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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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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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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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