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From Korea to Germany, experiments with socialism show markets always win

From Korea to Germany, experiments with socialism show markets always win

A red-hot topic in economics is randomised controlled trials (RCT). Esther Duflo, the MIT academic who has really driven this idea, has surely put herself in pole position for a Nobel Prize at some point.

The idea of RCTs has been imported from medicine.One group of people are selected at random to be subject to a particular policy, and the outcomes in this set are compared to the rest of the population, which are not.

The studies have been almost exclusively carried out in developing countries. Evaluating RCTs often involves some subtle statistical points, but they are a powerful way of identifying what really works. Their policy impact has already been substantial.

Over 200m people worldwide have been reached by the scaling up of programmes evaluated by the J-PAL network, in which Duflo is the leading light. The RCT studies themselves are carried out on a small scale, evaluating very particular policies. If they succeed, they can be expanded. Examples include encouraging the take-up of school-based deworming, chlorine dispensers for safe water, and free insecticidal bed nets.

A closely related concept is known as a natural experiment. This is when we observe two contrasting policies which have been carried out in the past, either at the same time on different populations or at different times on the same one.

The policies in this case have not been deliberately designed as part of an experiment. They have been introduced as part of the political process.

But good natural experiments can be just as informative as RCTs. Indeed, they can reach the parts which RCTs cannot get to, because we can observe natural experiments which have taken place on very large scales.

By far the most important of these is the series of natural experiments on the performance of market-oriented economies compared to their centrally planned socialist rivals.

The current tensions highlight the differences between North and South Korea. In the 1950s, the latter had living standards similar to African countries. Now, they are at Western levels.

Other countries which were poor in the mid-twentieth century and which have adopted the principles of market-oriented economics have also prospered.

The fall of the Berlin Wall at the end of the 1980s brought into sharp focus the contrast between East and West Germany. The Trabant was a popular car in the East, but it was of such poor quality that its value dropped to almost zero as soon as Western cars could be imported.

The major economic contest of the twentieth century was between the US and the Soviet Union, won easily by America.

India and China practised different forms of socialism until the late 1980s. The Chinese was the most extreme – resulting, for example, in the deaths of at least 60m people in the self-induced famines around 1960. After adopting market principles, both countries have flourished.

The outcomes of these major natural experiments are decisive. Belief in socialism in 2017 is equivalent to believing the sun goes round the Earth.

As published in City AM Wednesday 4th October 2017

Image: For God’s Sake by Ninian Reid is licensed under CC by 2.0
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Blame Jeremy Corbyn for the increasing number of public sector strikes

Blame Jeremy Corbyn for the increasing number of public sector strikes

The total number of working days lost through labour disputes last year was, at just 170,000, the second lowest annual total since records began in 1891.

What a difference a year can make. Southern Rail commuters have endured months of misery due to the prolonged series of strikes called by the RMT. Union members on Eurostar walked out in the past week and have threatened to do so once again over the Bank Holiday weekend. Before it was suspended yesterday, Virgin East Coast staff were planning industrial action.

We are also experiencing the long-running dispute between the government and junior doctors, who in April carried out their first full walkout in the history of the NHS. They are now threatening the “trade union dispute of the century”, with rolling strikes from September onwards.

Traditionally, strike activity rose as the economy picked up. And labour market statistics for 2016 do show that the UK economy is very close to full employment. Pockets of unemployment may be scattered in some of the regions, but the latest economy-wide figures show a rate of just 4.9 per cent, the lowest for 11 years. There are a record 31.7m people in employment, and the proportion of people aged between 16 and 64 who are in work is also at a peace time high of 74.4 per cent.

Despite the buoyancy of the labour market, however, disputes remain very rare in most sectors of the economy. The current spate of strikes is essentially confined to the public sector, broadly defined. Private companies operate the rail franchises, but Network Rail is responsible for the maintenance of the network as a whole.

The connection between the strength of the economy and the number of strikes still holds in transport and health. The innovative polices of the rail operating companies mean that passenger numbers have boomed, doubling over the past decade. And the demand for health services continues to grow rapidly.

The unions shed crocodile tears and claim the disputes arise out of concerns for the safety of the public. In one sense, the strikes are nothing more than good, old fashioned examples of the workers putting their hands in taxpayers’ and consumers’ pockets when the opportunity arises.

But we might reasonably ask why the same things are not happening elsewhere in the economy. There does in fact appear to be a more sinister aspect to these disputes. Many of the strike activists are supporters of Jeremy Corbyn. The Labour leader and his acolytes scorn the possibility of reform through representative parliamentary democracy. Building a so-called social movement is far more important to these true believers than is winning elections.

The Black Lives Matter campaign, another social movement, earlier this month closed access to Heathrow from the M4 and disrupted transport across the UK. Just as with the junior doctors and the rail workers, the same sanctimonious regret was expressed at any inconvenience caused to the public.

Unfortunately, Corbyn’s position as Labour leader and his advocacy of “social movements” gives comfort to the growing number of strikes, sit downs and general disruptions which we are currently witnessing. And if he wins the party’s leadership contest, we can expect them to continue.

Paul Ormerod

As published in CITY AM on Wednesday 16th August 

Image: Jeremy Corbyn by 70023venus2009 is licensed under CC BY 2.0

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Child poverty is thankfully not rising – but the archaic definition needs to go

Child poverty is thankfully not rising – but the archaic definition needs to go

David Cameron is feeling the heat. This is not just a consequence of the sudden dramatic rise in London temperatures. The need to extract something meaningful from our EU partners and the increased threat of terrorist attacks are sleep-depriving problems. But the Prime Minister did have one good result during the past week. Despite widespread predictions to the contrary in the liberal media, the newly-released child poverty figures showed that there had been no increase in the number of children in poverty over the 2011-12 to 2013-14 period.

According to official statistics, the number is still high, at 2.3m. This represents 17 per cent of all children. But apart from a small blip at the height of the 2008-09 recession, the trend has been slowly but steadily downwards since 2000, when 26 per cent were classed as being poor. A child is classed as being in poverty if the household has an income of less than 60 per cent of the UK median. The median is the level at which half of all households have an income above that level, and half are below. It is currently around £25,000 a year in the UK, so a poor household is one which has an income below £15,000.

Life isn’t much fun on that sort of income, and no amount of intellectual juggling can get away from this point. But the official definition of child poverty is a pretty odd one. The idea that an income below 60 per cent of the median made you poor was dreamt up in the 1960s by leftist academics like Peter Townsend, then at the LSE. It meant, quite literally, that the poor would always be with us. If, by the stroke of a magic wand, everyone’s real income in the UK were doubled overnight, the median level would be £50,000 a year. And those with less than £30,000 would then be deemed poor.

More importantly, the data on household incomes in any year are a snapshot taken at a particular point in time. The information does not tell us how people move over time.

In fact, there is a decent amount of mobility in terms of moving up and down the income ladder, as the work of scholars like Tony Atkinson at Nuffield College, Oxford shows. Being poor today does not necessarily mean you will be poor tomorrow. Sajid Javid  was the son of a bus conductor in Rochdale. He is now a multi-millionaire and in the Cabinet.

There is a large scientific literature on the question of income mobility. But as a broad summary, both here and in the US, 40 per cent of all households in the bottom 20 per cent of the income distribution will still be there in 10 years’ time. But this means that 60 per cent have moved up, around 10 per cent of them into the top 20 per cent of all incomes.

Rather than being stuck with one that is little more than a relic of the ideology of the 1960s, a more realistic definition of child poverty would take account of these dynamics.

As published in City AM on Wednesday 1st July 2015

Image: Income by GotCredit licensed under CC BY 2.0

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Who plays better poker? Cameron, Sturgeon or Varoufakis?

Who plays better poker? Cameron, Sturgeon or Varoufakis?

The gracious Palladian architecture of Edinburgh has often led the city to be described as the Athens of the North. If the referendum result had gone the other way, much closer parallels would have rapidly emerged. A high spending left-wing government, faced by a collapse in revenues with the fall in the oil price, would soon have faced the wrath of international capital markets. This could so easily have been the UK as a whole, as the recent politics of Aberdeenshire Council demonstrate. Until last month, the council was narrowly controlled by a motley collection of the unionist parties, embracing the Conservatives, Labour, and Lib Dems. This vignette shows that Labour would happily have worked with the SNP to form a government in Britain. But there are differences between Scotland and Greece. The Scots, for example, have shown themselves to be much more adept practitioners of the esoteric discipline of game theory. Varoufakis, former academic turned Greek finance minister, specialised in the subject. A sound knowledge of game theory can often be very useful. Chris Ferguson, for example, winner of no fewer than five World Series of Poker championships, teaches game theory at UCLA. The deluded Greek Trotskyist seems to have convinced himself that his theoretical knowledge would give him a decisive advantage in the negotiations with the troika of the IMF, the ECB and the European Commission. But he seems to have forgotten that the purpose of playing a game is to win. You win at soccer by simply scoring more goals than your opponent. But the concept of winning in a set of negotiations is often not as clear cut as this. One of the insights of game theory is that it is possible for both sides to win. To achieve this, the players might adopt strategies which signal their willingness to play co-operatively. The pay-off for both can be much higher over time than when they intend to, in the game theory jargon, defect. That is, make a move at some point which is intended to shaft the opponent. Nicola Sturgeon and David Cameron have manoeuvred themselves into a lucrative strategy of co-operation. The game began during the election campaign. The SNP needed to destroy Labour in Scotland. They trumpeted their intention to help Ed Miliband get into Downing Street. The Conservatives seized on this, and used the SNP bogeyman to frighten the voters in the marginals. The game goes on. Cameron needs to make some concessions to Sturgeon so she can boast about them to the Scottish electorate. But the SNP also needs to maintain a set of grievances, which is their raison d’etre. Neither side actually wants to redress them, so that both sides continue to gain and keep Labour out. Practical politicians are often much better practical game players than so-called expert theorists.

As published in City AM on Wednesday 24th June 2015

Image: Poker by Images Money is licensed under CC BY 2.0

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Does Miliband understand the importance of incentives?

Does Miliband understand the importance of incentives?

Ed Miliband has long had a problem with voters not perceiving him as “normal”. His famous struggle with a bacon sandwich in some ways says it all. But at a much more important level, he seems to have little or no empathy with one of the most fundamental of human motivations. The most profound insight of economics is that people respond to incentives. When incentives change, behaviour also changes. This certainly does not exclude other motives, such as altruism, but incentives are key to understanding how people make decisions. It is this which Miliband appears unable to grasp.

Consider the political situation in Scotland. A rampant SNP threatens many Labour seats. Yet despite the pleadings of his colleagues, Miliband finds it very difficult to rule out forming a coalition with the Nationalists after the election. In these circumstances, the incentives facing a Labour-inclined voter North of the Border are clear. Voting SNP promises a potentially powerful bloc in Parliament to press the case for extracting even more money from the English. And at the same time, you could still get a Labour government via the coalition route. For all except the truly faithful Labour supporter, incentives in Scotland point to voting SNP.

Pensions are another area where neither Miliband nor his political mentor Gordon Brown have shown the slightest sign of understanding the effect of incentives. Miliband proudly proclaims that he will finance a reduction in tuition fees by reducing the tax advantages of putting money into a personal pension scheme. One of Brown’s first acts as chancellor in 1997 was to abolish the tax relief pension funds earned on dividends from stock market investments. This crippled many final salary pension schemes. Pension pots are an irresistible lure for politicians with profligate spending aims. But at a time when life expectancy is rising sharply, it is an act of profound economic illiteracy to reduce the incentive for people to put money away for retirement.

Miliband played a prominent role in the last Labour government, first as a key adviser and fixer for Brown, and then as an MP and member of the Cabinet. Brown was at first an excellent chancellor, keeping us out of the euro and maintaining fiscal probity. But he soon went in for a massive increase in public spending, with entirely predictable results. Workers in the public sector were portrayed as angels, selflessly serving the nation. But they proved only too human, just like the rest of us. They responded to incentives.

The incentive to take advantage of the increases in public spending was strong. The outcome was a huge increase in the pay of the public sector relative to that of the private, even more attractive gold plated pension schemes, shiny new offices, more staff, and endless re-gradings and promotions. Most of the rise in public spending did not go into improving service provision. Instead, it went into subsidising the private consumption of those employed in the public sector.

Like it or not, responding to incentives is a very deep-rooted aspect of human behaviour.

As Published in City AM on Wednesday 11th March

Image: Ed Miliband and Fabian Hamilton by Bob Peters licensed under CC BY 2.0

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Popular culture is the driving force of inequality

Popular culture is the driving force of inequality

The Oscars have come and gone for another year. Winning an Oscar is very often the basis for either making a fortune, or turning an existing one into mega riches. Jack Nicholson has an estimated worth of over $400 million, and stars like Tom Hanks and Robert de Niro are not far behind.

Even winners who lack the instant recognition of these stars do not do too badly. Cuba Gooding Jnr has recently starred in the American civil rights film Selma. But after his 1996 Oscar for a supporting role in Jerry Maguire, he became notorious amongst film buffs for appearing in movies which were panned by critics and which tanked commercially. This has not stopped his wealth rising to an estimated $40 million.

The Premier League has provided us with another example of success apparently reinforcing success. Its recent TV deal with Sky and BT Sports is worth over £5 billion. Along with investment banking, soccer is one of the few industries which practices socialism, with almost all the income of the companies eventually ending up in the hands of what we might call the workers. The year immediately prior to the financial crisis, 2007, still represents a high point in the annual earnings of many people. But the average salary of a Premier League player has risen over this period from some £750,000 to almost £2.5 million.

At one level, films and football seem to provide ammunition for the sub-Marxist arguments of people like Thomas Piketty, arguing that capitalism inevitably leads to greater inequality. The rich simply get richer. This conveniently ignores the fact that over the fifty years between around 1920 and 1970, there was a massive movement towards great equality in the West, in both income and wealth.

During the second half of the 20th century, a profound difference in communications technology opened up between the world as it is now and all previous human history. Television by the 1960s had become more or less ubiquitous in the West. Vast numbers of people could access the same visual information at the same time. The internet has of course enormously increased the connectivity of virtually the whole world.

These advances in technology have altered the way in which people respond to information. The importance of social networks in influencing the choices made by individuals has risen sharply. The economic model of choice in which rational individuals carefully sift all the available information is no longer even feasible in many situations. Almost all click throughs on Google searches, for example, are on the first three sites which come up. It is simply not possible to work through the thousands, or even millions, of sites which are offered.

This means that self-reinforcing processes are set up. Things which become popular become even more popular, simply because they are popular. And because of communications technology, we know what is popular. In popular culture, a rapidly growing sector of the economy embracing both films and soccer, high levels of inequality of income are inevitable

As Published in City AM on Wednesday 25th February 2015

Image: Academy Award Winner by Davidlohr Bueso licensed under CC BY 2.0

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