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The blob is wrong: competition and independence raise school standards

The blob is wrong: competition and independence raise school standards

The A-Level results released last week confirm the dominance of schools in London and the South East. Provisional league tables have only appeared so far for state schools, but these two regions have two-thirds of the top 100. South Yorkshire, Tyne and Wear, and Wales did not have a single school between them in the top 100.

State schools in London and the South have many of their potentially brightest pupils creamed off by high-powered public schools. Yet they consistently produce much better results than their counterparts elsewhere in the country.

An article in the latest issue of the American Economic Association’s top Journal of Economic Perspectives sheds light on this persistent regional discrepancy in school performance. The paper, by Ludger Woessmann of Munich University, is an in-depth, meticulous statistical analysis of differences in the average achievement levels of school students in different countries across the world. There are of course formidable conceptual issues in comparing performances in, say, Ghana and Germany. But building on the pioneering work of the OECD and its Programme for International Student Assessment, the International Association for the Evaluation of Educational Achievement has made great progress in dealing with them.

An advantage of using such a disparate data set is precisely that there are large variations in both inputs and outputs in different countries. This means that, somewhat paradoxically, provided that the right analytical framework is used, the variability makes it easier to identify exactly what factors are important in determining outcomes. Even within the developed world, substantial differences exist. So we can usefully learn some lessons for inside the UK from Woessmann’s work.

The analysis confirms that resource inputs such as expenditure per student or class size appear to have limited effects on student achievement. Spending more money in itself is a very inefficient way of improving outcomes. This has been clear in general across the public sector as a whole since Gordon Brown’s experiments with massive increases in public spending.

Interestingly, “competition from privately operated schools positively affects achievement levels”. This implies that the strength of state schools in the South is in part due to the fact that they have to compete to attract good pupils. It is no coincidence that there is a cluster of very good state schools in South Manchester/North Cheshire, because Manchester, unlike anywhere else in the North, has a number of excellent private schools.

Given current debates here about devolving power within the educational system, Woessmann reports that school autonomy has positive effects on performance.

Finally, the values and attitudes of teachers and management matter. King David, a state school in an insalubrious part of North Manchester, promotes “traditional Jewish values of respect, self-discipline and the pursuit of excellence”. It came forty-ninth in the national tables.

Michael Gove described the UK educational establishment as “the blob”. The opinions and values of the blob are contradicted almost in their entirety by the scientific evidence. Competition, both within and between schools, and autonomy are key determinants of success.

Paul Ormerod

As published in City AM on Tuesday 23rd August

Image: Sports Day by Alex Lecea licensed under CC BY 2.0

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Why Britain and the US are streets ahead of Europe in innovation

Why Britain and the US are streets ahead of Europe in innovation

The proposed takeover of the hugely successful ARM Holdings by the Japanese giant SoftBank is in the news. Cambridge-based ARM is well placed to exploit the white hot concept of the internet of things, highlighting the UK’s recent advances in this field.

The UK has also performed well in biotechnology. But the industry came under scrutiny last week at a Centre for the Study of Financial Innovation seminar. Geoffrey Owen, former editor of the Financial Times, and Sussex academic Michael Hopkins introduced their new book Science, the State and the City.

On a world scale, the UK is second only to the United States in biotech, outstripping everyone else in key performance indicators for the industry. Owen and Hopkins’s book, however, is prompted by the fact that we are a very long way behind the leader. For example, US scientists have 45 per cent of all the citations in life sciences in academic journals, while we have just 15 per cent. The UK government spends roughly double the amount on health research and development of our European neighbours, but America spends at least 10 times as much as we do.

Our distant second places, in these and other areas which determine the success of a high technology industry, feedback on each other and cumulate. As a result, the market capitalisation of US biotech firms is more than 20 times as big as those of the UK.

Why has this happened? After all, what is possibly the greatest scientific discovery of the twentieth century which made all this possible, that of the double helix structure of DNA, was by the British scientists Crick and Watson.

Owen and Hopkins carefully dismantle the myth that it is the short-term outlook of the City which is responsible. This is often compared unfavourably to the long-termist approach of Germany and Japan. But it is the allegedly short-term Anglo-Saxon economies which are by far the best performers in biotech, an industry in which the time period from scientific discovery to marketable product is at least 10 and often as much as 15 years.

They do note, however, that British academics appear more interested in publishing academic papers and securing yet more research grants than in the process of commercialisation. There is a steady flow of entrepreneurial scientists who found biotech companies, but it is very much a minority taste in the UK compared to America.

The US industry clusters, with firms concentrated in San Francisco and Boston. So does the British, mainly near Cambridge. But attempts by European governments to develop clusters in a top down, dirigiste way have not worked. Owen and Hopkins argue that American success is based on a bottom up, evolutionary process, in which a successful ecosystem emerges rather than being designed.

Entrepreneurial academics, teaching hospitals, and venture capital spontaneously collaborated for mutual benefit. The US government also helped, with its massive funding for research and regulatory changes which boosted the industry.

The lesson is a general one for development. The public sector can facilitate but not command success. That arises from the drive of individuals with proper incentives.

Paul Ormerod

As published in CITY AM on wednesday 27th July 2016

Image: DNA representation by Andy Leppard is licensed under CC BY 2.0

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How Stalin’s right-hand man could help the UK in EU exit negotiations

How Stalin’s right-hand man could help the UK in EU exit negotiations

The topic of behavioural economics is very fashionable. But many economists remain rather sniffy about it, arguing that it often does not really add to what the discipline already knows. But one of its most distinctive and strongest results from a policy perspective is its emphasis on what is called the “architecture of choice”.

Economists love jargon phrases. But this particular one is in essence very simple. In any given context, the rules which are drawn up for the process of choice can have an absolutely decisive impact on the actual decisions.

For example, before the referendum the government struggled against opposition in the Lords to get through a bill on trade union political funds. At present, the costs of any political fund operated by a union are automatically deducted from a member’s dues. A member has to positively opt out if he or she does not want to pay it. The proposal was to make all members “opt in” so they would only pay into the fund if they take action to do so. The government has partially backed down on the measure, and it will now only apply to new members.

The reason the opposition has been so bitter is because how the choice is put will have a dramatic effect on the outcome. The “architecture of choice” will determine whether most union members pay the political levy or whether most do not. From a purely rational perspective, the only additional cost under “opting in” is trivial. It is the few minutes it would take to fill the form in. But in practice under “opt in”, most people would not bother.

The UK faces a crucial architecture of choice problem with the now notorious Article 50 of the EU’s Lisbon Treaty. In order to leave the EU, a member state has to invoke the article. Once this is done, there is a period of two years under which the terms of exit are negotiated. When the two years are up, the deal is simply what it is at the time. In theory further changes can be made, but since these would require the unanimous consent of all EU member states, it would be highly unlikely to happen.

So once we invoke Article 50, the EU has us over a barrel. The French, say, could simply sit there stalling for time and blocking all our proposals. Of course, they would never stoop so low. But if some other country did, we would just have to take what the EU gave us at the end of the two years. This is why we have to have extensive informal negotiations before Article 50 is triggered, which EU leaders say mustn’t happen. The Swiss drew up their first treaty with the EU in 1972 and are still negotiating.

The only alternative is to adopt the strategy of Molotov, Stalin’s right-hand man, at the United Nations in the middle of the last century. He simply said “no” to virtually everything. Until we get informal talks, we turn up at the Council of Ministers and veto every proposal on any subject whatsoever, regardless of its merit. A suitable job for Michael Gove, perhaps.

As published in CITY AM on Wednesday 6th July 2016

Image: LC-USZ62-135316 by National Museum of the U.S. Navy is licensed under CC 1.0

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There’s a smart case for diversity – but it’s not the one you think.

There’s a smart case for diversity – but it’s not the one you think.

Andy Haldane, chief economist at the Bank of England, hit the headlines last week with his confession that even he could not understand much of the material which pension providers give to customers. Less noticed, however, was a speech he gave the previous week at a dinner organised in aid of Children in Need on the fashionable theme of diversity.

The concept is dear to the heart of the liberal elite. Company boards, public institutions, all must embrace it without question. Each must have its “appropriate” quota of under-represented groups – every group, in fact, except white working class men. Mass immigration and open borders should be welcomed on the grounds that this makes society more diverse, which is unequivocally a Good Thing.

Haldane, one of the most original economists around, puts forward an altogether smarter set of arguments for diversity. A very deep seated human instinct is to be very wary of anything which is different. For much of our history, we have lived in small hunter-gatherer communities of 100 people or less. Groups of this size were very vulnerable to events which could make them extinct. The principal threats were conflict and disease, and the principal bearers of these were strangers. So it can be very sensible to prefer people who are similar to you and to distrust the unknown. As Haldane points out, this is “ecologically rational” behaviour.

But decisions which are rational for the individual can have consequences which are, collectively, bad. It is perfectly rational for everyone to head to the exits if the fire alarm sounds in the theatre. But the collective consequences are potentially catastrophic.

Haldane notes that economists call this an externality problem. He argues that a certain amount of diversity can generate positive externalities for society and the economy as a whole. Taking a very broad sweep of history, he cites Ancient Greece, medieval Italian cities and the London of Elizabeth I as examples of cosmopolitan, diverse cultures in which creativity flourished. Shakespeare was very much the product of that latter era, when England was opening up the world. And diversity, Haldane argues, in addition offers protection against the dangers of “group think”.

Some of his other examples are less convincing. He cites the results of the Harvard economist Alberto Alesina that a 1 per cent increase in the population arising from skilled immigrants raises long-run output by 2 per cent.  But the point here is surely that they are skilled rather than that they are immigrants. And, incredibly, Haldane gives the Monetary Policy Committee as an example of successful diversity.

Cultivating creativity requires what Haldane calls cognitive diversity, which may not be related at all to ethnic or gender diversity. Cambridge in the middle of last century consisted almost entirely of white, upper class men. Yet Keynes in economics, Wittgenstein in philosophy and, most important of all, Crick in biology generated world-changing ideas.

Haldane’s speech is a powerful counterweight to the tick-box mentality which currently dominates the thinking on diversity in policy circles.

Paul Ormerod

As published in City AM on Wednesday 24th May 

Image: All the colours by Garry Knight licensed under CC by 2.0

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There’s little logic to 2016’s shareholder revolts against executive pay

There’s little logic to 2016’s shareholder revolts against executive pay

The crisis at BHS has focused as much on the ethics of Phillip Green’s behaviour as it has on the plight of the company itself.  Sir John Collins, who put his name forward for a knighthood, has said Green should be stripped of it if his handling of the beleaguered company is found to have lacked integrity.

Green is by no means the only prominent businessman to have faced criticism in recent weeks.  Last month, almost 60 per cent of BP shareholders voted at the AGM against the £14m pay package for the chief executive in a year in which the company reported record losses, cut thousands of jobs and froze its employees’ pay.  Hours later, over 50 per cent of Smith and Nephew’s shareholders rejected the remuneration committee’s decision on executive bonuses, despite the fact that its shareholder returns were below the median of its peer group.

It is a natural human tendency to look for specific reasons why these headline grabbing events take place. So we feel that perhaps these attacks were justified because of the varying degrees of poor company performance in each of the examples.  But Sir Martin Sorrell, who has built up a global media business from scratch and really has created shareholder value, is expected to face similar criticisms at the WPP AGM in the summer.

At the opposite extreme, the business world is replete with examples of huge rewards being handed out for poor performance with no comeback at all.  One of the harbingers of the financial crisis in the autumn of 2008 was the collapse of Bear Stearns investment bank in March of that year, and the virtual destruction of its shareholder value.  Yet James Cayne, the chairman and chief executive, walked away unscathed with the $40 million he had been paid in cash.  Fred Goodwin at RBS did have his knighthood annulled, but he was one of the very few financiers to suffer despite the ravages which they caused.

It did seem that revolts against massive pay-outs would take off in the ‘shareholder spring’ of 2012.  The august Institute of Directors pronounced that companies must respond to shareholders’ anger or risk discrediting the wider business community.    In the end, the protests just fizzled out.

In terms of shareholder discontent with executive remuneration, we have examples where poor performance stirs this up, examples where even exceptionally poor performance does not, examples where even good performance provokes the shareholders, and examples where a protest movement simply fades away after lots of initial sound and fury.

So it is challenging, to say the least, to construct a logical explanation of what causes shareholders to get stirred up.   We should think of it instead as being more like a fashion item.  Once something starts to become popular, it is likely to become even more popular, simply because it is popular.  We may just have reached a tipping point, where the large institutional shareholders now feel it is the done thing to pillory top executives, almost regardless of their performance.

Paul Ormerod

As published in City AM on Wednesday 4th May 2016

Image: Sir Martin Sorrell by Chip Cutter is licensed under CC BY 2.0

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Scotland’s fiscal fantasy and the impact of an OUT vote

Scotland’s fiscal fantasy and the impact of an OUT vote

A short visit to the Highlands last week was refreshing. The scenery is just as spectacular as ever, and the people just as welcoming.  But elsewhere, the tectonic plates are shifting.  Last week, a televised debate took place amongst the political leaders contesting the elections to the Scottish Parliament in May.   It resembled a bidding contest in which each participant had to outdo the previous one in terms of boasting about how much public money they would spend. The excellent Ruth Davidson from the Conservatives was the conspicuous exception.

The sense of unreality was heightened when visiting the prosperous market towns of Perthshire, which would not be out of place in the Home Counties. Yet the polls suggest that they are about to vote for the SNP in large numbers, waiting to be fleeced to subsidise the less energetic denizens of the old industrial belt of Central Scotland.

Under the SNP government, the health service has deteriorated markedly and education has gone backwards. But it seems they will be returned to power with a large majority.  These problems are not believed to be the fault of the Scottish government but, in some mysterious way, the English.

If we plump for Brexit and North of the Border they do not, the strategy is to vote for independence and apply to be a member of the EU. But would the EU want them?  To put it in perspective, no one imagines that Portugal, say, is an important country which possesses clout in the European Commission.  Yet its population is over 10 million, and there are only 5 million Scots.

In addition, the public finances are shot to pieces. The Government and Expenditure Review Scotland announced earlier this month that the deficit in Scotland’s public finances is almost twice that of the UK as a whole.  Scotland’s net fiscal deficit was £16.7 billion, some 9.7 per cent of its GDP, compared with UK figures of £89 billion and 4.9 per cent.  The EU already has enough basket cases in the Mediterranean.  Why would the Germans welcome another country which they would have to bail out?

The Alice in Wonderland flavour is heightened by the posturing on tax. The SNP had been firmly committed to a top rate of income tax of 50p.  At the start of last week, Nicola Sturgeon pronounced that it was not possible.  Why?  She had just discovered that only 17,000 people in Scotland earned enough to pay it.  But these contribute no less than 14 per cent of the total take from income tax, and may simply move.  In the leader’s debate, she was once again in favour of the 50p rate, but only in the sense of St Augustine: “O Lord, make me chaste, but not just yet”.

Scotland epitomises the problems which all centre-Left governments face. They want high public spending, but the electorate will not pay the necessary tax.  They cannot finance it by issuing debt for very long.  The only solution is to find a kindly uncle who will pay, in this case the English.

As published in CITY AM on Wednesday 30th March 2016

Image: St Andrew’s Flag by Jim Bradbury is licensed under cc by 2.0

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