Stop sniping at central banks and set clear targets

What is the most important job in the world? President? Teacher? Parent? I suggest a post that would not feature on most people’s lists: central banker.

James Carville, who advised US president Bill Clinton, once quipped that he wanted to be reincarnated as the bond market, able to intimidate anybody. But as Ben Bernanke, Mervyn King and more recently Mario Draghi (crisis-era central bank heads in the US, UK and EU respectively) demonstrated, even the bond markets must bow to the desires of a central banker with trillions to spend.

Thank goodness for such financial superpowers. These central bankers have a strong claim to having prevented a rerun of the Great Depression. But the crisis is over, Mr Draghi is the last of that cohort still standing. Now in the final year of his term as European Central Bank president, he announced this week that eurozone quantitative easing would end this month.

So can central bankers now step out of the spotlight and toast their own intelligence, decisiveness and humility with a decent claret? It seems not. Politicians are spoiling for a fight.

President Donald Trump recently accused the US Federal Reserve of having “gone crazy” (the alleged sign of insanity: nudging interest rates up during a boom). Turkey’s Recep Tayyip Erdogan has been leaning on his central bank. And when the Reserve Bank of India’s governor abruptly resigned this week after weeks of political pressure, nobody was buying his claim that it is “for personal reasons”.

In the UK, Mark Carney, the governor of the Bank of England, has drawn fire both from prime minister Theresa May and Brexiter Jacob Rees-Mogg. Central bankers claim to be uninterested in politics, but politics is interested in them.

To understand how we got here, it is worth remembering why the idea of independent central banking, fashionable in the 1920s, became the received wisdom again in the 1990s.

The aim was simple: credibility. Politicians are always tempted to lower interest rates to keep the economy hot, unemployment low and voters happy. This might achieve short-term benefits but it undermines an economy’s health and stokes inflation. Even a principled politician’s promises to curb inflation would not be believed; bond markets would demand an inflation premium, unions big pay rises.

A flint-hearted technocrat can at times deliver better results for everyone. In the early 1980s, Fed chair Paul Volcker demonstrated the basic idea that inflation could be crushed by a sufficiently badass central banker. New Zealand formalised the arrangement a few years later by giving the Reserve Bank of New Zealand an explicit inflation target, regardless of consequences.

That target was hit. “Inflation will be defeated” seems to be partly a self-fulfilling belief, so credibility is a strong argument for central bank independence.

Yet central bankers have experienced some serious mission creep over the past decade. Paul Tucker, a former deputy BoE governor and author of Unelected Power (UK) (US), notes that we have handed ever more power to them. There were reasons for this. Central banks operate through the banking system and have the ability to create new money without limit. Instead of watching the crisis of 2008 from the sidelines, they rolled up their sleeves and got involved in almost every part of the bond and loan markets. Yet these efforts — from buying up debt to regulating mortgage availability — created winners and losers. That is the natural domain of politics.

And so we have three options. The status quo is to leave powerful unelected officials free to act with wide discretion, while serving as a scapegoat for politicians who have nothing else to offer. That will not do.

Or we could double down on autonomy. The central banks got plenty right during the crisis and, given the sorry state of politics at the moment, technocracy has a certain appeal. If the UK appointed Mr Carney supreme dictator for life and bought him a nice dress uniform, he surely couldn’t do a worse job of running the country than the elected politicians currently attempting to interpret the “will of the people”.

But the long-run health of our democracies demands that our politicians start taking responsibility again. The Brexit referendum demonstrated that it is unwise to turn over direct policymaking power to us voters; we lack the time, expertise and interest. Yet it is undemocratic to place the levers of power two or three steps away from the people.

There is no easy or complete solution, but Mr Tucker is right to demand a return to clear mandates for independent agencies, set and monitored by elected politicians. That is partly to keep the technocrats in check, but also to force politicians to step up.

If we see clearly that responsibility lies with elected officials, then we may start to value expertise for the sake of expertise again. We are only likely to trust technocrats to deal with the technical details if we see that politicians are dealing with the politics. We cannot allow unelected people unlimited discretion. But just as importantly, we cannot tolerate our politicians acting like children and hoping that the grown-ups will tidy up the mess.

Written for and first published in the Financial Times on 14 Dec 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

Why good forecasters become better people

So, what’s going to happen next, eh? Hard to say: the future has a lotta ins, a lotta outs, a lotta what-have-yous.

Perhaps I should be more willing to make bold forecasts. I see my peers forecasting all kinds of things with a confidence that only seems to add to their credibility. Bad forecasts are usually forgotten and you can milk a spectacular success for years.

Yet forecasts are the junk food of political and economic analysis: tasty to consume but neither satisfying nor healthy in the long run. So why should they be any more wholesome to produce?

The answer, it seems, is that those who habitually make forecasts may turn into better people. That is the conclusion suggested by a research paper from three psychologists, Barbara Mellers, Philip Tetlock and Hal Arkes.

Prof Tetlock won attention for his 2005 book Expert Political Judgment (UK) (US), which used the simple method of asking a few hundred experts to make specific, time-limited forecasts such as “Will Italy’s government debt/GDP ratio be between 70 and 90 per cent in December 1998?” or “Will Saddam Hussein be the president of Iraq on Dec 31 2002?”

It is only a modest oversimplification to summarise Prof Tetlock’s results using the late William Goldman’s aphorism: nobody knows anything.

Yet Profs Mellers, Tetlock and Don Moore then ran a larger forecasting tournament and discovered that a small number of people seem to be able to forecast better than the rest of us. These so-called superforecasters are not necessarily subject-matter experts, but they tend to be proactively open-minded, always looking for contrary evidence or opinions.

There are certain mental virtues, then, that make people better forecasters. The new research turns the question around: might trying to become a better forecaster strengthen such mental virtues? In particular, might it make us less polarised in our political views?

Of course there is nothing particularly virtuous about many of the forecasts we make, which are often pure bluff, attention-seeking or cheerleading. “We are going to make America so great again” (Donald Trump, February 2016); “There will be no downside to Brexit, only a considerable upside” ( David Davis, October 2016); “If this exit poll is right . . . I will publicly eat my hat” (Paddy Ashdown, May 2015). These may all be statements about the future, but it seems reasonable to say that they were never really intended as forecasts.

A forecasting tournament, on the other hand, rewards a good-faith effort at getting the answer right. A serious forecaster will soon be confronted by the gaps in his or her knowledge. In 2002, psychologists Leonid Rozenblit and Frank Keil coined the phrase “the illusion of explanatory depth”. If you ask people to explain how a flush lavatory actually works (or a helicopter, or a sewing machine) they will quickly find it is hard to explain beyond hand-waving. Most parents discover this when faced by questions from curious children.

Yet subsequent work has shown that asking people to explain how the US Affordable Care Act or the European Single Market work prompts some humility and, with it, political moderation. It seems plausible that thoughtful forecasting has a similar effect.

Good forecasters are obliged to consider different scenarios. Few prospects in a forecasting tournament are certainties. A forecaster may believe that parliament is likely to reject the deal the UK has negotiated with the EU, but he or she must seriously evaluate the alternative. Under which circumstances might parliament accept the deal instead? Again, pondering alternative scenarios and viewpoints has been shown to reduce our natural overconfidence.

My own experience with scenario planning — a very different type of futurology than a forecasting tournament — suggests another benefit of exploring the future. If the issue at hand is contentious, it can feel safer and less confrontational to talk about future possibilities than to argue about the present.

It may not be so surprising, then, that Profs Mellers, Tetlock and Arkes found that forecasting reduces political polarisation. They recruited people to participate in a multi-month forecasting tournament, then randomly assigned some to the tournament and some to a non-forecasting control group. (A sample question: “Will President Trump announce that the US will pull out of the Trans-Pacific Partnership during the first 100 days of his administration?”)

At the end of the experiment, the forecasters had moderated their views on a variety of policy domains. They also tempered their inclination to presume the opposite side was packed with extremists. Forecasting, it seems, is an antidote to political tribalism.

Of course, centrism is not always a virtue and, if forecasting tournaments are a cure for tribalism, then they are a course of treatment that lasts months. Yet the research is a reminder that not all forecasters are blowhards and bluffers.

Thinking seriously about the future requires keeping an open mind, understanding what you don’t know, and seeing things as others see them. If the end result is a good forecast, perhaps we should see that as the icing on the cake.

Written for and first published in the Financial Times on 23 Nov 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

The economist’s guide to the perfect Christmas

It was snowing even in London this week. Surely now it’s time to get serious about Christmas — and who better to give the perfect yuletide advice than an economist? (I also plan to include the best ideas from psychology, and call them “behavioural economics”; this is a proven formula.)

Economists are much needed at this time of year since Christmas is, more than anything, a consumerist blowout. It has been for well over a century. Joel Waldfogel, economist and author of Scroogenomics (UK) (US), comments that “just as every generation imagines that it invented sex, every generation imagines that it invented the vulgar commercialisation of Christmas”. Prof Waldfogel has tracked the size of the spending boom in the US in December, compared with November and January. It has been sizeable at least since the 1930s and probably much longer than that. If anything, Christmas stands out less in the spending data than it did three generations ago.

As an economist, I have nothing against this rampant consumerism — but I do wonder whether there is a way to enjoy a better Christmas.

Here is my three-point plan.

Step one: beware the efficient presents hypothesis. This is a variant on the efficient markets hypothesis, which says (roughly) that there are no bargains to be had on the stock market because they’ve already been noticed and snapped up. Similarly, the efficient presents hypothesis says that all the most suitable gifts have already been purchased — typically by recipients who have decided to treat themselves.

I have already fallen foul of the efficient presents hypothesis this year; carefully selecting a pair of extra-warm socks in precisely the style and size my wife prefers, I was dismayed when a parcel containing a duplicate pair arrived at our house a few days later. She was one step ahead of me in picking her own presents. The efficient presents hypothesis is not always true, any more than the regular efficient markets hypothesis. It is nevertheless true often enough to take seriously.

Step two: adopt a passive gift-buyer strategy. Again, the parallel with investment should be clear. You can achieve excellent investment results simply by making regular payments into passive index tracker funds. This strategy is dull and unimaginative, leaving no room for flair or good judgment. Nevertheless it works — partly because good judgment is scarce and flair often counterproductive. Active managers are often unable to outperform the stock market by enough to justify their fees. Individual investors tend to trade too often, buy high and sell low. Regular passive investment may be boring but it avoids these traps.

The ultimate passive gift is cash. Just like tracker funds it is utterly unimaginative yet a surprisingly difficult benchmark to beat. Many active gift-buyers swear they can get more than £50-worth of joy out of a £50 present, but Prof Waldfogel has good evidence that most of them fall well short. Gift-givers, like stock pickers, tend to overrate their abilities. (At least gift-givers have an excuse: they receive no feedback. Nobody is going to tell you that they hate the present you bought for them, but if your stock portfolio crashes it is hard not to notice.)

Since giving cash is often socially unacceptable, there is another passive approach that works well: find a wishlist, or just ask the recipient what they would like. Just as passive investment in index funds robs the stockpicking game of its daring and mystique, simply consulting a list seems robotic and joyless. But — as Francis Flynn of Stanford and Francesca Gino of Harvard have found — it is rarely perceived that way by recipients. While gift-givers hesitate to fall back on a wish list, recipients prefer items they have indicated that they actually want. They still think of the present purchaser as perfectly thoughtful: after all, someone took the trouble to find out what you wanted.

Step three: give the gift of time and attention. With all the effort you’ve saved ordering gifts from wish lists or simply writing cheques, see friends and enjoy the rituals of Christmas. Fresh from her wishlist research, Prof Gino has been part of a team studying the way family rituals influence our experience of seasonal festivities. Whether the rituals are secular or sacred, they are correlated with liking your family, feeling more satisfied with life and paying closer attention to your experiences. Exactly what causes what is not clear, but the idea that a good Christmas tradition brings people together is a sensible one. Too often, we lack the time because we are spending countless hours running around shops buying things that nobody will ever tell you they hated, already owned or both.

One could do worse than the reformed Ebenezer Scrooge, who, Dickens tells us, “knew how to keep Christmas well, if any man alive possessed the knowledge”. On Christmas morning the only physical gift he gives is a prize turkey, having been assured on good ghostly authority that it is much needed. Other than that, he gives time and money, notably a pay rise for Bob Cratchit.

Money! That’s the Christmas spirit. God bless us, every one!

Written for and first published in the Financial Times on 15 December 2017.

Brexit, Trump, and how politics loses the capacity to shock

How often do I find myself utterly unsurprised by a news headline that should be shocking? Whether it’s Donald Trump declaring the media to be “the true Enemy of the People” after bombs had been sent to CNN offices, or the UK government planning to charter a flotilla to keep the nation supplied with broccoli and penicillin in a no-deal Brexit scenario, I merely shrug. Of course it’s appalling, I think, but it’s the logical continuation of what has been said and done already.

So let’s talk about the psychologist Stanley Milgram. Milgram is most notorious for his electric shock experiments in the 1960s. He recruited unsuspecting members of the public to participate in a “study of memory”. On showing up at the laboratory, they drew lots with another participant to see who would be “teacher” and who “learner”. Once the learner was strapped into an electric chair, the teacher retreated into another room to take control of a shock machine.

As the learner failed to answer questions correctly, the teacher was asked to administer steadily increasing electric shocks. Many proved willing to deliver possibly fatal shocks — despite having received a painful shock themselves as a demonstration, despite the learner having already complained of a heart condition, despite the screams of pain and the pleadings to be released from the other side of the wall, and despite the fact that the switches on the shock machine read “Danger: Severe Shock, XXX”.

Of course, there were no shocks — the man screaming from the nearby room was pretending. Yet the research exerts a horrifying fascination. In the best known study, 65 per cent of experimental subjects went all the way to 450 volts, applying shocks long after the man in the other room had fallen silent.

In the shadow of the Holocaust, which influenced Milgram’s research agenda, the obvious conclusion was that we will do terrible things if an authority figure requires them. But psychologists no longer draw that lesson from Milgram’s experiment.

Behind The Shock Machine (UK) (US) a history by Gina Perry, reminds us that Milgram’s experimental set-ups varied. In most of them, more than half of participants refused to continue. And Alex Haslam, a psychologist who has re-examined the studies, found that direct orders backfired. When people complied it was not because they were ordered, but because they were persuaded.

One often overlooked detail is that Milgram’s shock machine had 30 settings in increments of 15 volts. It’s hard to object to giving someone a tiny 15-volt shock. And if you’ve decided that 15 volts is fine, then why draw the line at 30 volts? Why draw the line at 45? Why draw the line anywhere?

At 150 volts, the “learner” yelled out in distress. Some people stopped at that point. But those who continued past 150 volts were overwhelmingly likely then to persist to the full 450 volts. They were in too deep. Refusing to administer a shock of 225 volts would be an implicit admission that they had been wrong to deliver 210.

Perhaps we need to turn to another great mid-century psychologist, Leon Festinger, for an explanation. Festinger is best known for the theory of “cognitive dissonance”, the discomfort of holding two contradictory notions — such as “I’m a decent person” and “I just hit that poor guy with 210 volts”.

Festinger demonstrated that we are able to summon up considerable reserves of wishful thinking and selective memory in order to restore consistency. The further people slid into the Milgram experiment, the harder they worked to convince themselves that it was all in a good cause, or that no real harm was being done, or both.

Seeing the experiment described in textbooks half a century later, it still seems perplexing. And perhaps future students of history will be baffled to see recent events concisely summarised. The Republicans, party of “family values”, confirmed a Supreme Court justice nominee after he was accused of sexual assault? Could they really not find someone better?

But these future students will not see the 15-volt increments that got us to this destination. Electing a president who has boasted of his own sexual depredations meant crossing the 150-volt line. Once you’ve found a way to laugh off the issue, it is hard to treat it with gravity thereafter.

Although Brexit is a very different business, it, too, will make little sense to future generations unless they see that we got there 15 volts at a time. It turns out the single market requires free movement of labour? Zap! We’ve discovered that the border with Ireland is a sensitive issue? Zap! The funding of the Leave.EU campaign is being investigated by the National Crime Agency? Zap!

The consolation is that democracies provide us with moments in which we can step back and think about the direction we are taking. The recent US midterm elections were one; there will be others. “I have a choice,” responded one Milgram subject, when ordered to increase the voltage. “I’m not going to go ahead with it.” That is worth remembering.

Written for and first published in the Financial Times on 16 November 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

Messy desks and benign neglect allow ideas to grow

My daughter is about to receive a new desk, so in order to clear space for it we were obliged to hack our way through the undergrowth of a 12-year-old’s bedroom. We found a half-assembled jigsaw puzzle from last Christmas; three separate sets of worn pyjamas scrunched up and stored in diverse locations; and empty sweet wrappers from Halloween. More alarmingly, there were empty sweet wrappers from Easter.

I am trying my best to treat with equanimity the discovery of a novel ecosystem under my roof. This is because I have come to believe that many spaces work a great deal better if subjected to a sustained period of benign neglect.

Consider the office cubicle. Some people pile their desks with everything from old newspapers to unwashed mugs; others are fastidiously tidy. (I fluctuate.) I’m not saying that people with messy desks are more productive, although there’s some evidence that they are; I’m just saying that if your colleague is a messy-desker then he or she should be allowed to get on with it.

Support for this position comes from a study conducted by two psychologists, Alex Haslam and Craig Knight. A few years ago they set up simple office spaces in which they asked experimental subjects to spend an hour doing administrative tasks. Messrs Haslam and Knight wanted to understand what made people productive and happy, and they tested four arrangements in a randomised trial. One was minimalist: chair, desk, bare walls. A second was softened with tasteful prints and some greenery. Workers were happier there, and got more done.

The kicker comes with the third and fourth arrangements. In each case, workers were invited to rearrange the pictures and pot-plants as they wished before settling down to work. But while some were then left to their labours, others were second-guessed by an experimenter who stepped in and found a pretext to rearrange everything.

This, unsurprisingly, drove people mad. “I wanted to hit you,” one participant later admitted. Empowering people to lay out their own space led to happier, more productive workers. Stripped of that freedom, everyone’s productivity fell and some felt quite ill.

The principle of benign neglect may well operate on a larger scale. Consider Building 20, one of the most celebrated structures at Massachusetts Institute of Technology. The product of wartime urgency, it was designed one afternoon in the spring of 1943, then hurriedly assembled out of plywood, breeze-blocks and asbestos. Fire regulations were waived in exchange for a promise that it would be pulled down within six months of the war’s end; in fact the building endured, dusty and uncomfortable, until 1998.

During that time, it played host not only to the radar researchers of Rad Lab (nine of whom won Nobel Prizes) but one of the first atomic clocks, one of the first particle accelerators, and one of the first anechoic chambers — possibly the one in which composer John Cage conceived 4’33. Noam Chomsky revolutionised linguistics there. Harold Edgerton took his high-speed photographs of bullets hitting apples. The Bose Corporation emerged from Building 20; so did computing powerhouse DEC; so did the hacker movement, via the Tech Model Railroad Club.

Building 20 was a success because it was cheap, ugly and confusing. Researchers and departments with status would be placed in sparkling new buildings or grand old ones — places where people would protest if you nailed something to a door. In Building 20, all the grimy start-ups were thrown in to jostle each other, and they didn’t think twice about nailing something to a door — or, for that matter, for taking out a couple of floors, as Jerrold Zacharias did when installing the atomic clock.

As Stewart Brand drily remarked in How Buildings Learn (UK) (US) Building 20 worked because “nobody cares what you do in there”.

If benign neglect works for your colleague’s desk and it works for an entire building, what about a grander scale still? What about a city neighbourhood? Up to a point, yes: even cities benefit from being left alone in certain ways. Of course, potholes must be fixed, bins emptied and charging points for electric vehicles installed. But Jane Jacobs argued in The Death And Life of Great American Cities (UK) (US) that cities desperately need old buildings, and not just glorious masterpieces but “a good lot of plain, ordinary, low-value old buildings, including some rundown old buildings”.

Her reasoning: cities are always in need of new experiments and economically marginal activities. “Neighbourhood bars . . . good bookshops . . . studios, galleries . . . hundreds of ordinary enterprises” all need somewhere cheap.

There’s nothing wrong with new buildings, argued Ms Jacobs, frustratingly for those who hold her up as a Nimby icon. But they should not be built everywhere all at once. Something has to be neglected and run down, or the city has no soil from which new buds can shoot.

There is always a balance to be struck. Every old building was once new. Every desk needs the occasional wipe. And my daughter is currently engaged in an extended programme of supervised room-tidying. Yet neglect is undervalued. Sometimes we need to learn when to leave well alone.

The ideas in this column are more fully expressed in my book “Messy: How To Be Creative and Resilient in a Tidy-Minded World”. It’s available in paperback both in the US and the UK – or through your local bookshop.

Written for and first published in the Financial Times on 9 November 2018.

The untold career value of a little bit of luck

Almost exactly 20 years ago, fresh out of graduate school, I started work at a smallish strategy consulting firm. It was a poor choice, both for them and for me; I am not cut out to be a management consultant. I was even allergic to my own suit.

When one of my fellow recruits learnt this she pointed out that, in this job, “you only need to do two things: talk shit and wear a suit, and you can’t do either of them”. (I like to think that I have since mastered at least one of those skills.)

In any case, I was miserable and useless. My employers generously suggested that I might want to resign, and that if I did they would happily keep paying me for a while. I followed their advice and found a much more conducive job, most of which I was able to perform without embarrassment, wearing blue jeans. I had been very lucky.

But it is only recently that I realised that some of my luck required being born at the right time. Had I been a year younger I’d have crashed out of my job, not in the spring of 1999 but of 2000, just as the dotcom bubble was bursting.

Pity the babies of 1987 and 1990, then, who left school or university around the time that Lehman Brothers collapsed in 2008. Sending around a CV in the middle of the greatest financial crisis since their grandparents were born cannot have been a whole lot of fun.

Of course the financial crisis made life difficult for a lot of people, not just graduates. It is now over, although the scars remain. So here’s a question: are those people who were unfortunate enough to have been looking for their first job as a recession struck still disadvantaged after the recession itself has passed?

In 2006, an economist called Paul Oyer posed that very question about the young academics he was teaching. Let’s say that two equally able young economists, Alexandra and Betsy, are looking for work. Alexandra arrives on the job market during the good times, when departmental budgets are fat, and is hired by the 30th best university in the country. Betsy is a couple of years younger, tries to find a job during a lean year, and can only get a job at the 60th best university.

The question that Professor Oyer posed is: will this matter in the long run? Will the equally talented Betsy find a better job, given a few years? Or will she be trying to catch up with Alexandra for decades?

Prof Oyer assembled data describing the PhD students graduating from seven excellent graduate schools, and he concluded that Betsy would remain at a disadvantage for a long time. Students who graduate in good years are more likely to find good jobs — obviously — but there is also a strong correlation between getting a good job immediately and still having a good job four, eight or even 12 years later.

This makes some sense; if an economist applies for a mid-career job having already been an assistant professor at (say) the Massachusetts Institute of Technology, employers are unlikely to adjust for whether she secured that assistant professorship in an impossibly difficult year or at a somewhat easier time. The halo will shine, regardless. And regardless of whether it was a good year or a bad one, the young economist will have picked up skills from working at MIT, teaching MIT students and rubbing shoulders with Nobel Prize winners. If you want to work in a top research job, it helps a lot to start out in a top research job.

Prof Oyer conducted a similar analysis for MBA graduates looking for high-paying jobs in finance and consulting in the late 1980s. The results were similar. Could this be a problem only for the young elite — students on such a precision-engineered career path that their fate is sensitive to accidents of timing? Or might it be even more serious for those further down the educational pecking order?

A new study from economists Hannes Schwandt and Till Marco von Wachter suggests that the latter is true. Looking at young people entering the US labour market between 1976 and 2015, every group suffers lasting harm if they have to find their first job during a recession, but disadvantaged groups suffer more and for longer. High school dropouts fare particularly badly, both immediately and several years later, as do those from a racial minority. People with a college education suffer less.

Overall, for a typical recession, the unlucky cohorts can expect to lose the equivalent of seven months’ pay over the course of a decade, relative to their more fortunate peers, who are only a couple of years older or younger. That’s no trivial sum. People who can’t find the job of their dreams end up settling for something else, building up skills and contacts in a field that was never their first choice.

Few people, by now, need reminding that the financial crisis has had a lasting impact and that, in many ways (though not all), it is the younger generation that has been left to count the cost. But this research points towards other lessons. It’s easy to overlook luck; but good or bad, a single piece of luck can last in ways that we find it hard even to notice.

Written for and first published in the Financial Times on 2 November 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

What the Sydney Opera House teaches us about Brexit

Go down to Bennelong Point and make such progress that no one who succeeds me can stop this going through to completion.” That is how the ailing Joseph Cahill ensured that the Sydney Opera House would be built — at least according to one of his successors.

Excavations for the project duly began at Bennelong Point. Cahill, the premier of the state of New South Wales, died of a heart attack not long after. The Sydney Opera House was indeed completed, but in 15 years rather than five and at a cost of A$102m rather than A$7m — a truly impressive cost overrun of nearly 1,400 per cent.

Brexit, it seems, is also likely to overrun its original schedule, to the surprise of nobody who has been paying attention. I decided to look up Bent Flyvbjerg, perhaps the world’s leading authority on “megaprojects”, large and ambitious endeavours such as hosting the Olympic Games, building a high-speed rail line, or overhauling a big IT system. Such projects often — although not always — go badly wrong.

Is it useful, then, to think of Brexit as similar to a large construction or IT project? Professor Flyvbjerg’s answer: Yes, it’s a very useful analogy indeed. But, given the failure rate of megaprojects, it is not an encouraging one.

Brexiters will point out that some megaprojects live up to their promise, most famously the Guggenheim Bilbao— a tenacious, visionary scheme delivered on time, on budget and with benefits outstripping any reasonable expectations. Remainers anticipate the best-case Brexit scenario to be something more like the NHS National Programme for IT, abandoned after a decade and several billion pounds of wasted money.

Whichever side of this debate you are on, there is much to be learned from studying megaprojects. I gleaned six pieces of counsel from Prof Flyvbjerg to improve chances of successfully delivering a complicated project. Checking the list against what is happening with Brexit makes my heart sink.

First: prepare thoroughly. This one is awkward. Civil servants were banned by David Cameron’s government from preparing for Brexit before the referendum. Then, for her own reasons, his successor as prime minister, Theresa May, scrambled to begin the Article 50 countdown. “Zero preparation”, says Prof Flyvbjerg, “is as bad as it gets”.

Second: try to de-bias yourself, noting and adjusting for overconfidence, wishful thinking and other well-known cognitive biases. Alas, most British politicians are wary of seeming negative or timid about Brexit, for fear of implying the electorate was unwise. Instead, both government and opposition have embraced the goal of leaving while enjoying all the benefits of staying — hardly a clear-eyed exercise in spotting obstacles.

Third: choose an experienced team. Hmm . . . Sir Ivan Rogers, the UK’s ambassador to the EU and an experienced negotiator abruptly resigned early in the process.

Fourth: try to break a large project into smaller, standalone chunks, so that the failure of one is not a failure of everything. When everything is interconnected, small obstacles can snowball into major delays. (See also: The Irish border.) The logic of both politics and of diplomatic negotiation for Brexit points in the opposite direction: “nothing is agreed until everything is agreed”.

Fifth: key decision makers should be aligned, with everyone having an incentive to make things move smoothly. Alas, politics (again) pushes in the wrong direction here. Many of the people with power to smooth the way for Mrs May, from opposition leader Jeremy Corbyn to the former foreign secretary Boris Johnson to the EU’s chief negotiator Michel Barnier, have the incentive to make things difficult for her in one way or another.

Finally: have an early warning system so problems can be spotted and fixed before they grow. Yet warnings are routinely derided as “Project Fear”.

Even without political pressures, megaprojects are hard to deliver on time and on budget: their sheer scale opens up a thousand ways for things to go wrong. But they are always somewhat political, and Brexit is more political than most. Even as a pure organisational challenge, it is likely to take far more time and money than advertised.

The Sydney Opera House itself is, of course, a stunning achievement. But unlike the Guggenheim Bilbao it is an achievement built on lies. Those lies came from politicians who decided that an honest account of the likely costs would not achieve their goals. They tarnished the reputation of Jørn Utzon, the architect who became the scapegoat for their impossible promises. Lauded far too late, he received no other major commissions and never saw the finished Opera House. Would the truth really not have served?

As far as Brexit is concerned, we have dashed down to Bennelong Point and started shovelling frenetically, desperate that no one should “stop this going through to completion”. Perhaps one day we will get the Sydney Opera House, although that seems unlikely. At the moment, we’re at the bottom of a deep hole and we are still digging.

Written for and first published in the Financial Times on 26 October 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

Self help books that work

The self-help genre gets a bad press, and not without reason, but there are a few self-help books that I’ve read, enjoyed, and felt wiser as a result.

The Tao of Pooh (UK) (US) by Benjamin Hoff is a wise, funny meditation on life that changed the way I looked at the world when I read it as a 19 year old. I may be older and a little more cynical these days but this still feels like a book worth reading.

TED Talks (UK) (US) by Chris Anderson is the best book on public speaking I’ve ever read, and I’ve read a lot of books on public speaking. While I admire what Chris has done with TED, I expected to disagree with a lot of his advice. Nope; he won me over.

Getting Things Done (UK) (US) by David Allen is a modern classic with a cult following. The book feels a bit fussy, full of jargon, and over-complex. But the truth is that GTD wouldn’t have so many fans (including me) if it didn’t work on some basic level. The key idea of GTD is that you need to write down what’s on your mind, somewhere where you trust yourself to check at the right moment – and as a result, you’re more relaxed and more confident that at any particular moment you’re focusing on something sensible rather than leaving a time-bomb ticking away in your inbox. The rest is detail but the details do seem to matter. A strong recommendation from me.

Deep Work (UK) (US) by Cal Newport. Stop messing around and focus on something hard.

The Creative Habit (UK) (US) by Twyla Tharp. A superb book about creativity and the effort involved. Some great stories and advice – and it’s an intensely pragmatic guide to living a creative life.

Designing Your Life (UK) (US) by Bill Burnett and Dave Evans. Measured by the number of copies I’ve given away this must be my favourite book. It’s humane and practical, proposing that we use designers’ methods such as prototyping and brainstorming to create better, more fulfilling lives and careers. Full of good-yet-unusual ideas.

There is a fine line between stupid and clever

Recently a loyal reader emailed me with a disarmingly simple question: is it better to invest small amounts every month, or in a large lump sum? What seems a narrow topic has broader implications.

The popular argument in favour of regular investment into shares — often called “cost averaging” — has been made by retail investment advisers many times. “Take advantage of their downs as well as their ups,” says one, so that “if you invest a fixed sum every month you will be able to buy more units when a fund’s value falls”.

To see how this cost averaging might work, consider a share that costs $60 half the time and $120 the other half. Investing $600 a month returns 10 shares in each of the six months when it is cheap and five shares in each of the expensive months. At the end of the year, 90 shares have cost $7,200. The average cost per share is only $80, much closer to $60 than $120 and thus excellent value.

The argument is plausible, intuitive, and wrong — both in theory and when tested with hindsight against historical market data.

Here’s the problem with the theory: while it is unclear exactly how best to describe the fluctuations of share prices, they do not simply move up and down in the way my simple example describes. If they did, a far better approach would be to invest only when they cost $60, not when they cost $120.

A more realistic description of the stock market is that it follows a random walk with an upward drift. The random walk implies that we cannot expect prices to tend back towards some average. From any particular point there is no way to say in which direction they will lurch next. That means that we cannot expect that when a share is $120 it is likely to fall, and when it is $60 it is likely to rise.

The upward drift — the simple fact that share prices tend to rise over time — suggests that we should invest everything we plan to invest at the earliest opportunity. Drip-feeding delays profitable investment, and so costs money.

If theory is unkind to the cost-averaging principle, what about the historical evidence? We can ask, with hindsight, when investors with a large lump sum would have done better to drip it gradually into the market over the course of a year. The answer is unsurprising: drip-feeding has done better only when the market then fell, and since markets rise more often than they fall, lump-sum investing is a better bet. Cost averaging worked well in the last bear market, but, with access to that kind of hindsight, an even better strategy in a bear market is to wait until it is over.

Cost averaging, then, is wrong in theory and has not usually worked in practice.

It may, nevertheless, be excellent advice.

The simplest point in favour of drip-feeding is that it reflects the situation of a typical salaried investor. Purists will say that “cost averaging” should only be used to describe a deliberate strategy of delaying investment, but retail advisers often speak of the magic of cost averaging while praising regular investment. The magic may be illusory, but the benefits of regular investment are not.

Many of the empirical tests of cost averaging begin from the premise that an investor is sitting on some vast pile of cash, pondering whether to invest gradually or all at once. That is a pleasant dream to consider, and if you find yourself with a million dollars in your pocket then by all means invest promptly.

If you are nervous about risk, academic research suggests that drip feeding is not the most efficient way to reduce your risk. Better to keep a small portion of your wealth out of the stock market entirely.

But efficiency is a treacherous goal for an ordinary investor.

The strongest argument in favour of cost averaging is simply to ask ourselves what we are likely to do instead. The answer is not pretty. Researchers have found that retail investors tend to make two simple errors: they lose money by trading too much, and they tend to buy high and sell low. Without getting too technical, let me assure you that this is not the aim. If regular investments displace a Gordon Gekko complex, that is enough for me.

While markets do not swing back and forth with the metronomic predictability of my earlier illustration, they do fluctuate a lot, as we have seen in the past couple of weeks. That fluctuation is distressing for most people. If facile arguments for cost averaging reassure small investors and stop them from selling at the bottom, that is no bad thing.

Greg Davies, a behavioural finance expert at Oxford Risk, describes cost averaging as “deliberately doing something slightly inferior, to prevent the likelihood of something very inferior”. Just so. And it is worth looking for other areas where we might benefit from being guided by a slightly inferior rule of thumb — anything from “if it takes less than two minutes, do it immediately” to “never drink alone”. There are exceptions to these rules, but you may be better off just sticking to the rules.

As a wise man once said, it’s such a fine line between stupid and clever. Cost averaging seems clever, but we should recognise that its true value lies in not being stupid.

Written for and first published in the Financial Times on 19 October 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

Does economic growth need to end?

What are the limits to economic growth — and have we already recklessly exceeded them? Such questions were raised (again) recently by (another) alarming report about climate change. Many of my environmentalist friends are convinced that economic growth itself is the fundamental problem.

It was a timely moment, then, to give a Nobel Prize to two economists who’ve tackled that question head on. William Nordhaus and Paul Romer have tried to find ways to understand the invisible and sometimes ineffable causes and consequences of growth.

The modern world produces two things in abundance: carbon dioxide and ideas. Both swirl around, defying our attempts at control. We’d like more ideas but already have more than enough carbon dioxide. The future of humankind may depend on a strange race: can we keep living standards rising yet restrain consumption of resources and production of pollutants?

Economics being economics, Nordhaus and Romer received their prizes for technical achievements in economic modelling. Mr Nordhaus analysed the interaction between climate change and the economy; Mr Romer developed an elegant way to model innovation as an intrinsic part of the growth process, rather than falling from heaven. These are impressive intellectual accomplishments, but my fascination with both men concerns some of their more informal work.

In one of the economics papers I truly love, Mr Nordhaus tracked the price of illumination over the millennia, from the days when people could create light only with a campfire, through the time when they would use beef tallow — or clean, bright-burning spermaceti oil from whales — to the invention and improvement of incandescent bulbs.

Mr Nordhaus chopped and burnt wood, and tested antique lamps with a Minolta light meter. He concluded that in Babylonian times, a day’s hard work would produce enough to light a room for 10 minutes. By the end of the 20th century, the return on a day’s labour had improved from 10 minutes of light to 10 years. That is the kind of progress that gives one hope for us all.

The environmental toll paid for that light has also plummeted, which is good news for the whales and good news for us. Perhaps it really might be possible to enjoy the comforts of modernity without destroying the planet.

Since the early 1960s, UK carbon dioxide emissions per person have almost halved, yet the country’s economic output per person has tripled in real terms. This is partly due to moving production abroad, but most of it is from producing more value with fewer physical resources and a lot less coal.

That is where Mr Romer comes in. Like Mr Nordhaus, he is impressed by our capacity to make (and then take for granted) innovative progress and argues that there is room for much more. Consider the compact, self-repairing, mobile, renewable-resource-powered chemical reactor that we call a “cow”. Courtesy of evolution, it is vastly more impressive than human-designed facilities. This elegance, suggests Mr Romer, tells us that there is plenty of room for us to do things better.

That is also true for the institutions that produce new ideas. While Mr Romer’s prizewinning work makes particular assumptions about who pays for new ideas and who benefits when they are produced, his informal writing and policy work highlights that these things cannot be taken for granted. He wrote not long ago that “only a failure of imagination” allows us to conclude that in today’s universities, intellectual property rules and scientific norms we have perfected the way we develop and diffuse new ideas.

We should constantly be searching for better ways to do things — as Mr Romer himself did with a successful foray into digital learning, ahead of the trend, and later with his bold and controversial push for “ charter cities”, in which a country with weak institutions might outsource the governance of a greenfield city site to Canada or Norway.

In particular, we should do more to encourage innovation that attacks the climate change problem. It is conceivable that we will manage to solve the problem anyway, courtesy of dramatic progress in the cost of solar power and battery storage. If so, that is luck that we have done precious little to earn. The most obvious first step (among several worth trying) is a stiff tax on carbon dioxide emissions. That would encourage everything from clean energy to putting on a thermal vest in the cold.

There is still every reason to believe that material progress is consistent with the survival of the ecosystem. Human ingenuity is astonishing. It would be nice if policymakers tried harder to direct it toward low-carbon energy.

If policymakers matched climate change talk with action, my guess — just a guess — is that we would find that the transition to a vastly cleaner economy is smooth. I realise that my friends mean well when they demand that economic growth must stop, and soon. But I am pretty sure that they are wrong — and that their pessimism merely convinces others to do nothing.

Written for and first published in the Financial Times on 12 October 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback, and coincidentally the final, triumphant chapter is all about Bill Nordhaus’s work on the cost of light. Feel free to order online or through your local bookshop.