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Crocodile tears for the poor

Crocodile tears for the poor

INEQUALITY is now a buzzword in Britain. Scarcely a week goes by without a new publication by an academic or journalist lamenting the levels of poverty facing swathes of the population. They are bolstered by a complicit metropolitan liberal elite, who shed crocodile tears for the poor, while ruminating on the current situation.

Unfortunately, much of the work coming out of universities can hardly be described as scientific. Rather, it could be described as “advocacy research”. In other words, research that is carried out with the intention of providing evidence and arguments that can be used to support a particular cause or position. And too often, the taxpayer is left financing such activity.

However, a new book on poverty, Breadline Britain, deserves to be taken more seriously. The authors, economist Stewart Lansley and academic Joanna Mack, wrote the first version in 1983 when they were producers at ITV’s current events programme, Weekend World. Over the next three decades, they continued to collaborate on the topic.

Lansley and Mack make the startling claim that one in three households now suffer from poverty. Their method of calculating this figure is intriguing. Instead of wrestling with intricate statistical methods, they simply go out and ask ordinary people what they consider to be the basic necessities for a decent standard of living. On this basis, the percentage of households lacking three or more of the items listed has risen from 14 per cent in 1983 to 30 per cent now.

Of course, like any measure of relative poverty, it is open to the valid criticism that in material terms the poor are far better off than they were. But it does serve as a useful reminder of the different qualities of life which are on offer in the UK today.

A key point in the book is that poverty is far from being confined to those on benefits. A rising proportion of the poor are in work. The authors cite the usual suspects of zero hour contracts and the spread of low pay. But there is one fundamental driver of these changes in labour markets which they do not face up to – namely, mass immigration.

Under New Labour, Britain’s borders were effectively opened completely. While the party was in power, immigration added more than 3m to our population. At the time, we were invited to believe that this would have no effect on real wages. Equally, we were assured that immigration was vital in combatting the effects of an ageing society. Critics such as Bob Rowthorn, then head of the Cambridge economics faculty, were pilloried for making the obvious point that immigrants themselves get older.

Unsurprisingly, the increased supply of labour has driven down real wage rates at the lower end of the market. And the imperatives of politics means that benefit levels have had to follow suit.

If Lansley and Mack are right, as the inequality debate persists, we must acknowledge the part that the liberal elite’s advocacy of mass immigration over the past two decades has played in impoverishing the indigenous working class.

As published in City AM, Wednesday 18th February 2015

Image: Bread by Matt Burns licensed under CC BY 2.0

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Shouting at the supply-chain: is there a better way?

Shouting at the supply-chain: is there a better way?

EVERY year, the supermarkets hire substantial batches of high-flying graduates to work in their buying departments. The urban mythology is that these expensively-educated young people are paid to shout down the phone, browbeating suppliers to offer yet more discounts.
This hectoring seems to be at the heart of the recent decision of the Groceries Code Adjudicator to investigate Tesco, following allegations that the company delayed payments to suppliers and unfairly handled payments for shelf promotions. These particular complaints may prove groundless. Yet they don’t exactly serve to diminish sentiment that Britain’s large firms can act as ruthless short-term profit maximisers, squeezing their supply chain for every penny. Of course, even if that is the case, we could simply see it as being part of the workings of the free market, in which the most efficient survive. But given the relative sizes of our corporate giants and most of their suppliers, there is an inherent imbalance of power at play.

So how else could these supply chains be managed? Milk is a topical example, in which the much-maligned Tesco, along with Marks and Spencer and Waitrose, is cast as the good guy. It established long-term contracts with suppliers, in which the dairy farmers are probably getting around 30p a litre for milk. Amid allegations that supermarkets are using milk as a loss leader in price wars, other farmers are believed to be receiving as little as 20p a litre – below the cost of production. The National Farmers Union warns that many will be driven out of business; over the past decade, nearly 10,000 dairy farmers have left the industry.

Another answer can be found in many extant markets that function in more sophisticated ways, flying in the face of the simple economic textbook injunction of “slash costs and maximise profit”.

A 2012 paper by Alan Kirman of the University of Marseilles and Nick Vriend of Queen Mary, London, demonstrated this by studying Marseilles’ wholesale fish market. They obtained a data set documenting every single transaction that took place in the market, across a number of years. At the time, there were about 40 registered sellers, and around 400 regular buyers. The prospective buyer approaches a seller and says what he or she wants, and is quoted a price – crucially, no prices are advertised. The price quoted is on a take it or leave it basis, and there is no bargaining.

You would be forgiven for wondering how these non-conventional features translate into business. But for every type of fish, and across the market as a whole, the classic downward sloping demand curve is seen. A higher average price means less is bought. And in a reciprocal process, buyers become loyal to the sellers who offer them the highest utility. In turn, sellers tailor their products and services to these loyal buyers, who prompt higher gross revenues.

There is a lesson here for larger companies. Developing such longer term relationships may enable value to be created in the supply chain – in contrast to the conventional model, in which it is well and truly squeezed out.

As published in City AM on Wednesday 11th February 2015

Image: Milk Family by Solveig Osk licensed under CC BY 2.0

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In Praise of Inequality in Science

Does inequality in the output of scientists matter?  Inequality is a fashionable topic these days, and evidence for its existence is keenly sought in all sorts of places.  John Ioannidis, a health policy researcher at Stanford, and his colleagues have found it in the research outputs of their fellow academics.  In a paper published in the prestigious journal PLoS ONE, they searched the entire published scientific literature in academic journals over the period 1996-2011.

They discovered that a grand total of over 15 million individuals had published a paper in a peer reviewed scientific journal.  However, only 150,000 had published something in every single one of those years.  And these individuals were authors of almost 42 per cent of the total number of articles which appeared.  It appears to give a new dimension to the Occupy Wall Street slogans.  Less than one per cent of scientists ‘own’ almost half the academic literature in the world between 1996 and 2011.

Reactions from some academics have been dismissive.  There has been a massive growth of journals in recent years, to meet the demands on academics everywhere to publish something, somewhere.  The phenomenon was satirised decades ago in Kingsley Amis’ classic comic novel Lucky Jim. The young academic anti-hero, struggling in his career, publishes, in a brand new journal based in Argentina, a totally futile article entitled ‘Economic Consequences of the Development of Ship Building Techniques 1450-1485’.  Such journals now proliferate and, as Chris Cramer of the University of Minnesota remarked in ‘Nature’, ‘some would probably publish your local phone directory if you coughed up the page charges’.

But Ioannidis and his colleagues consider their findings to be rather disturbing.  If a few established researchers dominate the literature, they suggest, it will be difficult for younger scientists to make their mark: ‘The research system may be exploiting the work of millions of young scientists for a number of years without being able to offer continuous, long-term stable investigative careers to the majority of them’.

Their own discoveries should in fact lead them to conclude that this inequality in scientific output is actually a good thing.  The 1 per cent may publish nearly half of all the papers.   But they account for almost 90 per cent of the papers which have more than 1000 citations.  This is how the scientific community assesses the quality and importance of an article.  Scientists have to acknowledge previous work in their area, and they do this by citing papers already published in the literature.  The more a paper is cited, the more important it is.  A citation level of more than a 1000 puts the authors in the field of sight for a Nobel Prize.

The implication is that research grants should be allocated in an even more concentrated way than they are now.  Some should be scattered in a ‘blue sky’ way, to encourage young researchers.  But the elite one per cent is responsible for almost all the progress made in science over the past two decades and should get most of the cash.

As published in City AM on Tuesday 29th July

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Economists are not impressed by Piketty’s views on inequality

The financial crisis has undoubtedly created a demand in popular culture for works which portray capitalism in a bad light, such as the recent best seller by Thomas Piketty.  Piketty’s writing has gathered increasing attention from economists, and his arguments do not really bear scrutiny.

The focus of Piketty’s work is the long-run evolution of the ratio of capital to income.  He claims that this is now very high by historical standards, and will rise even further as the 21st century unfolds.  Wealth will become more concentrated and inequality will rise inexorably even more.

The message that capitalism inevitably leads to greater inequality is one that many people want to hear.  Unfortunately for them, it is wrong.  Piketty assembles an impressively large amount of empirical evidence. This shows clearly that from around 1910 to 1970, inequality actually declined sharply across the West.

Piketty argues that there were special factors involved in this period, which will not be repeated in the future.  But modern capitalism was essentially formed in the decades either side of 1900.  A truly massive merger and acquisition movement took place, and for the first time ever, companies existed which operated on a global scale.  So we have had a globalised capitalist economy for approximately 120 years.  For half this period, inequality fell, and in the other half it rose.  The belief that capitalism always creates inequality is scientific nonsense.

A devastating theoretical and empirical critique of Piketty is made in a recent paper by Bob Rowthorn, former head of the economics department at Cambridge.  Rowthorn became in his younger days an expert in Marxist economics, and so is ideally placed to appraise Piketty’s work.

Piketty shows that there has indeed been a sharp rise in the ratio of wealth to income in the early 21st century, to around 5 or 6 compared to just 2 to 3 in the 1950s and 1960s.  Rowthorn points out, using Piketty’s own data, that the whole of this increase is due to capital gains in both housing and the equity markets.  In real terms, the ratio has been constant in Europe and has actually fallen in America.  This is highly relevant.   A crucial part of Piketty’s argument about the future is that he believes that the rate of economic growth will be low.  But if growth is low over many decades, it is very hard to believe that there will not be a reversal of the increases in real estate and share prices, and Piketty’s measure of the ratio of wealth to income will fall.

From a theoretical perspective, mainstream economics has a great deal to say about the evolution of the ratio of capital to income, and the implications for wages and profits.  Piketty uses this theory.  But, as Rowthorn points out, the theory is set out in real terms, not in the current price terms which Piketty uses for his empirical evidence.

Economics can be very useful, not least in exposing the fundamental flaws in popular opinions.

As published in City AM on Tuesday 8th July

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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

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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

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