That is history. This is not: the former mita districts are 25 per cent poorer than apparently identical districts on the other side of a boundary that ceased to mean anything 198 years ago. A long-abolished colonial system has somehow shaped the modern world.

The discovery, by a young economist at MIT named Melissa Dell, is one of many made recently which show that economic development has a long memory. Here is another example, from Daniel Berger, a PhD student at New York University: the 7° 10’ line of latitude that runs through Nigeria is geographically unremarkable and has had no administrative significance for 96 years. Nevertheless, villages just to the north of this line on a map enjoy more competent government than those just to the south.

Economists became interested in the idea that history means something when three influential research papers were published, the first in 1997. Rafael La Porta and colleagues argued that British common law provided better protection for investors than the Roman civil law tradition, and showed that former British colonies seemed to have more advanced financial markets than former French colonies. Stanley Engerman and Kenneth Sokoloff argued that Latin America had underperformed relative to Canada and the US, because it had a climate better suited to growing plantation crops such as sugar, which in turn led to exploitative institutions. And Daron Acemoglu, Simon Johnson and James Robinson showed that the reason tropical diseases are strongly correlated with underdevelopment is less for the obvious reason – that malaria is bad for the economy – and more because such diseases killed large numbers of settlers, who lacked any resistance to them. This encouraged colonial powers to grab gold, ivory and slaves rather than settling the countries and establishing decent institutions. (The Pilgrim Fathers nearly went to Guyana before thinking better of it when they realised their chances of surviving the local diseases were very low.)

Nathan Nunn, an economist at Harvard, has recently summarised the new wave of economic history. He argues that work such as Dell’s and Berger’s helps us understand not just whether history matters, but, thanks to a better handle on the channels of causation, why it matters.

Dell shows that areas outside the mita system were more likely to have large farms; the owners of such haciendas were politically influential and were able to campaign for public goods such as better roads. Berger argues that the 7° 10’ line of latitude in Nigeria is important because different systems of taxation once prevailed on either side of it. To the south, officials relied on customs duties and other taxes on trade through Nigeria’s ports. North of the line, taxes were levied on people – which meant somebody had to arrange a census and keep proper accounts. The difference in bureaucratic capability has persisted for a century.

All this suggests a fatalistic conclusion about economic development: if today’s economic outcomes are influenced by institutions shaped centuries ago, there is reason to be pessimistic that we can do much to help now. That would be going too far, because history is not the only thing that matters. But matter it does.

Also published at ft.com.

Emerging economies have to pay attention to what foreign investors think, because they typically have to borrow in dollars rather than their own currency. Life is different for countries such as the US and the UK, which have been borrowing enthusiastically in their own currencies with little sign of serious concern from the bond markets. For richer countries it is possible that Dick Cheney was right when (according to former treasury secretary Paul O’Neill) he said that “Reagan proved that deficits don’t matter.” If deficits don’t matter, one can only surmise that their natural consequence – public debt – doesn’t matter either.

We had better hope that both Cheney’s claim and Adam Smith’s rumination prove to be true, because many wealthy governments are building up debt very swiftly indeed.

According to the IMF, in the years leading up to the crisis, the gross debt to GDP ratio – which includes interest payments – was just over 40 per cent in the UK and 60 per cent in the US. This year it looks like it will exceed 80 per cent in the UK and 90 per cent in the US. By 2014, the IMF expects the UK ratio to be just under 100 per cent, and the US ratio to rise to nearly 110 per cent.

What are the likely consequences of issuing all these IOUs? A new study by Carmen Reinhart and the IMF’s former chief economist Kenneth Rogoff offers clues. Reinhart and Rogoff have been constructing an impressive database on public debt, covering 44 countries and stretching back two centuries. If the past is any guide to the future, they offer plenty of reason to be concerned.

Reinhart and Rogoff look at episodes of low, medium, high and very high indebtedness, drawing boundaries arbitrarily at public debt/GDP ratios of 30, 60 and 90 per cent. And up to a point, Dick Cheney and Adam Smith are right: there is little sign of trouble at any level of public debt up to 90 per cent of GDP. But once public debt strays into the “very high” category – which is where most rich countries are quickly heading – economic growth has tended to slump. For highly indebted rich countries, median economic growth is about 1 per cent lower than for less indebted rich countries, and mean growth is 4 per cent lower. The fact that mean growth is particularly weak indicates that for a minority of countries, high debt is a catastrophe.

The Reinhart-Rogoff study offers some cause for optimism. Most rich countries are still below the 90 per cent public debt/GDP threshold: so far, debt and deficits are a symptom of weakness, not its cause. And the high inflation feared by some commentators has not, historically, been a feature of high debt levels in rich countries.

Overall, though, the study is worrying. Although there are cases of highly indebted governments presiding over rapid growth – such as Australia and New Zealand immediately after the second world war – they look like deceptive parallels for today. High debt is to be expected after a major war, and as the economy moves to a peacetime footing, high growth is quite possible too.

But high debt in peacetime is suggestive of something rotten in the body politic. The UK government’s structural deficit is larger than the budget for the National Health Service. It will be a long slog from here.

Also published at ft.com.

The tax is being backed by a large coalition of charities and fronted by Bill Nighy in a smooth marketing campaign. It’s all in a good cause. But I have been appalled by the campaign’s profound lack of curiosity as to whether this tax would be a good idea.

Start with the claim on the Robin Hood tax website that this is a “tiny tax on bankers … the people who caused this mess”. First, it’s not a tax on bankers. It’s a tax on financial transactions. And it’s not necessarily tiny, because some worthwhile financial transactions have a very large face value, and a much smaller true value. For instance, I might buy car insurance which could – if I knocked somebody down and permanently disabled them – trigger a payment of £1m. My insurance company might want to reinsure that million-pound risk, a perfectly sensible, socially useful and non-speculative transaction. But at a “tiny” tax rate of 0.05 per cent, that’s a £500 tax on a face value of £1m. It’s hard to imagine such a tax wouldn’t somehow affect my premium.

The Robin Hood tax proposes to raise several hundred billion pounds, and it will ultimately be paid not by “bankers” but by all of us, with the burden shared unpredictably. Robin Hood himself seems incurious where his arrows will strike, or at least unwilling to be specific.

The tax would certainly be attractive if, like a tax on carbon dioxide or congestion, it reduced destructive activities. But would it? James Tobin and John Maynard Keynes both proposed taxes on financial transactions and each believed that the tax would reduce financial volatility. This is possible but far from obvious, when you realise that the tax might encourage bigger, more irregular financial transactions. An analogy: if I have to pay a charge whenever I use a cash machine, I make fewer, larger withdrawals and the amount of money in my wallet fluctuates more widely. Bear in mind, too, that the most bubble-prone asset market is for housing, which is bought in very lumpy, long-term chunks.

There isn’t much evidence as to whether transaction charges reduce volatility. What there is is mixed – but perhaps leaning against the Robin Hood tax. On the French stock market, coarser “tick sizes” raise spreads and act like a tax: they increase volatility. Transaction taxes on Swedish stocks in the 1980s reduced prices and turnover but left volatility unchanged.

Banks have let us down, but the answer is to reform the banks, not tax financial transactions. (Sometimes the local bus company lets me down; I have never regarded this as an argument for a bus tax.) I’d modestly suggest a combination of stricter capital requirements, closer supervision, better bankruptcy procedures for banks and charges for the taxpayer’s underwriting of banks’ balance sheets. A tax on financial transactions doesn’t make my top 10 policy reforms. In fact, it doesn’t figure on the list at all. It’s a sideshow.

I haven’t forgotten the ultimate aim of raising money for the very poor. It’s a cause I continue to support politically and personally. But the Robin Hood campaigners have dented my confidence that they should be trusted with my cash. Money isn’t enough: we must also care about what works. Do they?

Also published at ft.com.

The prosecution has assembled quite a case. A recent survey by Yoram Bauman and Elaina Rose, two economists from the University of Washington, explains that in experiments, economics students are less generous, more likely to choose an unco-operative approach and more likely to accept bribes.

There have been a couple of contrary pieces of evidence. For instance, a study of who paid their dues to professional bodies such as the American Economic Association found that economists were more honest than sociologists and political scientists. And perhaps the budding economists are not truly mean and selfish, but are simply showing that they have mastered their studies by producing the behaviour described in simple textbook models. Arguably, the students of economics are not doing anything sinister, any more than if they calculated the roots of a quadratic equation.

But neither this argument nor the stray pieces of contrary data are entirely reassuring. Bauman and Rose, and also Bruno Frey and Stephan Meier, have shown that students of economics are less likely to contribute to university-nominated charities when invited to do so as they register for new courses each semester. This is disturbing, since the data comes not from the laboratory but from studying real decisions.

Let me offer a defence of the morality of economics, based on nothing more than casual observation. Economists seem to me to be more interested than many in problems of poverty and development. They are internationalists, more likely to consider the welfare of foreigners when weighing up the pros and cons of trade or immigration. They have a touching faith in the idea that deep down, everyone is equal and everyone is a good judge of their own best interests. Economists may be less focused on racism and discrimination than some other social scientists, but largely because – with a few important exceptions – we find them almost too baffling to analyse. We forget that when Thomas Carlyle coined the epithet “the dismal science”, he was condemning not the gloomy Malthus but John Stuart Mill and his stubborn, infuriating opposition to slavery.

Economists are cautious about get-rich-quick schemes – they have seen too many bubbles – and yet optimists about the future of humanity. They habitually look for gains from trade rather than zero-sum squabbles. Above all, economists are interested in results rather than rhetoric.

Perhaps this is all a self-indulgent fantasy, and perhaps I have conflated the experience of learning economics with the experience of growing up. I can hardly point to much empirical evidence in support of my claims, as any good economist would want to. At least I mean well. Bauman, after demonstrating to his satisfaction the corrupting nature of economics, is trying to seduce students with a stand-up comedy routine and a cartoon introduction to the unsavoury subject. One panel opines: “The true miracle of the invisible hand is that in certain situations the world will look heavenly even if it’s full of selfish jerks!” Excusing selfish jerks is reckless – but would you really expect a social conscience from an economist?

Also published at ft.com.

The answer reminded me of a brain-teaser that’s been entertaining me for the past couple of months. Since buses often run almost empty, two people sharing a car emit less CO2 per person than do bus passengers. Shouldn’t we then be travelling by car?

The BBC’s in-house environmental activist, Justin Rowlatt, aka “Ethical Man”, recently pondered this question and concluded that, no, he’d still be taking the bus. Why? Because the buses are making the journey anyway.

A pause to run through the statistics. According to my colleagues on the BBC’s More or Less programme, cars emit 127g of CO2 per passenger per kilometre and buses 106g, based on average occupancy. Even London buses average a mere 13 passengers. This is one of the problems of a public transport system: in order to make the system attractive, frequent services need to run off-peak, and in order to make the system work at all, vast chunks of metal need to counter-commute, almost empty, to get back to the start of their rush-hour routes. They are “making the journey anyway”.

There is something strange going on when the environmentalist and the anti-environmentalist use the same excuse – one to justify taking the plane, the other to justify taking the bus. An admittedly unscientific poll of environmentalists at dinner parties suggests to me that they think “the plane is making the journey anyway” excuse is unacceptable but “the bus is making the journey anyway” excuse is spot on – and that they have no coherent justification for the distinction. Their favourite excuse is “you have to set an example” – but surely, before you decide to set an example, you need to be sure that you aren’t setting a bad one.

To cut through the fog we need to rely on some technical language. We must distinguish between average cost, marginal cost, and average marginal cost. The average carbon cost of travelling by car or bus is the total emissions divided by the number of passengers: these are the numbers that are unflattering to buses. The marginal carbon cost is the extra emissions caused by one additional passenger. For planes, trains and buses this is low – unless, that is, the passenger is the straw that breaks the camel’s back, and causes an additional bus, plane or train to be scheduled in future, in which case the marginal carbon cost of that passenger will be gigantic.

The average marginal cost averages out the marginal costs of a large chunk of passengers. (Exactly which chunk to use seems to be a rather black art.) The idea is to share out the cost between the passengers who do not provoke an extra bus or flight, and the passengers who do.

For all you environmentalists out there, then, here is the justification for the double-standard of taking the bus but not the plane: it is that bus schedules might be insensitive to passenger demand, while planes are highly sensitive – and ever more so since the budget airlines arrived on the scene. Your best argument for taking the bus is a perverse one: that, no matter how many people do likewise, it’s the rare public transport tsar that will lay on extra buses.

I’ll be cycling.

Also published at ft.com.

I will concede that offering cash is not always productive. In the days when I was young, free and single, I was never tempted to try to seduce cute girls at parties by slipping them a couple of crisp twenties. (Perhaps I should have done it. It is not as if my hit rate on an unpaid basis was particularly good either.)

Yet many policy wonks believe not just that there are some things that money can’t buy, but that cash incentives are counterproductive and even morally corrosive. The touchstone of this school of thought is Richard Titmuss’s book The Gift Relationship, published in 1970.Titmuss’s most memorable and influential claim was that the British system of voluntary blood donation led to better outcomes – healthier blood, supplied in a more timely fashion – than the American system of paying blood donors.

Titmuss’s argument was influential. In an example made famous by Freakonomics, when parents at an Israeli kindergarten were fined a small amount for showing up late to collect their children, their punctuality actually declined. The behavioural scientists Dan Ariely and James Heyman asked experimental subjects to perform a boring task; those paid a few cents did less work than those paid nothing at all.

Another experiment showed that when kindergarten students were given little awards when they drew with crayons, they tended to refuse thereafter to draw for nothing. Who colours in for free, anyway?

And there is even the evergreen idea that by underpaying nurses, we might attract the right kind of people – those with a vocation.

I can’t help feeling that we believe in the altruism thesis so strongly because it feels like the way the world should work. But the empirical support for the belief is thinner than we like to think. In the Ariely-Heyman experiment, a payment as low as five dollars was enough to remotivate their subjects. It was only the laughably small payments that caused problems. Bear in mind, too, that Ariely and Heyman were not trying to test a hypothesis about payment for performance, which is why they did not make the reward conditional on results.

Attachment to the Titmuss hypothesis has the power to cause harm. The psychologist Barry Schwartz used the kindergarten experiment to excoriate an experimental New York schools programme which paid older children to show up and work hard. It was depressing to see a write-up of a small experiment being used to argue that New York should not run a large and realistic one.

The “cheap nurses are good nurses” thesis is demonstrably false; in the British health service, the economists Emma Hall, Carol Propper and John van Reenen have shown that lower real wages for nursing staff mean more temporary staff, more overpromoted staff – and more patient deaths. As for blood donation, Titmuss’s thesis is far less pressing now that better blood-screening techniques have been developed. It is not clear how solid the idea was, since he himself complained about the lack of good data. But perhaps he was right that paying for blood was counterproductive.

Still, it is interesting to see a new study by the economists Nicola Lacetera, Mario Macis and Robert Slonim concluding that paying for blood increases the quantity donated without lowering the quality. Distasteful it may be, but sometimes the way to get results is to pay for them.

Also published at ft.com.

But how much did the banks benefit from Hank Paulson’s “gift”? Did the policy have the desired effect? If so, why? All these questions are answered in research carried out by Pietro Veronesi and Luigi Zingales, economists at the University of Chicago, updated last month. One fascinating conclusion is that Paulson, a former chief executive of Goldman Sachs, may have missed a huge money-making opportunity.

The plan apparently stabilised the financial system in the short run; in the long run, it may have the opposite effect by encouraging some future generation of bankers to take more risks. Both these effects are impossible to quantify.

Veronesi and Zingales restrict themselves to the narrower question of whether the gain to bank shareholders and bondholders outweighed the loss to the US taxpayer. (Perhaps that sounds like a low threshold. It isn’t: most government protection costs the taxpayer or consumer far more than they ever benefit the beneficiaries – witness almost every trade tariff in history.) They conclude that shareholders and bondholders in the banks were about $130bn better off as a result of Paulson’s gift. Taxpayers stumped up less than that, taking a loss of perhaps $20bn-$45bn. As much as $5 may have been gained for every tax dollar spent. Infuriating as it may be to those taxpayers who had no desire to write a cheque to bank bondholders, it may be some consolation that the policy was terrific value for money.

It is no surprise that injecting cash into banks would increase the wealth of their shareholders and bondholders. What is less obvious is why the effect was so large. Veronesi and Zingales believe the gift prevented runs on the banks, the risk of which was depressing bond and share prices. A bank run is a situation where a bank can be bankrupted simply on the strength of the fear that it might happen. If a government guarantee can relieve such panic, it can create great value at little cost. And, indeed, the banks that gained most from Paulson’s gift are also the banks that were in imminent danger of a run.

The mix of guarantees and equity injection also appears to have been superior to most of the other ideas floating around at the time. The original idea behind the Troubled Asset Relief Program (Tarp) was to buy assets from the banks, apparently at market value. This would have required a cool $4,000bn of purchases and subjected the taxpayer to enormous risks – and profit opportunities. A straight equity injection also looks expensive and would have required near-nationalisation of many banks.

Pats on the back all round then. But one lingering question: if the plan created such gains, why didn’t Paulson ask for more from the banks, as Warren Buffett had done three weeks earlier when he invested in Goldman Sachs? Veronesi and Zingales reckon that if Paulson had secured the same terms as Buffett, the taxpayer would have made more than $40bn, a roughly even split with the banks’ creditors. Easy to say now – but it would have made a big difference to the politics of the bail-out. No wonder the Treasury is drawing up a bill for services rendered.

Also published at ft.com.

The story – told by Major General Andrew Mackay CBE and Commander Steve Tatham in a new paper on “Behavioural Conflict” for the UK’s Defence Academy – illuminates the situation facing coalition forces in Afghanistan. There has been a tendency among commentators and politicians to treat the “hearts and minds” aspect of counter-insurgency as a popularity contest. But the “voters” are not casual spectators, trying to choose between the Taliban or the coalition forces; they are individuals weighing up complex choices in difficult circumstances.

I met Andrew Mackay, who commanded 52 Brigade in Helmand Province (and who announced his resignation from the army in September), because of his interest in the problem of influence in conflict situations. He was reading books about behavioural economics, including my own, in the hope of adding some insight to experience gained in the field.

Some of the more successful tactics in Iraq and Afghanistan have indeed been built on the simple economists’ prescription: if you want to change behaviour, change incentives. For example, killing insurgents without holding territory did not encourage co-operation from bystanders, as anyone who had collaborated would be killed when the insurgents returned. When coalition forces switched to the tactic of holding territory and preventing the return of insurgents, people became happier to share information.

The more psychologically detailed insights of behavioural economics may also be promising. Mackay and Tatham cite Afghanistan’s National Solidarity Programme as an example of the “choice architecture” described by policy guru Cass Sunstein and the behavioural economist Richard Thaler. The NSP handed out grants to villages, provided the village leaders were elected by secret ballot, held communal meetings, and posted accounts in a public place: a nudge towards better governance.

Yet it is unrealistic to hope for too much oven-ready insight from behavioural economics. The armed forces need to develop their own approaches, and this cannot be done from Whitehall. A patrol leader will have to make his own decisions about how to influence the local population. Without the right training, they will often be bad decisions. Mackay and Tatham offer a worrying analysis: the British armed forces have little expertise in psychology or public relations, and what expertise they do have is centralised. British research capability in this area is weak, and is being dismantled.

Whether or not generals can learn from economists, economists can certainly learn from generals. I have been as guilty as anyone of being fascinated by behavioural economics. But the financial system did not fail because of some psychological trait, but because it was riddled with damaging incentives that were hard to spot because the system was complex and changing quickly. So, too, with counter-insurgency: Mackay started by thinking about economic psychology but ended up focusing on complexity, and what it takes to create an organisation capable of adapting to complexity. It has taken me too long to come to the same conclusion myself.

Also published at ft.com.

Such quibbles aside, it seems only sensible that when unemployment rises and companies stumble, the taxpayer should take up the slack. And yet the economic case for government stimulus is far from clear cut. Stimulus spending can erode private spending. My wife, for example, is a portrait photographer. Recently she secured a contract from a local council that kept her busy for weeks. While she was working on it she kept her head down, actively avoiding work in the private sector. A company looking for a photographer would have had to go elsewhere, perhaps paying more for an inferior snapper, perhaps giving up on the whole business.

The pro-stimulus view is that the government hires otherwise-unemployed workers, who spend money, which is used to hire other otherwise-unemployed workers, who go on to spend more money, and so on. No wonder such government spending is said to have a “multiplier”. But the example of my wife suggests that the multiplier could also be zero. Rather than reducing unemployment, the government may be shifting workers from the private to the public sector.

There is nothing absurd about assuming a multiplier of zero. It is implicit in the traditional cost-benefit analysis of government projects, photographic or otherwise, which simply asks whether the projects should go ahead on their own merits, rather than speculating on all the jobs that might be multiplied into existence. If the multiplier is zero and you want to spend a billion dollars on bridges, then make sure you think the bridges are worth a billion dollars.

If government spending snarls up the economy, the long-run multiplier might well be negative (look up “Soviet Union” in any encyclopedia). But the assumption has tended to be that it is positive, at least in times of recession. In his General Theory, Keynes outlines an example with a multiplier of 10. President Obama’s Council of Economic Advisers puts forward a multiplier of 1.6, which seems modest in comparison. But even a multiplier of 1.6 would be impressive. It means that if the government spends a billion dollars building a few bridges, the knock-on effects will be to increase the size of the private sector by $600m. We get the bridges, and we get more of everything else, too. With a multiplier of 1.6, paying people to bury money and dig it up again is sound policy. Even a multiplier of 0.5 would mean we could get a billion dollars of bridges while losing only $500m of private sector activity – a pretty good deal.

This analysis helps to clarify what we’re talking about. But it does not tell us what the multiplier is. I have seen estimates based on careful work by respected economists that range from zero to 1.5 – perhaps higher still if we think the world economy was on the brink of depression in 2009.

It should be no surprise that there is disagreement, sometimes ill-tempered disagreement. Government spending varies because the economy is in flux; it is almost impossible to say what causes what, and the tantrums tend to be about whose methodology is the least absurd.

My own conclusion: government projects probably do enjoy a multiplier-related discount in straitened times. But it is still worth asking whether the projects themselves are worth doing.

Also published at ft.com.

This virtue is underrated. Environmentalists have been slow to realise that the fashionable eco-lifestyle is riddled with contradictions. The one that particularly exasperates me is the “food miles” obsession, whereby we eschew tomatoes from Spain and roses flown in from Kenya, in favour of local products grown in a heated greenhouse with a far greater carbon footprint.

Other less-than-obvious truths are: that pork and chicken have substantially lower carbon footprints than beef and lamb (yes, even organic beef and lamb); that milk and cheese also have a substantial footprint; that dishwashers are typically more efficient than washing dishes by hand; and that eco-friendly washing powders may be distinctly eco-unfriendly because they tend to tempt people to use hotter washes.

My conclusion is that a well-meaning environmentalist will make counterproductive decisions several times a day. I don’t blame the environmentalists: the problem is intrinsically complicated. Over a vegetarian curry in London recently, Vaze ruefully described to me the “six bloody months” he spent trying to research an eco-renovation of his home.

Even the experts can tie themselves in knots. Duncan Clark, author of The Rough Guide to Green Living, unveiled “10 eco-myths” in a Guardian podcast in November. Many of them were well chosen, but unfortunately his number one “myth” was not a myth at all: that switching off lights will reduce CO2 emissions. Clark’s logic is seductive: some European carbon emissions, including those generated by electricity, are subject to a cap. Clark is right to say that conserving electricity will allow other sectors to take up the resulting slack, because they will be able to buy permits to emit more cheaply than if we left our lights blazing.

Where Clark goes wrong is in assuming the cap will remain fixed forever. If we all turn out our lights, the price of permits will fall and politicians will find it politically easier to tighten the cap. So, keep installing those energy-efficient light bulbs. (Another less-than-obvious truth is that it’s not worth waiting for your old bulbs to burn out before you fit the new ones.)

After picking through the ideas of Vaze, Clark, David MacKay (a Cambridge physicist) and others, my view is that it is hopeless to expect that volunteers will navigate this maze of decisions.

That is why a broad-based, credible carbon price will be the foundation of any successful policy on climate change. The price would affect the cost of every decision we make; it would take away the guesswork. Current carbon pricing schemes, such as the European emissions trading scheme, are a good start, but they leave out too many sectors, and permits are too cheap.

And a final admission: not every feature of the low-carbon lifestyle is impossibly obscure. I felt rather smug when I realised I could stop drinking cappuccino in favour of espresso, saving 90kg of CO2 a year. Then I totted up my carbon footprint from air travel in 2009. It is the equivalent of almost 50 tonnes of CO2 – or more than the entire footprint of a typical British family of three. It doesn’t take a genius to figure out how to shrink that particular footprint. This year I shall do better.

Also published at ft.com.