil. In 2015, the Welsh Assembly reversed the decision, but a lot of damage had been done to the human capital of Wales. For over a decade, students were less well educated than they could have been.

This lack of a skilled talent base inevitably holds back enterprise. This, along with other counter-productive decisions, may be why Wales is increasingly dependent on public sector jobs. Overall, Wales raises £14bn a year less in taxes than it spends on public services.

Might Wales be able to turn its fortunes around if it were forced to consider its economic decisions more carefully? After all, the policy of subsidising underperforming regions has been tried for decades. It has made no difference.

So instead of paying reparations, perhaps we should consider withdrawing subsides, as New Zealand did with great effect. By removing the handouts which are distorting Welsh decision-making and causing a vicious cycle of subsidy demands, we can give Wales the chance to restore the enterprise which used to flourish in the nation.

As published in City AM Wednesday 9th October 2019
Image: Welsh Assembly by Anne Siegel via Wikimedia Commons licensed under CC by 2.0

What kind of person crosses the Nevada desert to investigate UFO conspiracies?

Posted by on October 3, 2019 in Behavioural Economics, Blog, Economic Theory | Comments Off on What kind of person crosses the Nevada desert to investigate UFO conspiracies?

What kind of person crosses the Nevada desert to investigate UFO conspiracies?

Area 51 is a mysterious place.

Located deep in the Nevada desert, it is home to highly classified US military operations. Rumours abound that it harbours secrets about extraterrestrial life.

In June, a podcaster released an interview with someone who claims to have studied flying saucers in Area 51. The video spread like wildfire on the internet.

A proposal for an event took shape, labelled “Storm Area 51, They Can’t Stop All of US”. The idea was for large numbers to gather on 20 September in a couple of tiny Nevadan towns next to Area 51. The security defences would be overwhelmed. Citizens could then see for themselves the aliens being kept secret by the military-industrial complex.

Around two million individuals pledged on Facebook to attend. Estimates vary, but it seems that in reality only some 2,000 turned up in the nearby towns. Of these, a mere 200 or so actually arrived at the security fences which guard the area. No one tried to cut or climb over the barriers.

The event has subsequently attracted a great deal of ridicule in both the mainstream and social media. But it usefully illustrates two important principles in economic theory.

The first is the so-called free rider problem. It occurs when some individuals fail to contribute their fair share to the cost of a shared product or services.

An everyday example is that of a shared kitchen space in an office block. Provided enough people are willing to keep it clean, there is an incentive for others to free-ride and enjoy the clean kitchen without doing anything themselves.

The problem is that where free riders exist, the product or service in question tends to be under-produced. In the kitchen example, the supply of people willing to clean may drop off.

Exactly the same thing took place outside Area 51. Everyone wanted the razor wire fences to be cut, so they could consume the “product” of entering the site to see if it contained aliens. But not enough – in fact no one at all – was willing to cut the wire and incur the potential cost of being shot.

The event also illustrates the importance of revealed rather than stated preference.

Economists traditionally attach little weight to surveys in which people are asked hypothetical questions about what they might do or pay in different situations. These constitute stated preferences.

Instead, economists prefer to infer preferences from the actions people actually take. If you always buy Pepsi rather than Coke, you have revealed your preference between the two.

Pressing a button to say you “like” something merely states your preferences.  The cost of doing this is virtually zero. Revealing preferences may involve substantial costs, such as travelling to the Nevada desert.

This fundamental point is being lost in many of the reactions of decision-makers to events on social media. Far too much importance is being attached to actions which are almost costless.

The UFO buffs of Area 51 have done a public service by providing a clear example of this principle, and of evidence that “likes” do not necessarily equal action.

As published in City AM Wednesday 2nd October 2019
Image: Area 51 by RJA1988 from Pixabay

In such volatile times, the safest assets aren’t necessarily what investors think

Posted by on September 26, 2019 in Blog, Markets | Comments Off on In such volatile times, the safest assets aren’t necessarily what investors think

In such volatile times, the safest assets aren’t necessarily what investors think

Given the climate of intense uncertainty, the FTSE index remains remarkably resilient.

It currently sits almost bang in the middle of the 7,000-7,600 range, where it has been since the beginning of January 2017.

Brexit does not seem to trouble share prices. Nor do the threats by John McDonnell, Labour’s shadow chancellor, to carry out extensive raids on shares and put workers on the boards of companies.

These risks and uncertainties are “priced in” by the market. The concept of market efficiency, revered by economists, means that all available information is taken into account in the process of setting share prices. The implication is that pension funds and traders alike appear to attach only a small probability to a disruptive Brexit or to Labour forming a government.

Of course, it is precisely when an unexpected disruptive event takes place that the market ceases to be efficient. Market participants need time to absorb and process the implications of the new environment, and do so at different speeds. There is widespread disagreement about what the “rational” price of an asset is, and as a result volatility abounds.

So despite the sanguine way in which the market is currently behaving, there must be many investors in shares of various kinds who are casting anxious eyes back over their shoulders.

They can take comfort from an article published in the latest Quarterly Journal of Economics by Oscar Jorda, of the University of California, and colleagues. Its findings represent an important addition to scientific knowledge.

The authors publish estimates of the annual total returns on equities, housing, long-term government bonds and short-term fixed interest government securities (three-month Treasury bills in the UK). The impressive nature of the work is not simply that it covers 16 advanced economies. Data is provided for every year between 1870 and 2015.

Government debt in countries like the US and the UK is considered a “safe” asset. But one of the most remarkable findings of the research is that the real return (in other words gains after allowing for inflation) on such assets has been very volatile, often even more so than the supposedly “risky” assets such as equities.

This is quite contrary to the conventional view of how the world is supposed to work. If one asset gives a higher return than another, the expectation is that its price is more volatile. There is a trade-off between risk and return. But this seems not to be the case in reality.

Intriguingly, both equities and residential real estate have yielded total real gains of no less than seven per cent a year. Housing outperformed shares from 1870 until the Second World War, and the position has been reversed since then.

Governments come and go, as indeed have two major world wars. But over the course of well over a century, holding equities and not worrying about short-term fluctuations has yielded rich rewards.

Obviously, the past is not necessarily a guide to the future – but the past here spans evidence from nearly 150 years. Something to think about if you’re looking to invest at a time of such global political uncertainty.

As published in City AM Wednesday 25th September 2019
Image: Investment via Pixabay

Britain’s car industry could weather a storm of tariffs better than you’d think

Posted by on September 19, 2019 in American Economy, Blog, Industry | Comments Off on Britain’s car industry could weather a storm of tariffs better than you’d think

Britain’s car industry could weather a storm of tariffs better than you’d think

The latest American Economic Review contains a timely paper. Keith Head and Thierry Mayer, at the University of British Columbia and the Banque de France respectively, estimate the consequences of changes in tariff and non-tariff barriers to the car industry.

They look at both US-led protectionism and Brexit, and calculate how these might change the location of production.

The car industry is of course the tradeable industry par excellence. For example, 50 per cent of cars sold in OECD markets are assembled in locations that are neither the headquarter nor the consuming country.

The United States had threatened to impose so-called Section 232 tariffs of 25 per cent on cars imported from Canada and Mexico on national security grounds. And President Trump did bring in such tariffs in aluminium and steel, although in the summer America reached separate bi-lateral agreements with Canada and Mexico.

Head and Mayer estimate that Section 232 tariffs would have devastated the Canadian and Mexican car industries. Even if the two countries retaliated, car production would have fallen 40 per cent in Mexico and 67 per cent in Canada.

A key reason for these massive numbers is that almost all the brands made in Canada (11 of 12) and Mexico (10 of 14) are also made in the US. Under tariffs, there would be a strong incentive to shift production to America.

The results for the Brexit scenario are quite different.

The simulation is of a hard Brexit. UK exports face the European Union’s 10 per cent Most Favoured Nation tariffs, and Britain reciprocates at the same rates. The authors assume that we cannot roll-over existing EU agreements with third-party nations, and that the tariff structure with them reverts to the same basis.

The EU runs a large trade surplus with the UK in cars, so higher tariffs mean that we have less to lose. The British car industry actually gains through the protective effect of tariffs.

Overall, Head and Mayer estimate a fall in production of only four per cent. This arises purely from their calculations of trade with countries such as Turkey and South Korea.

The paper is impressive in its detail and in the rigour of its analysis. These are the great strengths of much modern economics.

Of course, it also has its weaknesses. The analysis is, to use a jargon phrase, a purely static one: it takes the technology and the structure of production as given, and traces how tariffs, by changing costs and so the incentives of firms to produce in different locations, work through the industry.

It does not take into account any dynamic changes: how productivity or innovation (which alter the structure of production) might respond to changed circumstances.

Assessing these factors is a much harder task. Most would agree, for example, that a hard Brexit under Jeremy Corbyn would lead to ossification, although this is a matter of judgement and not analysis.

Still, despite these limitations, the study shows that the impact on production of a hard Brexit even in an industry which thrives on trade would be negligible. It makes interesting reading at a time when hysteria over a no-deal Brexit is once again reaching a fever pitch.

As published in City AM Wednesday 18th September 2019
Image: Final Assembly by Brian Snelson via Wikimedia is licensed under CC BY 2.0

Watch out fiscal conservatives – the mood has shifted and the spending taps are on

Posted by on September 12, 2019 in Blog, Government Spending | Comments Off on Watch out fiscal conservatives – the mood has shifted and the spending taps are on

Watch out fiscal conservatives – the mood has shifted and the spending taps are on

The Autumn Spending Review announced by the chancellor Sajid Javid barely raised a ripple last week.

Yet the increase planned in 2020/21 for what the Treasury calls “day-to-day departmental spending” is the highest for 15 years, no less than 4.1 per cent in real terms.

This spending pays the running costs of public services, the main component of course being public sector wages. An increase of this size ought to mean better services, although the Gordon Brown years demonstrated quite clearly that more spending need not mean an improved service.

This number only represents 37 per cent of total public spending. Considerably more is spent on welfare benefits, pensions, and interest on the national debt. The squeeze is still on here, so the overall rise in total current public spending is more modest, at just 2.0 per cent after allowing for inflation.

Nevertheless, Javid’s plan does represent a step up in the move away from austerity envisaged by the former chancellor Philip Hammond in last year’s autumn Spending Review.

Still, this pales in comparison to what is envisaged for the public finances under the current Republican administration in the US. The Congressional Budget Office (CBO) there notes that the federal budget deficit for 2019 will be $960bn. Budget deficits are projected to average $1.2 trillion a year between 2020 and 2029.

The CBO calculates that this will push up federal government debt to 95 per cent of GDP, the highest level since the late 1940s.

On both sides of the Atlantic, the move away from austerity represents a major shift in the narrative around public sector debt. It is now, it seems, okay to feel relaxed about government borrowing.

The mood in mainstream academic macroeconomics has also shifted. Ken Rogoff, a former chief economist at the IMF, said in 2010 that a debt-to-GDP ratio above 90 per cent risked a substantial reduction in the long-term growth rate (a view shared by many in developed countries), triggering a wave of austerity.

Yet in February this year, he changed his tune, saying that the steady decline in global real interest rates meant that the debt-to-GDP ratio was no longer a concern.

Olivier Blanchard, another former IMF chief economist, made a similar point earlier this year, when he argued that, as the real rate of interest is lower than the real growth rate, future interest payments on debt could be met out of the proceeds of growth.

While this is not necessarily unusual (such a state of affairs has been the case often enough in the last 150 years), the argument that governments should use it as an excuse to build up debt very definitely is.

The shift in attitude has implications in politics, too. For years, right-wing parties have painted the left as being as being spendthrift and irresponsible.

With an election seemingly inevitable in the UK, it will be interesting to see whether the Conservatives – having turned on the taps – can make that narrative stick to Jeremy Corbyn.

As published in City AM Wednesday 11th September 2019
Image: Taps via PxHere is licensed under CC0 1.0

Economic theory can offer a lesson to struggling football clubs

Posted by on September 5, 2019 in Blog, Sport | Comments Off on Economic theory can offer a lesson to struggling football clubs

Economic theory can offer a lesson to struggling football clubs

The expulsion of Bury FC from the English Football League last week continues to generate a huge amount of sound and fury.  

Regardless of the apparently dodgy nature of some of Bury’s transactions, the simple fact is that the club overspent massively in order to gain promotion from League Two last season.

The surge in the costs involved of running a football club has been dramatic. Over the summer, for example, Premier League clubs were involved in transfer deals worth a collective £1.4bn. Marcus Rashford signed a new contract with Manchester United in July worth £250,000 a week, and quite a few players get even more.

Professional sporting clubs are an unusual sort of beast from the perspective of economic theory.

Economists agree that companies act to maximise profit. The concept is not completely clear-cut – a pricing policy, for example, which gouges customers and increases profits this year may eventually prove disastrous.

But generally sustainable profit is the aim. But sporting clubs do not even attempt to maximise profits. Their principal motivation is to maximise costs. Spending more money means getting better players. And better players mean more success on the field.

The correlation between the total amount a team spends on its players and its league position is not perfect, but it is high. It is the principal reason for success. So there is an inherent tendency for clubs to live beyond their means, unlike almost all other businesses. It is performance on the field which matters.

The behaviour of clubs, however, nicely illustrates another concept in economics. This is the potential conflict between individual and collective rationality. It is the collective interests of top soccer clubs to scale down the payments to players. The problem for clubs is that if they offered stars laughably small amounts, say a mere £100,000 a week, other top clubs both here and in Europe would entice them away.

It is not in the individual interests of the club to allow this to happen.

One possible solution is for the regulatory body of a game to impose a binding salary cap, limiting the total amount which can be spent on a team.

This works well in American football, for example. As an approximation, all the teams spend the full amount. So unlike soccer, where a handful of clubs dominate, success rotates around.

There was, in fact, a maximum wage in force in soccer until 1961. It was only twice average earnings, around £1,200 a week in today’s money, and was ended by the threat of a players’ strike.

Nowadays, of course, players able to perform in the Premier League are part of a global market. American footballers are not. The game is hardly played anywhere else.

Players with Premier League skills thus are exported to and imported from abroad – what economics describes as a tradeable market. In the lower divisions, however, the players are non-tradeable in this sense.

A salary cap, no matter how tightly drawn up, is always open to creative abuse.  But economics suggests that it is the way forward for teams in divisions below the Premier League.

As published in City AM Wednesday 4th September 2019
Image: In Memory of Bury FC by David Dixon via Geograph is licensed under CC BY-SA 2.0

Supply and demand at work, or just good bargaining? The reality behind CEO pay

Posted by on August 29, 2019 in Blog, Business | Comments Off on Supply and demand at work, or just good bargaining? The reality behind CEO pay

Supply and demand at work, or just good bargaining? The reality behind CEO pay

A report published by Deloitte a couple of weeks ago will have enhanced the feeling of holiday wellbeing for many people.

The median annual pay for bosses of FTSE 100 companies fell in 2018 to £3.4m, compared to £4m in 2017.

This is the lowest level since 2014, when the UK brought in rules which require firms to report a single figure for chief executive pay.

Criticism of the remuneration of top corporate executives has been growing strongly for some time. In June, for example, the shareholders of Netflix voted down – albeit by a very narrow margin – the firm’s executive officer compensation plan.

Netflix grew from nothing in 1997 to a current value of around $150bn, and over the last four years its share price has almost trebled. But shareholders still did not like the chief executive’s proposed package.

Top executives may feel rather aggrieved at this mounting unease over their “emoluments” – a much more suitable word for these grandiose packages.

After all, does not basic economics provide a sound justification for their pay? In the textbooks, prices are set by the interaction of supply and demand. If something is in short supply, such as the skills of executives, the price will be bid up.

Remarkably, a more sophisticated version of this argument is advanced by some leading members of the economics profession.

Greg Mankiw, a top Harvard economist, is one of the biggest cheerleaders. Technological change, he argues, usually increases the demand for skilled labour. As such, unless society is able to educate and train people so that the supply of skilled labour increases at least as much as the demand, the earnings of skilled workers will rise relative to the rest of the labour force.

Technology is further invoked by some to justify the pay of those at the top. Because of a truly dramatic increase in the level of connectivity in society, highly talented individuals have been able to leverage their talents across global markets and capture rewards that would have been unimaginable in earlier times.

This is certainly the case with stars of popular culture and sport. A hundred years ago, for example, the only people who could have any direct experience of Manchester United playing football live were those present in the stadium during the game. Now, the team can be watched by literally billions around the world, using a variety of delivery channels, and the players reap huge amounts as a result.

However, it is not at all apparent that the same argument applies to corporate executives.

The huge growth in business schools in recent decades, for example, has presumably led to a substantial increase in the supply of people capable of filling top executive roles.

The fact is that, in many situations, there is an inherent indeterminacy around a price – or a pay package – when it is being set. The Oxford economist Francis Edgeworth argued over a century ago that “in pure economics there is only one theorem, but that it is a very difficult one: the theory of bargain”.

Corporate executives have certainly exhibited great bargaining skills in recent decades. But it seems that, at last, their bluff is being called.

As published in City AM Wednesday 28th August 2019
Image: Handshake via pxhere licensed under CC0 1.0

Stamp duty contortions and eco-warriors with private jets? Welcome to silly season

Posted by on August 22, 2019 in Blog, General | Comments Off on Stamp duty contortions and eco-warriors with private jets? Welcome to silly season

Stamp duty contortions and eco-warriors with private jets? Welcome to silly season

August is traditionally the silly season. Brexit makes this year slightly different, of course, but it is good to see a fine British tradition still being preserved. Silly stories abound.

Sajid Javid was linked (erroneously, he now claims) with the idea of fixing the housing market by making sellers pay the stamp duty rather than the buyers.

Sentiment around the housing market has been weakening for some time. This is certainly the case in London, where the large amounts of duty charged on expensive sales have acted as an additional deterrent.

But we might reasonably wonder how shifting the tax from the buyer to the seller will make any difference at all.

An activity, the sale of a house, is being taxed. At one extreme, the buyer could offer the asking price less the full amount of the tax. At the other, the seller could add the tax to the price. Or the two could strike a bargain around what proportion each will pay. It really does not matter who is legally responsible for the tax – its existence will still have an impact on people’s desire and ability to buy and sell.

An even dafter policy idea emerged from Bright Blue, ostensibly a “pressure group for liberal conservatism”. The think tank seems to have forgotten the most basic principles of how economic incentives operate.

The policy wonks proposed higher fines for motorists who leave their engines idling. They went on to suggest that a proportion of the fines should be paid to the people who reported offenders to the police. So for the cost of a phone call or the time spent composing an email, you could trouser around £50.

That beats working as far as most people are concerned. The police would be swamped, not just with genuine incidents, but with scores being settled.

And Prince Harry seems to be having a silly season all of his own. He suggested that people can be “unconsciously” racist. He himself demonstrates how “unconsciously” one can win the Monty Python Upper Class Twit of the Year award.

Not content with lecturing a Google gathering in Sicily, attended by hundreds of private planes, on the evils of climate change, he and Meghan Markle flew for a six-day break to Ibiza, again on a private jet. Only 48 hours after their return, off they went again on an “Uber for billionaires” to Nice.

It is in these trying times that the house Bible of the metropolitan liberal, the Guardian newspaper, reliably provides light relief. The travel pages eulogise “eco-lodges” in places halfway across the world like Cambodia and Peru.

A piece last week created mental agony for the writer. A social enterprise, Beyond Food, is helping homeless people turn their lives around by teaching them a skill– a Good Thing not just in itself, but because it is not run by wicked capitalists.

But the skill is how to barbecue meat – boo, hiss. At least, we are assured, the meat is “sustainable”.

Markets, incentives, and social norms are the standard meat and drink of this column – and normal service on them will be resumed next week, when silly season is at last drawing to an end.

As published in City AM Wednesday 21st August 2019
Image: Private Jets via Pixabay licensed under CC0 1.0

 

What was behind Friday’s National Grid outage? Network theory, not conspiracy

Posted by on August 15, 2019 in Blog, Energy | Comments Off on What was behind Friday’s National Grid outage? Network theory, not conspiracy

What was behind Friday’s National Grid outage? Network theory, not conspiracy

National Grid is getting a kicking in the aftermath of last Friday’s electricity blackout.

Potential explanations swirl around both social and mainstream media. The system cannot cope with too much wind-generated electricity. The Russians hacked into the computers.

A puzzling aspect is that the initial shock to the National Grid was a very small one. The gas-fired station at Little Barford in Bedfordshire went down. Within minutes, a massive power outage had taken place.

Rebecca Long-Bailey, Labour’s energy secretary, has honed in on this. The fact that a small outage had such huge consequences is, to her, clear evidence of under-investment, and makes the case for public ownership. But scientific advances over the past 20 years provide a quite different perspective.

The National Grid is, by definition, a network. Power stations receive supplies from various sources, and then the energy is transmitted from them to businesses and households via power lines.

A key discovery in the maths of how things spread across networks is that in any networked system, any shock, no matter how small, has the potential to create a cascade across the system as a whole.

Duncan Watts was at Columbia University when he published a groundbreaking paper on this in 2002 with the austere title “A simple model of global cascades on random networks”. He was subsequently snapped up by first Yahoo, then Microsoft.

Watts set up a highly abstract model of nodes, all of equal importance, connected on a network. Initially, all of these were, putting it into the Grid context, working well. He investigated the consequences of what happens when a very small number of them malfunctioned.

The results were surprising. Most of the time, the shocks – made deliberately small by assumption – were contained and the network continued to function well. But occasionally, a small shock triggered a system-wide collapse.

Watts coined the phrase “robust yet fragile” to describe this phenomenon. Most of the time, a network is robust when it is given a small shock. But a shock of the same size can, from time to time, percolate through the system.

In the mid-2000s, the academic Rich Colbaugh was commissioned by the Department of Defense to look into the US power grid.

The physical connectivity of the network had increased substantially due to advances in communication and control technology.

The total number of outages had fallen – when one plant failed, it was easier to activate a back-up. But the frequency of very large outages, while still rare, had increased.

I collaborated with Colbaugh on this seeming paradox. We showed that it is in fact an inherent property of networked systems. Increasing the number of connections causes an improvement in the performance of the system, yet at the same time, it makes it more vulnerable to catastrophic failures on a system-wide scale.

There may still prove to be a simple explanation of the sort loved by decision-makers the world over. But the science of networks may shed more light than theories based on conspiracy and incompetence.

As published in City AM Wednesday 14th August 2019
Image: Electric Pylons via PublicDomainPictures licensed under CC0 1.0