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A lesson in cognitive dissonance for the Corbynites

A lesson in cognitive dissonance for the Corbynites

Behavioural economics — which extends the ability of economics to explain the world — has become very fashionable.

Richard Thaler, Nobel Prize winner for his work in this area, observed that most of the time, the rational choice model of standard economics works well. People gather information on the various alternatives open to them, and choose the one which fits their preferences most closely.

Behavioural economics comes into play when people are observed to deviate from the predictions of this model. To explain this, Thaler points out that economists borrow bits from psychology and add them on to their basic rational choice theory. He has shown how various psychological concepts, such the so-called “endowment effect” and the “sunk cost fallacy”, can be used to explain why people make irrational choices.

Yet one important piece of psychology which economists have not used so far is the concept of cognitive dissonance.

The US psychologist Leon Festinger encountered a classic example when he infiltrated a group which believed that a catastrophic flood would end the world on 21 December 1954. The appointed day came and went, and the world was still there. Rather than processing this information rationally and abandoning their discredited beliefs, group members adhered to them even more strongly. The fervour of their proselytising increased.

Another important instance is seen in the Ukrainian famine of the early 1930s. On Stalin’s instructions, the Soviet military and armed members of the Communist Party seized the grain in the Ukraine. Millions died as a result.

The ardent young Communists turned on the Ukrainians and accused them of terrorism.  The peasants were, despite all the evidence to the contrary, deliberately starving themselves to death in order to discredit socialism. Any Party member who disagreed was shot.

A much less harrowing example is given by Jeremy Corbyn and his cult during the General Election here.

The Friday before polling day, I was in my home town of Rochdale, having a drink with a couple of long-standing friends, both very experienced local Labour members. They were certain that Labour would lose. Brexit was certainly being mentioned on the doorsteps as a reason why voters weren’t supporting Labour, but the main reason was Corbyn.

My friends made specific predictions on the basis of rational analysis of the evidence. The neighbouring seat of Heywood and Middleton (majority 8,000 in 2017) would be lost. It was.  Elsewhere in Greater Manchester, the Tories would win Leigh, Labour since 1922. They did.

Information of this kind, gathered on the ground by experienced agents, was fed back to the Labour leadership throughout the campaign from all over the country. It was pointedly ignored, possibly on the grounds that the informants were right-wingers trying to discredit the Dear Leader.

The electorate took some time to discover the reality of Corbyn. But once they had done so, far from displaying cognitive dissonance, they made a rational choice.

Now Labour, if it is ever to recover from defeat, should learn the same lesson.

As published in City AM Wednesday 18th December 2019 
Image: Jeremy Corbyn via Flickr licensed for use CC BY-2.0
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For richer or for poorer? The economic case for marriage is worth remembering

For richer or for poorer? The economic case for marriage is worth remembering

An important piece of social news emerged last week. According to the Office for National Statistics, the divorce rate in 2018 fell to its lowest level for nearly 50 years.

The overall trend is clear and well-established. The divorce rate rose steadily from the late 1950s, with sharp rises immediately following the Divorce Act of 1969, to the early 1990s.

Since then, with minor blips, the rate has fallen. It now stands at just over half the level of its 1993 peak.

Economic theory has a lot to say about marriage and divorce.

This may be surprising to many. But economists believe that the theory’s basic model, that of someone making a rational choice from the alternatives on offer in any given situation, is universal in its application. The institution of marriage is a key social phenomenon, and so the rational choice model ought to be able to give an explanation as to why it exists.

The Chicago economist Gary Becker received the Nobel prize in 1992 for his pioneering work in this area. Essentially, the participants in a marriage reap what economists see as the gains from trade. One partner goes to work and earns money, and the other raises children and does housework. By each concentrating on the activity which he or she does better than the other, both parties benefit.

Implicitly, Becker took as the social background to his theory the institutional structure of marriage and the family as it existed in the Midwest of the USA in the 1950s. Gender roles have certainly evolved since then, but his basic insights remain valid.

A much more general theory of marriage is linked with the work of economists such as Bob Rowthorn, former head of the Cambridge economics department.

In this approach, marriage is seen as an institution for providing couples with the confidence to make long-term investments in their relationship. The basic theme is that marriage should be seen as an institution for creating trust between individuals in the sphere of family life.

Given this emphasis on both trust and the long term, it is curious that many metropolitan liberals, not least Supreme Court justice Lady Hale when she headed the family courts, appear to see marriage as no better than any other form of family structure.

The empirical evidence overwhelmingly supports the special value of marriage for the individuals concerned, for their children, and for society. Indeed, there are few hypotheses in the social sciences which receive such clear confirmation from serious research.

For example, most children grow up to be useful and well-adjusted members of society regardless of family structure. But the incidence of crime and mental illness among children whose parents have divorced, while low as a proportion of all such children, is much higher than it is among those whose parents remain married.

The falls in the divorce rate can be seen as rational learning by the generation who were children themselves when divorce was at its peak. They see the costs imposed on them. And society as a whole will reap the benefits in years to come.

As published in City AM Wednesday 4th December 2019 
Image: Wedding Rings via Piqsels licensed for use CC0 1.0
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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
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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
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Retailers beware, the online shopping revolution isn’t going anywhere

Retailers beware, the online shopping revolution isn’t going anywhere

Another week, another retailer biting the dust. The baked potato specialist Spudulike has closed all 37 of its branches, with a loss of nearly 300 jobs.

Shopping centres are undergoing a sudden and dramatic squeeze, with many retailers only able to stay in business if granted a dramatic rent reduction.

Last week, Intu Properties, owners of the prestigious Lakeside and Trafford centres, announced a loss of £840m pre-tax. Net rental income fell by 18 per cent in the first half of this year.

Local authorities have become big owners of shopping centres to try to revive their town centres. But in most cases, the council taxpayer is taking a big hit. Shropshire Council, for example, bought three shopping centres in Shrewsbury early last year.

Their value has since fallen by over 20 per cent. The main reason is well known: more and more consumers are switching to the internet.

The latest estimates from the Office for National Statistics show that online sales now account for 18 per cent of all retail sales – and this is rising rapidly. In the year to October 2018, online sales grew 12.6 per cent. The only sector resisting the internet revolution is food, where the growth in online was only 1.8 per cent. The internet itself has been around long enough for a whole generation to have grown up unable to imagine life without it.

What is new is the surge in retail online activity in the past few years. The potential has been there for some time, but it is only now having a real impact. Why should this be?

Some 50 years ago, a larger-than-life Texan business school academic, Frank Bass, offered an explanation. He formulated a simple differential equation – and in differential equation terms it certainly is simple – which describes how new products get adopted in a population.

Bass made millions from his discovery, and it is still widely used in marketing circles today.

The basic idea is that people adopting a new product – in this case, shopping on the internet – can be classified into two groups. A fairly small set are innovators, those who are willing to experiment with something new. Most people are imitators, who wait and see how the innovators get on.

The speed of adoption, if it happens at all, of any new product is determined by the interactions between the two types of consumer and the degree to which they are willing to innovate or imitate.

Remarkably, given its simplicity, the model gives a very good account of the growth of a whole range of products.

In the early stages of a new product, growth is always slow. Almost all those buying are innovators. Then, suddenly, a critical point is reached. The imitators start to swarm in and growth becomes rapid.

Modern network theory offers a more sophisticated approach, but it is still essentially based on the motivations described by Bass.

Either way, the future for both retail and shopping centres looks bleak, unless they themselves find some dramatic way to innovate and alter their offer.

As published in City AM Wednesday 7th August 2019
Image: Empty High Street via Geograph licensed under CC BY-SA 2.0
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Citizens’ assemblies would hand power to establishment experts

Citizens’ assemblies would hand power to establishment experts

Citizens’ assemblies have become the height of fashion.

The London borough of Camden is currently holding one on how to reduce carbon emissions in the area.

Last month, Nicola Sturgeon announced plans to set one up to consider constitutional issues in Scotland.

The Irish government’s one on abortion featured in the 2018 referendum on the matter.

The basic idea is that a small number of citizens, reflecting the socio-demographic characteristics of the population, are selected at random.

The assembly considers a particular topic. Members get the chance to discuss the matter in much more depth than they would usually do. At the close, recommendations are made to the political authority which set the assembly up.

It all sounds plausible. But economic theory gives us good reasons to be very suspicious of the concept.

One feature of the assemblies is that they are addressed by “experts”, who can be questioned by members. This is intended to raise the level of both debate and understanding among the ordinary people who make up the assembly.

Imagine, however, that a citizens’ assembly had been used in 2016 instead of the Brexit referendum to decide the UK’s position in Europe.

The overwhelming majority of UK economists were opposed to Brexit. The so-called experts would have spoken on the Treasury’s economic forecasts in Project Fear. The hapless assembly members would have been assured that a deep and immediate recession would follow any decision to leave the EU.

Of course, after the event, everyone now knows that this expertise was misplaced.

But an important concept in behavioural economics, supported by a lot of empirical evidence, is that of “authority bias”. People in authoritative positions tend to be trusted. It would have been very difficult for assembly members to go against the expert advice in a Brexit assembly.

A famous experiment by Stanley Milgram in 1963 showed that many people were willing to administer painful electric shocks to others when instructed by a doctor. The shocks, of course, were imaginary, but the participants supposedly administering them to an unseen stranger did not know this. The findings have been repeated many times.

Experts in the social sciences increasingly share a set of metropolitan liberal values. It is these experts who will be presented to assemblies.

Economic theory is in essence about how agents – people, firms, governments – decide to allocate scarce resources. An assembly would simply not be properly equipped to consider many policy issues without first of all being given a thorough understanding of the fundamental principles of economics.

One in particular, namely opportunity cost, is essential. When an option is chosen, this is the “cost” incurred by not enjoying the benefit associated with the best alternative choice. The concept would have to play a major role in any discussion of climate change, for example.

Strange as it may seem, this idea never seems to be put forward by advocates of the assemblies.

Representative democracy, for all its faults, remains a much better way of making decisions than handing yet more power to so-called experts.

As published in City AM Wednesday 24h July 2019
Image: School Children Protesting by Goran H via Pixabay licensed under CC0 1.0
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