Articles published in August, 2013
From Monday 12 August, by Sam Fleming, Economics Editor:
Harford, a Financial Times columnist and presenter of Radio 4’s More or Less, is best known for his work on microeconomics, homing in on everyday matters such as coffee prices, gambling in Las Vegas casinos, bosses’ pay packages and the tactics behind speed dating. In the new book he looks at the world through the wide-angle lens of macroeconomics — the management of entire economies. Harford manages to explain the topic with beguiling clarity and in the effortlessly breezy style that has characterised his previous books.
Harford spurns the polemical style that infects so much writing about macroeconomics, offering a clear exposition of the key debates using case studies ranging from Second World War POW camps to the 1970s oil shock and Brazil in the 1990s. In doing so he also explains the elusive concept of money, taking in not only the gold standard and bitcoins but the Micronesian island of Yap, where the currency was stone wheels up to 4½ tons in weight, one of which sat at the bottom of the sea. Yap’s currency might seem singularly odd, but Harford makes a convincing case that it is considerably less crazy than the monetary system we use today, based on circulating bits of paper.
Harford’s sympathies and passions lie in microeconomics, and this comes across in the book. Macroeconomics, he suggests, is a profession facing something of a crisis after its theories proved incapable of responding to the banking crisis of 2007-09.
While Keynes argued that master-economists should combine the gifts of the mathematician, historian, statesman and philosopher, modern macroeconomists tend to have a far narrower focus. Harford discusses this complex field in the Q&A format used in his columns. Some readers might find this wearing over 285 pages, but it is a good way of leading the reader by the hand through what can be an inaccessible subject. Harford explains the subject with impressive clarity and wit.
The book is out in the UK at the end of August – more details here.
Groups that carve out space for different perspectives tend to make more sensible decisions
“My study shows that the companies with ‘family friendly’ policies have higher profits,” says a researcher in a Dilbert strip from 1997. Dilbert responds, “Do family policies cause high profits or do high profits simply camouflage the true costs of the policies?”
It’s often thus in social science. Take the question of diversity on corporate boards. There are some intuitive reasons to believe that companies are better off if they consider the widest possible pool of directors and carve out space for different perspectives – in other words, put some people on the board who aren’t white men.
This isn’t necessarily because women and non-white men are smarter, wiser or more diligent, although that may be true. It’s because diverse groups tend to make more sensible decisions. This idea has emerged from the case studies of the psychologist Irving Janis and the psychological experiments of Solomon Asch, and has been explored formally by the complexity scientist Scott Page. Diversity even seems to be good for the Bank of England’s monetary policy committee.
Some studies provide empirical support for the idea that shareholders should want to see more diverse boards. In the Journal of Financial Economics, Renée Adams and Daniel Ferreira found that female directors seemed to provide better oversight, and to inspire their male colleagues to do likewise. In the Financial Review, David Carter, Betty Simkins and W Gary Simpson found a correlation between firm value and diversity on the board. But this raises the Dilbert problem: are these companies well run because their boards are diverse, or do well-run firms decide to appoint diverse boards anyway?
A new study by Alan Gregory and colleagues in the British Journal of Management takes a different tack by looking at how the stock market responds to trades by female company directors. When a director buys stock in his or her own company, that’s probably a good sign: naturally enough, the price of that stock tends to rise almost immediately as investors follow suit. But what if the director is a woman? The study (looking at tens of thousands of trades in UK companies from 1994 to 2006) showed that the stock market reaction was more muted, suggesting that investors didn’t take women’s judgments very seriously.
There are a number of alternative explanations for this. The stock market pays particular attention to executive directors, and to directors’ trades in smaller companies. Women are disproportionately likely to be non-executive directors, and on the boards of larger companies. But whether or not there is a non-sexist explanation for what appears to be a chauvinistic market response, fund managers should be paying more attention to what female directors do.
Why? Because they make more money when they buy shares. On a medium-term timescale, from three months to a year, their trades outperform those of their male counterparts. Far from dismissing the decisions of female directors as noise trading by air-headed tokens of political correctness, investors should follow them more assiduously than they do the men.
This is just one study, and the “women outperform” result, while observed across a variety of time periods, is uncertain enough that it may be a statistical fluke. But it is not a complete surprise: a famous study, “Boys Will Be Boys” by Brad Barber and Terrance Odean, found that men lost money on the stock market relative to women because they traded too often.
The reason for the lack of statistical significance is depressingly simple: there are few female company directors. And, if the attitude of the investment community is anything to go by, that is not about to change.
Also published at ft.com.
William Stanley Jevons was born in Liverpool in 1835. When his father’s business ran into trouble, he left his studies at University College London and went to work for five years in Sydney, assaying precious metals at a mint, before returning to London and academia. He made some important contributions to economics – the young John Maynard Keynes thought Jevons was one of the outstanding minds of the 19th century – but he died at 46, drowning in the sea off Bexhill.
Despite Keynes’s admiration, Jevons might now be forgotten, save for one famous prediction and one intriguing argument. The famous prediction – that the UK’s economic prosperity was at risk because the country would run out of viable reserves of coal – was contained in The Coal Question (1865), a book that made Jevons a celebrated pundit at the age of 29. The coal industry did fall into decline. Production peaked exactly a century ago, when there were 1.1 million coal miners – four times as many as when Margaret Thatcher was elected in 1979. Whether this had much to do with the fall of the Empire is a fascinating question.
Jevons remains notable in some circles for an argument he made in The Coal Question, rebutting critics who claimed that a coal shortage was no problem because steam engines would become dramatically more efficient. Jevons replied: “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.” This idea became known as the Jevons paradox: that energy efficiency does not reduce energy consumption. When light was hugely expensive, a person might read by the fickle flame of a single candle; now it’s so cheap we flood our cities with it. Double glazing could mean lower heating bills but in practice it means warmer houses.
So was Jevons right? That’s a hotly contested topic. On a microeconomic level, he was not: a 50 per cent increase in the energy efficiency of a device will lead to increased use, but rarely to the doubling in usage that would be necessary for Jevons to be correct. Aha, reply Jevons’s defenders: even if a fuel-sipping car does not induce me to drive much further, I may still spend my cash savings on some other energy-guzzling device. True. But energy is a small enough part of the economy – about 6 to 10 per cent – that the actual cash savings available to spend elsewhere will usually be modest.
The broadest version of the Jevons paradox is that energy efficiency, in a very general sense, makes economic growth possible, and this in turn creates new demands for energy that swamp the initial energy saving. This claim – sometimes called the Khazzoom-Brookes postulate – is hard to evaluate. In the UK, energy consumption per person is at its lowest level for 50 years, which is a mark against Khazzoom-Brookes. Yet world energy consumption continues to increase despite a cornucopia of efficiency gains over the decades. This perverse correlation is not necessarily causal – and more importantly, it is not inevitable. It is possible to enjoy the benefits of energy-efficient devices without burning yet more energy.
Which brings us to policy conclusions. Jevons has been used to argue that energy efficiency is pointless as a goal of public policy. That’s wrong: what matters is how that goal is pursued. Government rules requiring efficiency may fail to deliver lower energy consumption. But there is a complement to the regulatory approach: using taxes (or tradeable pollution permits, which have a similar effect) to raise the price of consuming fossil fuels. A new efficiency standard may not do much in isolation but it will work wonders when coupled with a tax on carbon.