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History shows us that slavery is an economic catastrophe as well as a moral one

History shows us that slavery is an economic catastrophe as well as a moral one

Slavery has certainly been in the headlines in the past couple of weeks.

Given this sudden interest in this area of history, it is worth considering the economic lessons it can teach us, as well as the moral ones.

Slavery was abolished in England itself in the twelfth century. Then in 1772, Lord Mansfield gave his famous judgment that as soon as any slave set foot on British soil, he or she was automatically freed.

Clearly, some people became rich by trading or owning slaves abroad. There is nothing new or unusual about this. Taking a broad sweep of human history, the societies in which slavery does not feature form a very distinct minority.

It was Karl Marx who coined the phrase the “ancient mode of production” to describe the economies of both Ancient Greece and Rome. Greece, of course, gave us the concept of democracy itself. Yet, ironically, its economy was built on slavery.

Rome developed the concept even further. With a plentiful supply of labour from its military conquests, the aristocracy owned vast tracts of land, maintained by slaves.

Yet although individuals became rich through slavery, Rome as a society did not.

When the Empire was at its maximum extent in the second century AD, the living standard of the average Roman citizen was the highest the world had yet seen. Indeed, it was probably not surpassed until the early modern era.

Yet the Roman economy, prosperous though it was, remained at the living standard of purely agrarian societies. It never got “lift off”, as Europe did in the eighteenth and nineteenth centuries.

The fundamental problem was that an economy based on slavery has little incentive to adopt new, more efficient ways of working. Indeed, for the individual slave there is virtually no incentive at all. If a particular task can be done better and more quickly, there is always another one which he or she will be given. Innovations, when they did happen, spread only very slowly.

The inherent inefficiency of slavery as a method of production is clear from the experience of Stalin’s Soviet Union and Mao Tse Tung’s Communist China — the two great slave societies of the twentieth century.

The labour camps, filled with the so-called enemies of socialism, represented a huge drain on their economies. Output was low, and large amounts of resources were needed to run and maintain the system.

Slavery is of course morally repugnant, a stain on the histories of civilised societies. But it is also economically detrimental to the societies it ostensibly appears to benefit. The fact is that no society based on slavery has ever come anywhere near to delivering decent living standards for the average person.

The only system which has is capitalism. Britain and other areas of north west Europe started to become rich through a system based on the rule of law, the ability of individuals to profit from innovation and not be expropriated, and the freedom of labour to negotiate contracts.

Morality undoubtedly played a part in Britain’s leading role in abolishing slavery. But by the early nineteenth century, it had become an anachronism. Resources employed in slavery could be put to much more productive use under capitalism.

Perhaps, then, we should remove not just statues of British slave owners, but erase the whole corpus of Greek and Roman art, financed as it was by Marx’s slave-based ancient mode of production.

As published in City AM Wednesday 17th June 2020
Image: Antique Statues via Wallpaper Flare
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Economists have lost the public’s trust by meddling in politics

Economists have lost the public’s trust by meddling in politics

Michael Gove famously said during the Brexit campaign that people “have had enough of experts”. Certainly, the outcome suggests that many were sceptical of the doom-laden economic projections of Project Fear.

But what do the public think about economists themselves? An intriguing survey released last week by ING bank and the Bristol University Economics Network sheds light on how this particular group of experts is viewed. The findings were presented at a seminar held in the Treasury last week.

Some key results were reassuringly as expected. For example, an overwhelming majority of respondents, in the poll conducted by You Gov, think that economics is important.

There is a widespread misconception of what economists actually do. A great deal of media focus on economics is about macro economic forecasts, what will happen to GDP, inflation, interest rates and the like. In fact, very few academic economists work on forecasting problems, and even within the Treasury and the Bank of England, the teams directly involved with this are small.

Most economists work on micro problems, trying to figure out, for example, the impact of changing tax rates on incentives, or trying to assess the costs and benefits of an infrastructure problem.

In principle this is useful work. But, regrettably, the survey did not disclose to the respondents just how many economists are employed in the public sector. In 1964, the incoming Labour government of Harold Wilson doubled the number of economists in the civil service from six to twelve.

Now there are 1,400, not counting those working in the Bank of England and the numerous regulatory authorities. Much of the expansion took place under Gordon Brown. It is hard to believe that diminishing marginal returns, to use a jargon economics phrase, have not set in. In plain English, there are far too many of them.

An important feature of the survey is that there is a big problem of trust in the opinions of economists. This is particularly the case with older people and with Leave voters. Many believe that economists express views based on personal and apolitical opinion than on verifiable data and analysis.

A striking illustration of this is of course Brexit itself. It cannot be said too often that the Treasury forecasts of the consequences of a Leave vote predicted a massive rise in unemployment of 500,000 by the end of 2016. It has of course fallen.

At least 90 per cent of professional economists in the UK supported the Remain campaign. Some brave souls in university departments who favoured Leave found themselves virtually ostracised. The shameful attacks on Leave voters, accusing them of being dupes and incapable of understanding the arguments, are based on the misplaced intellectual certainty of the economics mainstream on this topic.

Economics is far from being an empty box, and it can usefully illuminate many practical problems. But the profession needs to be more honest with the public. Some parts of the discipline do have strong empirical backing. Others seem based more on groupthink than on objective science.

As published in City AM Wednesday 10th May 2017

Image: Big Ben from London Eye by Zen Whisk is licensed under CC by 2.0
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Don’t believe the myths: Capitalism has performed well since the financial crisis

Don’t believe the myths: Capitalism has performed well since the financial crisis

Ten years ago, the financial crisis began to grip the Western economies. During the course of 2007, GDP growth slowed markedly everywhere. By the end of 2008, output was in free fall.

A key theme in economic commentary is the sluggishness of the subsequent recovery of the developed economies.

The picture is not quite as bad as it is usually painted. True, last week the Office for National Statistics announced a dip in UK growth in the first quarter of this year. But from 2009, the trough of the recession, to 2016, GDP growth averaged 2.0 per cent a year.  Not exactly a stellar performance. But from 1973, the year prior to the major oil price shock, to 2007, the British economy expanded by just 2.3 per cent a year on average. The contrast between the two periods in the US is slightly greater. From 1973 to 2007, growth averaged 3.0 per cent a year, and since 2009 it has been 2.1 per cent.

There is a very stark contrast with the experience of the 1930s, the last time there was a global financial crisis. This time is different, things have only got better. The recovery may be slower than desirable, but it has been much more widespread than in the years following the Great Depression of the 1930s.

A decisive indicator is the length of time it took not just for growth to resume, but for the previous peak level of GDP to be regained.  So in the UK, for example, the economy started to grow again in 2010. But it was not until 2013 that there had been enough growth for the economy to get back to its 2007 size.

Looking at a group of 18 developed economies, which includes all the main and medium sized ones, GDP had regained its previous peak within 3 years in no fewer than 8 of them. By 2016, everyone in the group except Finland, Italy and Spain had a GDP which exceeded its previous peak.

Three years after output began to fall in 1930, not a single economy had managed to regain its 1929 level of output. Even by 1938, output was below its 1929 level in Austria, Canada, France, the Netherlands, Switzerland and Spain.

Perhaps Keynes’ most powerful insight was why the slump was so prolonged. He developed the concept of “animal spirits”, which are not a mathematically based prediction of the future, but the sentiment of the narratives which companies form about the future. He wrote: “the essence of the situation is to be found in the collapse of animal spirits…. this may be so complete that no practicable reduction in the rate of interest will be enough.”

Zero interest rates and low growth! Keynes got there before us.

Still, capitalism has performed much better in the aftermath of the financial crisis of the late 2000s than it did in the crisis of the early 1930s. Animal spirits may not be buoyant, but they are in much better shape than in the 1930s.

As published in City AM Wednesday 2nd May 2017

Image: Day 20 Occupy Wall Street by David Shankbone is licensed under CC by 2.0
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Kenneth Arrow proved economists needn’t be loud to make a difference

Kenneth Arrow proved economists needn’t be loud to make a difference

Does winning the Nobel Prize in economics cause longevity?  We might be forgiven for thinking so.  Thomas Schelling died last year aged 95.  The author of the famous textbook, Paul Samuelson, passed away at 94, whilst his colleague, Bob Solow, is still going strong at 92.  The British Laureate Ronald Coase reached the age of 102.  Kenneth Arrow was a mere whippersnapper in comparison, dying a couple of weeks ago at 95.

The metropolitan liberal elite in America represent an aristocracy every bit as interwoven by family connections as the grandees of 18th century England.  Forget the Clintons and their daughter.  Arrow was Samuelson’s brother in law.  He was the uncle of Larry Summers, former Treasury Secretary and President of Harvard.

In terms of his contribution to science, Arrow was possibly the most important economist of the second half of the 20th century.  But he is essentially unknown to the general public, spending his career in the sheltered groves of American Ivy League universities.

This illustrates a fundamental feature of economics.  In the media, it appears to be solely about the big features of an economy, the macro variables in the jargon, such as GDP, unemployment and inflation.  In the public perception, economists seem to spend most of their time having furious arguments with each other.

But this is just the tip of the iceberg, the bit that is seen.  Where Arrow worked, under the surface, is where most economics is done.  And it is where economists are far more often in agreement than in dispute.  It is the territory of micro economics, the study of how individuals behave and take decisions.

Arrow made a massive contribution to the crown jewel of this world, so-called general equilibrium theory.  The idea that markets are a Good Thing goes back at least as far as Adam Smith, as does the insight that supply and demand can be brought into balance by changes in the price of the product.

The role of price in any particular market is easy to understand.  For many decades economists wrestled with a problem which is straightforward to state but fiendishly difficult to solve.  Price can equalise demand and supply in a single market.  How can we establish whether a complete set of prices can exist which ensures that all markets clear in this way, so that supply is the same as demand?

An analogy with quadratic equations might help.  Most readers will recall struggling to solve these at school.  But there is a formula which guarantees to find the solutions to any such equation.  Simply plug in the relevant numbers, and the answer pops out.  Arrow’s mathematical work was not to find a set of prices for any particular economy.  It was to establish the conditions, to find the formula, under which a solution could be found for any economy.

This may sound, and indeed it is, highly esoteric.  But general equilibrium models, thanks to Arrow, are now, for better or for worse, part of the everyday practical tool kit of modern day economists.

Image: Seesaw by Antony Mayfield is licensed under CC by 2.0
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