Paste your Google Webmaster Tools verification code here

What’s the point of economists? Look to America’s tech giants to find out

What’s the point of economists? Look to America’s tech giants to find out

Despite the dire predictions from the economics profession about Brexit, the UK economy is doing well.

Growth continues at a steady pace. An all-time record 32.4m people are in work. Unemployment has fallen to levels not seen since the mid-1970s.

In contrast, the Eurozone is on the brink of recession – and Italy is already in one.

Economists in the UK are overwhelmingly anti-Brexit. Yet the persistent failures of their forecasts do not seem to lead them to revise their views.

Of course, macro-forecasting is just one part of what economists do. Economics as a subject is fundamentally about the allocation of scarce resources. So economists clearly have a role to play in government, where politicians are constantly having to make trade-offs between what they would like to do and what funds are available.

Even so, we might reasonably wonder whether the massive expansion of the Government Economic Service (GES) under Gordon Brown has been worthwhile. Well over 1000 economists are now employed in the GES.

An altogether more positive view of the point of economists comes from across the Atlantic. The giant tech companies just can’t get enough of them.

Amazon, for example, has hired over 150 economists qualified to PhD level in the past five years. This makes Amazon’s economics team several times larger than the largest academic departments in America.

This phenomenon is the subject of a fascinating article in the latest Journal of Economic Perspectives by Susan Athey of Stanford and Michael Luca at Harvard. Athey was previously the consulting chief economist at Microsoft, and Luca works closely with companies such as Yelp and Facebook.

The close commercial links of the authors are typical of how tech companies are using economists.

Collaboration with the academic world is actively encouraged. But at the same time, as Athey and Luca point out: “the majority of economists in tech companies work on managerially relevant problems with data from the company, and many are in business roles”.

They work on a wide range of practical issues. For example, economists use both actual and experimental data to help decide whether to introduce new products and how to evaluate the impact of competitors.

There are important questions around evaluating not just advertising, but a whole range of marketing initiatives. The skills of economists are very useful in the design and analysis of randomised controlled experiments on these topics.

At the top level, economists get involved in the key strategic decisions of the business. At Microsoft, Athey herself worked on the strategy and empirical analysis of Microsoft’s investment in Facebook and the acquisition of Yahoo’s search business.

It is not all one way. At tech companies, economists have had to become familiar with modern analytical tools in machine learning and artificial intelligence. These are very powerful tools, but academic economists have tended to look down their noses at them.

In the UK, the government is the biggest employer of economists. In the US, it is the tech companies. The contrast shows that we have some way to go to catch up with the entrepreneurial spirit of America.

As published in City AM Wednesday 6th February 2019
Image: Amazon via Pixaby by Geralt
Read More

AI has not yet spurred a productivity boom, but just you wait

AI has not yet spurred a productivity boom, but just you wait

Nobel laureate Bob Solow pronounced 30 years ago that “you can see the computer age everywhere but in the productivity statistics”.

At the start of the 1980s, the world entered the digital age. Fax machines transformed communications. The introduction of personal computers made high-powered computing available to all.

But it took time to work out how to make best use of these major changes in technology. In the 1980s, output per worker in the US grew by only 1.4 per cent a year. But between 1995 and 2005, this had accelerated to 2.1 per cent.

We are on the cusp of another acceleration in productivity growth, due to artificial intelligence (AI).

Even the mention of AI strikes fear into many hearts. Surely this will cause massive job losses? That is one way to boost productivity, but it’s hardly desirable.

In fact, to date most of the applications of AI in companies have not replaced workers.

Rather, they have supplemented what employees do, enabling them to be more productive.

Two recent pieces in the Harvard Business Review provide firm evidence for this. Satya Ramswamy found that the most common use of AI and data analytics was in back-office functions, particularly IT, finance and accounting, where the processes were already at least partly automated.

Thomas H Davenport and Rajeev Ronanki came to the same conclusion in a detailed survey of 152 companies. AI was used, for example, to read contracts or to extract information from emails to update customer contact information or changes to orders.

Developments within the techniques of AI itself suggest that practical applications of the concept are about to spread much more widely.

There was a surge of research interest in AI in the 1980s and 1990s. It did not lead to much.

Essentially, in this phase of development, people tried to get machines to think like humans. If you wanted a translation, for example, your algorithm had to try to learn spelling, the correct use of grammar, and so on. But this proved too hard.

The real breakthrough was through the 2000s. Researchers realised that algorithms were much better than humans at one particular task: namely, matching patterns.

To develop a good translator, you give the machine some documents in English, say, and the same ones translated into French. The algorithm learns how to match the patterns. It does not know any grammar. It does not even know that it is “reading” English and French. So at one level, it is stupid, not intelligent. But it exceptionally good at matching up the patterns.

In the jargon, this is “supervised machine learning”.

At the same time, a new study in the MIT Technology Review shows that purely scientific advances in this field are slowing down markedly. In other words, in the space of a single decade, this has become a mature analytical technology – one that can be used with confidence in practical applications, in the knowledge that it is unlikely to be made obsolete by new developments.

Productivity looks set to boom in the 2020s.

As published in City AM Wednesday 30th January 2019
Image: AI via vpnusrus.com by Mike MacKenzie under CC BY 2.0
Read More

No matter how we measure inflation, politics will forever trump economics

No matter how we measure inflation, politics will forever trump economics

THE ECONOMIC Affairs Committee of the House of Lords has got its bovver boots on. Last week, the government was given a sound kicking.

The issue was the seemingly esoteric one of how to measure inflation. Inflation tells us how much the prices of goods and services are going up. The question is: what do we put into the basket when we are working this out?

The most general measure is the consumer price index (CPI). This takes into account literally everything which individuals in the UK buy. Something which is widely purchased, such as rail journeys, will carry more weight than, say, spending on parts for model railways. But they all count. The percentage change in the CPI is one measure of inflation.

Gathering all this information obviously takes time. In contrast, the retail price index (RPI) is quick and easy to calculate. It is, quite literally, based on a basket of products available in shops. The basket gets changed from time to time to reflect changes in spending patterns. The disadvantage of the RPI is that it is much more focused on goods than on services.

In recent years, inflation as measured by the RPI has been higher than the CPI. Between 2014 and 2018, the respective rises were 9.7 and 5.9 per cent.

These differences have important practical consequences. All sorts of things get increased each year by the “rate of inflation”.

The Lords accused the government of using the RPI for uprating stuff like rail fares and student loans, where directly or indirectly the government rakes in money. But it uses the CPI when it comes to paying out on pensions and benefits. “Index shopping” was their Lordships’ neat description of this practice.

But in top academic circles, much more fundamental attacks have been made on both these traditional metrics.

Measuring inflation faces a very difficult problem. How do you take into account changes in the quality of goods and services?

A simple example is a car. A particular model may cost exactly the same as the identical model last year. But suppose that, unlike last year’s model, this car has heated seats and parking sensors. The measured price has not changed, so inflation is zero. But you are getting more for your money.

The problem becomes acute in any area of new technology. Smart phones did not exist 30 years ago, and the internet was not yet developed for general use. How much have their prices changed since then? We have only to ask the question to see the problem that the vast advances in technology pose.

Even back in 2003, the top MIT econometrician Jerry Hausman estimated that the CPI was systematically overstating inflation by as much as two per cent each year, because of this quality issue.

Measured correctly, inflation could well have been negative in the current decade. But it will be hard to get politicians to take an interest in this. Imagine having to tell people that their pensions would be reduced because prices were falling.

Even if we could improve the measurement inflation, as the Lords demand, politics is forever likely to trump science here.

As published in City AM Wednesday 23rd January 2019
Image: Maths Equation by World Bank Photo Collection under CC BY-NC-ND 2.0
Read More

Capitalism has reduced inequality and improved the world, yet still it is under attack

Capitalism has reduced inequality and improved the world, yet still it is under attack

DESPITE the First World War ending the previous November, the year 1919 was a very bad one. For example, the UK entered what was by far its deepest ever economic recession.

Output fell some 25 per cent between 1919 and 1921 as the economy attempted to adapt to peacetime conditions. The troops had been promised “homes for heroes”, but many of them received the dole instead.

Globally, the influenza virus which killed between 50m and 100m people in the years from 1918 to 1920 was in full swing. Scaling this up to the present day would give a figure of between 200m and 400m deaths.

Given the nature of much of the comment in the mainstream media, we might easily think that similar disasters were affecting us in 2019.

On the contrary, there is a great deal to celebrate.

In the UK, real GDP per head is now some five times higher than it was a hundred years ago. Even poor people today are comfortably off by the standards of 1919.

Life expectancy in 1919 was 55 years for men and 59 for women. Now, a new baby can expect to live at least 25 years longer.

Across the world, we see inequalities in living standards between countries being eroded. Then, only a small handful of western countries could be described as rich by the standards of the time.

Now, more and more nations are joining the club. Literally billions of people have escaped lives of unremitting drudgery, at income levels close to starvation.

All this has been brought about by the institutional structure of capitalism, of companies motivated, at least in part, by profit, operating in a market-oriented system.

Yet, incredibly, capitalism is under attack, often by those who are some of its most conspicuous beneficiaries. According to a 2018 YouGov poll, only 30 per cent of Americans aged under 30 had a favourable view of capitalism.

This is precisely the group which lives and breathes capitalism, not just through its material consumption, but through popular culture.

Last week, I was in New York and visited the Whitney Museum to see a stunning exhibition of Andy Warhol’s work.

It was Warhol who said: “in the future, everyone will be famous for 15 minutes”. He describes, prophetically, the world of the internet, in which self-styled anti-capitalist young people blog, tweet, and work their apps furiously to try to get their own 15 minutes’ worth.

The difference between capitalism and socialism is neatly captured in a video of the group Boney M currently available on YouTube. In the years around 1980, the band was massive, selling some 80m records with hits such as Rivers of Babylon and Daddy Cool.

In the video, the group is playing at the Sopot Festival of Culture in the then Communist-controlled Poland in 1979. The artistic audience gaze open mouthed at their exotic performance.

Socialism offered the Red Army choir and “Song of the Partisans”. Capitalism had Boney M.

A real effort is needed to re-educate people. Capitalism offers not just material wealth, but exciting popular culture as well.

As published in City AM Wednesday 16th January 2019

Image: In the future… by Brian Solis under CC BY 2.0
Read More

Europe has suffered from the euro – just ask the Greeks

Europe has suffered from the euro – just ask the Greeks

One of the entertainments of the holiday period was reading Adults In The Room, the book by Yanis Varoufakis.

It describes his time as finance minister of Greece, and his negotiations with the IMF, the European Central Bank, and the European Commission.

Varoufakis was only in the job between January and July 2015. He had the unenviable task of trying to renegotiate the massive debts of the Greek government.

Reading between the lines, Varoufakis cannot have been an easy person to deal with. Indeed, he was effectively forced out of his position by the far-left Prime Minister Alexis Tsipras.

Still, the academic-turned-politician had many bright ideas. But he could get no traction.

Some of Jeremy Corbyn’s shadow cabinet will undoubtedly have read the book. The more reflective among them will realise that negotiating with international bodies when you have a large burden of public sector debt is not exactly fun. In the end, exactly like the Greeks, you will be forced to adopt policies of austerity which you have spent your political life criticising.

But many of our more ardent Remainers would also benefit from reading the former Greek finance minister’s analysis and descriptions of events.

To them, the EU represents a kind of Garden of Eden, where milk and honey (as well, of course, as sweetness and light) flow in abundance.

The harsh reality is that, in their fanaticism for greater European integration and its crowning symbol of the euro, Europe’s elite are quite unable to get to grips with the fundamental problems which the continent faces.

The financial crisis of the late 2000s began to take hold of the wider economy during the winter of 2007/08. The year 2007 represented for most countries the peak level of output before the crash.

Over the past decade, western European countries in the Eurozone have grown much more slowly than comparable ones which have their own currencies.

Greece, of course, has experienced one of the deepest and longest recessions in the entire history of capitalism. Greek output in 2017 was 22 per cent lower than it was in 2007.

Even leaving Greece out of the calculations, the growth performance of western European economies in the Eurozone has been poor. Their average growth over an entire decade has been just 5.6 per cent.

In contrast, average growth in a group made of the US, Canada, Japan, Australia, the UK, and smaller non-Eurozone countries like Norway and Switzerland has been 16.2 per cent. The UK itself is below the average for this set at 11.4 per cent – still, a lot higher than the Eurozone average.

Towards the end of last year, much was made of the fact the growth in the Eurozone as a whole had slowed from 0.4 per cent in the second quarter of 2018 to just 0.2 per cent in the third quarter.

But Europe’s problems are much deeper-seated. The evidence of an entire decade shows the stultifying impact of the euro. The best decision that Gordon Brown ever made was to keep us out of it. If only Greece had done the same.

As published in City AM Wednesday 9th January 2019

Image: Street Art by Aesthetics of Crisis under CC BY 2.0

Read More

The Ghost of Christmas Past could tell us where the negotiations all went wrong

The Ghost of Christmas Past could tell us where the negotiations all went wrong

In Charles Dickens’ A Christmas Carol, Scrooge finds being haunted by the Ghost of Christmas Past unbearable.

He begs it to stop. The Ghost replies: “These are the shadows of things that have been. That they are what they are, do not blame me.”

It might almost be the Prime Minister speaking about the whole Brexit process.

How might things have been different? And are there any pointers about our future dealings with the countries of the EU?

A fundamental concept in game theory is that of the non-credible threat. This means making a threat in a sequential game – one in which there is a sequence of moves by each side – which a rational player would not carry out because it is not in their interest to do so.

But in order to be effective, the other side has to believe that you will in fact carry it out if necessary.

Donald Trump is a master of making such threats. China and North Korea both respect and fear him precisely because he conveys the impression that he might indeed do something completely irrational.

The UK held – and still holds – two major bargaining chips in the Brexit negotiations: our armed forces (specifically the nuclear deterrent) and GCHQ. But at an early stage, Theresa May ruled out using either of these in the negotiations.

At the moment, for example, British troops are stationed on the border of Estonia and Russia. They have taken part in war games to offer deterrence to Vladimir Putin.

The Baltic states live in fear of a Russian invasion. They all have sizeable Russian-speaking minorities. In 1940, they were taken over by the then Soviet Union, and only regained their independence in 1991.

They may not count for much in EU circles. But Britain could have made it clear that, unless these countries supported us, they would have to rely on, say, the Germans to defend them, and not the UK.

Similarly, GCHQ is acknowledged to be the best cyber intelligence organisation in the EU. The head of the agency said in June that it had played a critical role in thwarting terror attacks in four other European countries in the past year. Letting just one of these attacks go ahead would have brought instant credibility to Britain’s leverage – though it would of course have come with a significant cost.

On a more positive note, a number of EU governments are openly critical, and almost actively hostile, to the European Commission.

Poland, Slovakia, Hungary, and the Czech Republic all have major concerns over migration. Matteo Salvini in Italy has never made a secret of his dislike of Brussels, and since his election has had a fierce argument with the EU over the Italian budget.

But the Prime Minister seems not to have tried to build an alliance with him, nor with these other eurosceptic nations.

Some may argue that these governments are not necessarily in the liberal tradition. They are, however, potential allies. And as the great nineteenth century Prime Minister Viscount Palmerston said: “Britain has no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.”

If May had heeded this, how differently things might have turned out.

 

As published in City AM Wednesday 19th December 2018

Image: Theresa May by Arno Mikkor under CC BY 2.0

Read More