Undercover Economist

Why brilliant people lose their touch

It hasn’t been a great couple of years for Neil Woodford — and it has been just as miserable for the people who have entrusted money to his investment funds. Mr Woodford was probably the most celebrated stockpicker in the UK, but recently his funds have been languishing. Piling on the woes, Morningstar, a rating agency, downgraded his flagship fund this week. What has happened to the darling of the investment community?

Mr Woodford isn’t the only star to fade. Fund manager Anthony Bolton is an obvious parallel. He enjoyed almost three decades of superb performance, retired, then returned to blemish his record with a few miserable years investing in China.

The story of triumph followed by disappointment is not limited to investment. Think of Arsène Wenger, for a few years the most brilliant manager in football, and then an eternal runner-up. Or all the bands who have struggled with “difficult second-album syndrome”.

There is even a legend that athletes who appear on the cover of Sports Illustrated are doomed to suffer the “SI jinx”. The rise to the top is followed by the fall from grace.

There are three broad explanations for these tragic career arcs. Our instinct is to blame the individual. We assume that Mr Woodford lost his touch and that Mr Wenger stopped learning. That is possible. Successful people can become overconfident, or isolated from feedback, or lazy.

But an alternative possibility is that the world changed. Mr Wenger’s emphasis on diet, data and the global transfer market was once unusual, but when his rivals noticed and began to follow suit, his edge disappeared. In the investment world — and indeed, the business world more broadly — good ideas don’t work forever because the competition catches on.

The third explanation is the least satisfying: that luck was at play. This seems implausible at first glance. Could luck alone have brought Mr Wenger three Premier League titles? Or that Mr Bolton was simply lucky for 28 years? Do we really live in such an impossibly random universe?

Perhaps we do. Michael Blastland’s recent book, The Hidden Half, argues that much of the variation we see in the world around us is essentially mysterious. Mr Blastland’s opening example is the marmorkrebs, a kind of crayfish that reproduces parthenogenetically — that is, marmorkrebs lay eggs without mating and those eggs develop into clones of their mothers.

Place two clones into two identical fish tanks and feed them identical food. These genetically identical creatures raised in apparently identical environments produce genetically identical offspring who nevertheless vary dramatically in their size, form, lifespan, fecundity, and behaviour. Sometimes things turn out very differently for no reason that we can discern. We might as well call that reason “luck” as anything else.

This is not to say that skill doesn’t matter — merely that in a competition in which all the leaders are highly skilled, randomness may explain the difference between triumph and failure. Good luck plus skill beats bad luck plus skill any time.

It is easy to underestimate how much chance is at play all around us. The psychologist Daniel Kahneman has recently been studying what he calls “noise”: the variability of judgments for no obvious reason.

A wine expert blind-tasting two glasses from the same bottle will often rate them differently. Pathologists disagree with each other in their judgments of the same biopsy. More disconcertingly, they also disagree with their own prior judgments of the case.

We rarely appreciate just how much inconsistency there is in the judgments we and others make, argues Prof Kahneman. It can hardly be a surprise, then, if past performance is no guarantee of future success.

We should remember, too, that people often achieve outsized success by taking risks or being contrarian. When John Kay examined the forecasting record of economists in the 1990s, he noted that Patrick Minford, an idiosyncratic forecaster, would often produce the best forecast one year and the worst forecast the next. If the consensus is wrong, being an outlier gives you a high chance both of dramatic success and spectacular failure.

We perceive all this randomness through a particular filter, too. Few people make the cover of Sports Illustrated after a run of mediocre luck. They appear after things have been going well, and if the good luck fails to hold then it seems like the SI jinx. More likely it is “regression to the mean”, or in simple terms, a return to business as usual.

We begin paying attention only when someone is producing a remarkable performance. Genius followed by mediocrity is a story arc we all notice. Mediocrity followed by genius just looks like genius — assuming the mediocre performer gets a second chance. Not all do.

So I wish Mr Woodford well. Perhaps he has lost his touch, perhaps the world has changed, or perhaps he has simply been unlucky. It would be nice to know which, but in such matters the world does not always satisfy our curiosity.

Written for and first published in the Financial Times on 24 May 2019.

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 Doris Day effect – when obstacles help us

She had hoped to become a ballet dancer. After her leg was shattered in an accident at the age of 15, she took singing lessons instead. It was a striking detail in the obituaries. If not for that painful setback, the star that was Doris Day would never have risen.

Was the car accident that redirected her career an extraordinary twist in the story of an extraordinary life? Or was it typical of some broader truth about life, that frustrations can actually help us? Perhaps it is true that what does not kill us makes us stronger. It may, in contrast, be that what does not kill us nevertheless slows us down.

The conventional wisdom is that initial advantages tend to snowball into an avalanche of privilege. Sometimes this reflects genuine achievements: a bit of luck with an early teacher sharpens a student’s skills, lifting her into a higher set, which in turn gets her into a better university, then a job with more stimulating peers, and so on.

An egregious example, made famous by Malcolm Gladwell’s book Outliers, is the tendency of elite athletes to be born early in their school year. Being a few months older at the age of five means you are stronger and faster, are more likely to be picked for school teams, get more practice and are still reaping the benefits as an adult athlete. The effect is particularly well-studied among boys playing ice hockey in Canada, and football in a variety of countries.

At other times, well-deserved acclaim is followed by unearned praise. In academia this tendency was named by the sociologist Robert K Merton as “the Matthew Effect” in reference to a biblical verse: “For to every one who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.”

If three researchers collaborate on a problem, and one of them already has a Nobel Prize, the laureate tends to earn disproportionate recognition for the joint work. When a teacher and a student work together, the senior researcher is cited because that name is already recognised. The junior is easily forgotten.

In the wider workplace, we have evidence that the luck of graduating in a benign economic climate can lead to a lasting advantage. One researcher, Paul Oyer, found that young PhD and MBA students who started off in favourable job markets were employed in better places with smarter colleagues, and were still doing better a decade later than those who started out in tougher times.

Hannes Schwandt and Till Marco Von Wachter studied the other end of the US labour market to find the story is even worse there: entering the job market during a recession damages anyone’s prospects, but the harm is deeper and lasts longer for less-educated and otherwise disadvantaged groups.

All this suggests that setbacks are setbacks: they drag us down, perhaps disproportionately. Doris Day was an exception, not the rule.

Yet a striking new study suggests that the Doris Day effect is quite real in one particular group of people: young scientists applying for research grants. Yang Wang, Benjamin Jones and Dashun Wang looked at scientists applying for funding from the US National Institutes for Health, with grants averaging $1.3m. In particular, they focused on borderline decisions, comparing those who scraped through to get a grant with those who just missed out. The near-winners and the near-losers were otherwise indistinguishable before the decision point, but afterwards it was the losers who prospered, publishing substantially more highly cited research papers.

We should remember that anyone in a position to nearly secure a million-dollar research grant has presumably enjoyed a few successes along the way at school and university. Failure at this hurdle may be described as an “early career setback”, but it is not comparable to the setback suffered by an undernourished two-year-old with no books in her bedroom.

Still: this is a counterintuitive finding. Yet I was not entirely surprised to encounter it. It may be that many people respond to a setback by bouncing back with renewed determination. It may also be that the failure provokes a rethink and a fresh course of action. Doris Day, after all, did not respond to a shattered leg by trying even harder to become a dancer. She changed her goals and prospered as a result.

We don’t have to be promising young scientists — or aspiring starlets — to benefit from having obstacles placed in our way. Something as mundane as a strike disrupting regular commuting has been shown to push people towards new habits. Three economists who studied data from London’s public transport network found that after a 48-hour strike in London in February 2014, thousands of commuters changed routes and never switched back. They discovered that they’d been doing the commute wrong their entire working lives.

Often failure is simply failure, and a setback is exactly what it seems. But sometimes the obstacle that has been placed in our path might provoke us to look around, and perhaps to discover that a better route was there all along.

Written for and first published in the Financial Times on 17 May 2019.

My book Messy explores some of these ideas in more depth – feel free to order online or through your local bookshop.

Why we should favour second guesses over first instincts…

Tension is rising in the Harford household as exams approach and we try to persuade Miss Harford Sr to relax, and Miss Harford Jr to be slightly less relaxed. I’m sure many readers have vivid memories of the exam room, recent or otherwise. But here’s a question about exam technique that suggests a much wider lesson. In a multiple-choice test, you sometimes write down an answer and then have second thoughts. Is it wise to stay with your first instincts, or better to switch?

Most people would advise that the initial answer is usually better than the doubt-plagued second guess. Three-quarters of students think so, according to various surveys over the years. College instructors think so too, by a majority of 55 to 16 per cent. The 2000 edition of Barron’s How to Prepare for the GRE Test is very clear that students should be wary of switching. “Experience indicates that many students who change answers change to the wrong answer.”

This confidence would be reassuring, were it not utterly erroneous. Researchers have been studying this question since the 1920s. They have overwhelmingly concluded both that individual answer changes are more likely to be from wrong to right, and that students who change their answers tend to improve their scores. This gap between perception and reality is stark enough to have earned a name: the “first-instinct fallacy”. No doubt our first instincts are often right, but when we start to have second thoughts, the second thoughts are usually occurring for a reason. It is better to switch. So why don’t we?

Justin Kruger, a psychologist at New York University, has been studying this question. (Prof Kruger is more famous as co-discoverer of the Dunning-Kruger effect: people who are incompetent are too incompetent to realise how incompetent they are.) With his colleagues Derrick Wirtz and Dale Miller he replicated the longstanding findings that college students believe you should trust your first answer in a multiple choice question, and yet that switching to a second answer tends to improve your grades. Then the trio started to explore why.

In one study they showed subjects video based on the TV show Who Wants To Be A Millionaire? and asked them to imagine that they were watching a teammate play, accumulating cash for the team whenever he or she gave the correct answer. Some subjects were shown teammates who always switched on 50/50 questions, while others were shown teammates who always stuck with their first instinct. In the study, both strategies produced identical results, yet subjects watching a switching teammate were more frustrated and critical and had a good memory for the errors.

Another study by Prof Kruger and his colleagues showed that we also have a warped recollection of our own errors in multiple choice tests. We have a rosy memory of sticking to our first instincts, forgetting the failures and exaggerating the successes. We vividly recall switching to the wrong answer and overestimate how often we did so. In short, we remember sticking as having been the best tactic, when in fact switching was better. No wonder the Barron’s guide remarks that “experience” tells us switching is a bad idea. Our own experiences do indeed tell us that, but only because we misremember the lessons of previous switches.

If you — or a loved one — are about to enter exam season, perhaps this evidence-based strategy will be of use. But it’s hard not to see a broader lesson. How often in life do we make a choice and then stick to it despite mounting doubts?

In politics, such questions are aggravated by questions of partisanship and pride. Nobody wants to admit that they were wrong in the face of jeers from those on the opposite side of the political fence. The U-turn is one of the greatest sins in politics, if only because it is so easy to criticise. Either you were wrong before or you are wrong now.

But even in everyday life, we find ourselves clinging to bad choices. Steven Levitt, the co-author of Freakonomics, once conducted a study in which people hesitating over big choices — to leave a spouse, to adopt a child, to quit a job, to start a business — agreed to be guided by a coin toss. Those who had been nudged to act ended up being happier several months on than those who had been nudged to stick with the status quo.

We are prone to cling tightly to the devil we know. The likely explanation is that we are seeking to minimise regret. Forget the old cliché about regretting the things you didn’t do more than the things you did: we regret misfiring action more than misfiring inaction. We starkly remember the times we changed things for the worse, and we more easily forget the times when we failed to change things for the better. It’s not that impulsive action is always the best option, any more than your first answer on a test is always wrong. Instead, the lesson is that if you are hesitating over whether to leave things as they are, you probably needed to make a change some time ago.

Written for and first published in the Financial Times on 10 May 2019.

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 clash of the two cultures and the challenge of collaboration

May 7 was the 60th anniversary of the delivery of CP Snow’s famous lecture, The Two Cultures and the Scientific Revolution. It is dimly remembered as a lament about the mutual incomprehension between arts and sciences, wrapped up with some pompous anecdotes about Oxbridge high table and airy generalisations about the dynamism of scientists. Some of it is absurd. Snow dismisses George Orwell’s 1984 as pure Luddism, “the strongest possible wish that the future should not exist”. (Orwell old chap, relax and enjoy the fruits of technological progress!) That Snow’s lecture is remembered at all is probably thanks to an acidic rebuttal by the literary critic FR Leavis.

Nevertheless, Snow was on to something important. His message was garbled, in fact, because he was on to several important things at once. The first is the challenge of collaboration. If anything, The Two Cultures understates that. Yes, the classicists need to work with the scientists, but the physicists also need to work with the biologists, the economists must work with the psychologists, and everyone has to work with the statisticians. And the need for collaboration between technical experts has grown over time because, as science advances and problems grow more complex, we increasingly live in a world of specialists.

The economist Benjamin Jones has been studying this issue by examining databases of patents and scientific papers. His data show that successful research now requires larger teams filled with more specialised researchers. Scientific and material progress demands complex collaboration.

Snow appreciated — in a way that many of us still do not — how profound that progress was. The scientist and writer Stephen Jay Gould once mocked Snow’s prediction that “once the trick of getting rich is known, as it now is, the world can’t survive half rich and half poor” and that division would not last to the year 2000. “One of the worst predictions ever printed,” scoffed Gould in a book published posthumously in 2003. Had Gould checked the numbers, he would have seen that between 1960 and 2000, the proportion of people living in extreme poverty had roughly halved, and it has continued to fall sharply since then. Snow’s 40-year forecast was more accurate than Gould’s 40 years of hindsight. Even when we fancy ourselves broadly educated, as Gould did, we may not know what we don’t know. That was one of Snow’s points.

But the deepest point of all — buried a little too deep, perhaps — is a practical problem that remains as pressing today as it was in 1959: how to reconcile technical expertise with the demands of policy and politics. In short — have we really had enough of experts?

The historian Lisa Jardine highlights this sentence in Snow’s argument: “It is the traditional culture, to an extent remarkably little diminished by the emergence of the scientific one, which manages the western world.” We didn’t decide we’d had enough of experts in 2016; we made that decision long ago.

There have never been many scientists in politics. In his 2012 book, The Geek Manifesto, Mark Henderson reckoned there was one scientist among 650 members of the UK parliament. The US Congress is packed with lawyers. We need a little more technical expertise close to the levers of power: pithy quotations from Cicero will not do the trick; nor those from Karl Marx.

As Snow pointed out in a series of lectures he gave at Harvard in 1960, published as Science and Government, grave mistakes can result not only from a vacuum of technical knowledge in politics, but from a monopoly — the single expert, unchallenged. He cited the allied bombing of dense urban areas in Germany during the war, which not only took a terrible toll on civilians, but failed in military terms by sparing industrial targets. The source of the problem was a flawed statistical study by Winston Churchill’s scientific adviser Frederick Lindemann that no one had both the technical skill and the political clout to challenge. It is not enough to give political influence to a physicist or an economist. The corridors of power must ring with scientifically informed debate.

Snow quotes another scientist about losing the argument over area-bombing. “I confess to a haunting sense of personal failure . . . if we had only been more persuasive and had forced people to believe our simple arithmetic . . . might we not have changed this decision?” That is precisely how many economists felt after the Brexit referendum. There is no moral equivalence, but there is an intellectual parallel: we felt that a serious mistake had been made and that it was partly our fault for not being more persuasive.

None of this is to assert the superiority of a technical education over a classical, literary or vocational one, although Snow sometimes seemed to yield to that temptation. We don’t need a parliament full of chemists any more than we need one full of classicists. We need a mix. Like scientific research, good policymaking is now a team effort. It requires different perspectives and a range of specialist expertise. We all must learn to work with people who see the world very differently. That wasn’t easy to do in 1959. It is no easier today.

Written for and first published in the Financial Times on 3 May 2019.

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 going on holiday gives us more memories

Lucky me. I’ve just returned from a family holiday in that most exotic of countries, Japan. So many fresh sights and strange tastes: from flower gardens, temples and communal baths to robots, bullet trains and the Kawaii Monster Café. Although we were there barely more than a week, it’s hard to believe we packed so much in.

While on an adventurous holiday, many people experience that strange sense of time having slowed down in the most pleasurable way, and of conversations that begin, “Was it really only yesterday that we . . . ?”

Ten days in a far-off land produces a richer treasury of detailed memories than 10 weeks back home. But what is behind this phenomenon? And does it teach us something about living a full life?

One answer comes from Claude Shannon, a titan of computer science still under-appreciated outside his field. In 1948, Shannon published one of his two profound contributions, A Mathematical Theory of Communication.

One of the implications of Shannon’s theory is that a message can be compressed to the extent that it is predictable. Anyone who has played the guessing game of Hangman knows that once a few letters are in place, the remainder are usually easy to guess. Similarly: sntnces wth vwls rmvd sty cmprhsbl. Ritualised conversations (“How are you?” “Very well, thank you. How are you?”) can be heavily compressed; poetry, perhaps, less so.

A movie can be compressed because, between cuts, each frame tends to resemble the previous one. A compression algorithm can start with the first frame after the cut and store a series of “diffs” — changes from the previous frame. The faster and more dramatic the movement or transitions, the harder a video is to compress, because the diffs are almost as big as the original frames.

Although the parallel is not exact, much the same thing seems to be going on with our memories of life. The brain is not a video recorder; we recall the gist. Sometimes the gist is very brief. If I get up in the morning at the usual time, eat my customary breakfast and catch my usual train to the office, why should my brain trouble itself to remember this day two weeks after the fact? The diffs are barely worth bothering with. In contrast, fresh experiences defy compression: the diffs are too big.

We could expand this idea to other aspects of life, maximising information content by keeping things unpredictable. Brian Christian, author of The Most Human Human, a book about conversations between humans and computers, speculates that if we’re seeking advice we should ask the person of whose answer we are least certain. If we want to understand a person, we should ask them the question to which we are least sure of their answer.

Perhaps the best newspaper columnist is the one whose columns are the least predictable? That may be going too far: too much novelty is exhausting, and we need an anchor for our expectations. But I well recall a friend saying that her favourite newspaper pandered to her preconceptions so much she didn’t really need to bother reading it; she could just think hard about everything she already held true. We scribblers should hope to do better.

One would not want a life of endless novelty, if only because that would mean a procession of superficial impressions and comparisons. Static, surprisingly, is impossible to compress without losing information, because its randomness makes prediction or interpolation impossible. Yet static is also meaningless. Too many random novelties, too fast, produces a lived experience not unlike static.

One of the virtues of experience is that it can attune us to subtle details and deep connections: “a world in a grain of sand, and a heaven in a wild flower”. (It may also allow us to draw out meaning from a brief allusion to a larger body of work.) But if repeated experience becomes humdrum, and we do not look for the depths, our days will be thin and forgettable.

So if you want a full life, rich with memories, keep searching for new experiences. That is far easier for the young than the old, but it should be possible for anyone. Surprising conversations are always there for the having and, while a holiday on the other side of the world is a costly (if reliable) source of vivid experiences, novelty is affordable for almost anyone in the form of new music, books, even walking an unfamiliar path through your own home town. It is always worth seeking out whatever is excellent — but for vivid memories, the same old excellence is not quite enough. Freshness matters, too.

I suspect that we all know this, yet we fall back on familiar routines. I often eat the same lunch in the same lunch spot, have a favourite library desk, and enjoy particular genres of film and book. In the moment, these habits are convenient and comforting. In the future, they will result in a life more easily compressed in the memory.

In Japan, it was hard to avoid eye-opening sights and attention-grabbing situations. Now I’m resolved to seek out the new and challenging in the UK, just as we did when far from home.

 
Written for and first published in the Financial Times on 26 April 2019.

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.

Is Thanos a good model for economists? On balance, no

In a few days’ time, Avengers: Endgame will hit the cinemas, and the universe’s mightiest heroes will resume their battle against the supervillain Thanos. Thanos fascinates me not only because he’s the best bad guy since Darth Vader — but because the muscular utilitarian is an economist on steroids.

Thanos’s claim to the economists’ hall of fame lies in his interest in scarce resources, his faith in the power of logical analysis, and a strong commitment to policy action — specifically, to eliminate half of all life in the universe, chosen at random. He collects some magical bling enabling him to do this with a snap of his fingers.

“It’s a simple calculus,” he explains. “This universe is finite, its resources, finite . . . if life is left unchecked, life will cease to exist. It needs correcting.”

I think it’s fair to say that since Thanos first took centre stage in Avengers: Infinity War, he has become the most popular economist around. People love his logic and his utilitarian commitment to maximising happiness. Many were delighted that Thanos succeeded. They accepted his argument that the alternative to the swift, dispassionate and fair-minded elimination of half the universe was the slow and choking death-by-overpopulation of everybody. A discussion board on Reddit, “Thanos Did Nothing Wrong”, acquired hundreds of thousands of members before beginning a mass purge of half of them — randomly chosen, of course.

It seems unlikely that Thanos has ever heard of Robert Malthus, but one suspects his scriptwriters have. Malthus was an English clergyman and economist who published, in 1798, an argument observing that exponential population growth could far outstrip any linear improvement in food production.

Malthus’s “simple calculus” works the same way as that of Thanos, but Malthus was not a believer in catastrophe. While Thanos claims the universe is out of balance, Malthus thought that population was tragically self-balancing, thanks to “a strong and constantly operating check on population from the difficulty of subsistence”. Whenever living standards looked like improving, he argued, population would increase to consume the spare resources, and everyone would be back at subsistence levels once again. Thanos predicts that overpopulation would lead to catastrophe, while Malthus saw population growth as a reliable source of everyday misery.

The two men also differ in their policy recommendations. While Thanos kills trillions, Malthus baulked at the sin of birth control. Yet I feel that Thanos offers us a cautionary tale. His tragedy is that he hasn’t fully thought through the likely consequences of his favoured policy.

Thanos, observing that there were too many people, decided to kill half of them. But this is curiously short-sighted for a man regarded by many as a policy prophet. Any exponential population growth process will soon replace the lost people: that is why exponential growth is such a headache in the first place. For example, if an economy’s resource footprint grows exponentially at a rate of 7 per cent, it doubles in just ten years — meaning that in less time than has elapsed since the first Iron Man movie, we could be back where we started.

The only lasting solution is an economy that uses resources at a sustainable rate. Malthus’s qualms notwithstanding, contraception has been a very good start. The world population growth rate is steadily approaching a very sustainable-sounding zero.

Thanos has convinced himself that’s he’s seen something nobody else can quite understand. The truth is that he sorely needs peer review. Like many powerful people, he regards himself as above his critics, not to mention every sapient being in the universe. He views humans less as free-willed agents capable of solving their own problems, and more like overbreeding rabbits, needing a cull for their own good.

We puny economists lack the snapocalyptic power of Thanos, but some of us share his lack of humility. A friend of mine once invented a Thanos-esque supervillain called “Socio-economist Man” (definitely a man) who would deliberately cause traffic jams, provoke accidents or even plant deadly bombs, because he calculated that the indirect consequences of these actions would promote the greatest happiness of the greatest number.

Not every social scientist has such ruthless confidence in their models. At best, we’ve learned that the economy is a complicated system and unintended consequences abound. But once the data are gathered and the graphs plotted, it can be all too easy to convince ourselves that we understand the system well enough to improve it with drastic changes. We don’t.

The best economist, then, recognises the importance of scarcity and of painful trade-offs, like Thanos. But unlike Thanos, she doesn’t treat everyone as pawns on a chessboard and instead seeks out constructive criticism and advocates gradual action, avoiding irreversible moves. The snapocalypse, by contrast, is not gradual. Neither is it reversible — unless the Avengers have anything to do with it.

Written for and first published in the Financial Times on 19 April 2019.

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 the world needs a carbon tax

You can’t please everyone, it seems. Royal Dutch Shell has announced plans to plant trees in order to absorb some of the carbon dioxide produced when we burn the fossil fuels it sells. What’s more, it plans to invite motorists to chip in at the pump by buying “carbon offsets”: a clever way to help the planet, raise cash, and spread the blame around. Environmental campaigners are sceptical. So am I.

I admit an interest here. I once worked for Shell (with the love-hate relationship that might imply), met my wife at Shell, and have occasionally been paid to return to Shell and dispense pearls of wisdom. Yet, despite a grudging affection for Big Oil that very few people share, I think climate change is far too important a challenge to entrust to oil companies.

The issue is not whether they have benevolent intentions. (I assume Shell’s motives are mixed. Whose aren’t?) It’s that the dramatic reduction in carbon emissions we need isn’t something that is within an oil company’s gift. We’re all involved. If you drive a conventional car, use a gas cooker or boiler, or — green tariff or no — are plugged into a national electricity grid, then you, like me, are part of the problem.

Our instinctive reaction is to guilt-trip each other and big companies into doing something. That is understandable, but falls short. Guilt is too feeble a tool and it is often applied in the wrong place.

Our intuitions about how our daily activities warm the planet are unreliable. Which breakfast contributes most to greenhouse gas emissions: fresh berries flown in from Kenya, toast browned in a toaster powered by coal-fired electricity, or cereal drenched in milk from methane-belching cows? Even if you know the right answer, it’s absurd to expect many others to know — and even more absurd to expect enough of them to care. Voluntarism is not enough to solve climate change.

One response, then, is to demand an ambitious programme of government investment and regulation — the most prominent of which is the Green New Deal, advanced in the US by Ed Markey and Alexandria Ocasio-Cortez, two prominent Democrats. The exciting thing about the Green New Deal is that it has serious political momentum focused at addressing climate change. Yet this momentum has come at a price. The details have deliberately been left vague, and grand aims often win more support than hard practicalities. (See also: Brexit.)

The Green New Deal is also expansive. The resolution not only wants to act against climate change, but to “promote justice and equity . . . repairing historic oppression of indigenous peoples, communities of colour, migrant communities, deindustrialised communities” and many others. Worthy goals these may be, but in mobilising the US government to take action on every imaginable progressive goal, the whole project may become derailed by its own utopianism.

The other risk of a huge centrally planned response to climate change is that of a huge centrally planned response to anything: clumsy megaprojects chosen for their political or bureaucratic acceptability rather than because they deliver the biggest results for the lowest cost.

A planned response to climate change isn’t hopeless, because there are some obvious big wins — tightening rules on the energy efficiency of new buildings, and replacing coal-fired power with renewable alternatives. Yet the best case for the Green New Deal is that even a clumsy response may still be better than none at all.

But there is a better way: a carbon tax (or its close sibling, a carbon permit auction). A broad-based tax on carbon dioxide and other greenhouse gases would be far less expensive than a Green New Deal is likely to be, yet it could motivate action on a scale that is both grander and more precise. Every part of the economy and each decision we make would be shaped by such a tax. A carbon tax would pull billions of different levers in an economy that is both complex and saturated in fossil fuels.

Each one of the billions of different products on sale can be designed, produced, transported and consumed in a way that might increase or reduce carbon emissions. A carbon tax nudges the energy mix to shift in favour of renewables, but also pushes fossil fuels from coal towards gas. It encourages efficiency in the design of cars, homes, any light bulb or any motor, but it also rewards frugality. A lump-sum subsidy can encourage the uptake of electric cars — but a carbon tax will also reward those who cycle instead of driving. Our modern economy reflects countless choices, made by billions of people all over the world. A broad-based carbon price influences them all. Nothing else can.

I fear that, like Buridan’s Ass, the American political system may continue to do nothing rather than choose between different plans for dealing with climate change. I would rather a Green New Deal than inaction, and a carbon tax alone is not the ideal response. But such a tax is the long-overdue, all-embracing response to climate change that America, and the world, badly needs. Everyone who cares about climate change should be advocating for it.

Written for and first published in the Financial Times on 12 April 2019.

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.

Counting the economic cost and the economic causes of Brexit

“The economy, stupid.” Pinned to the wall, this motto famously reminded Bill Clinton’s campaign staff to stay on message as he ran for the US presidency in 1992. Somebody may want to pin it up in the UK Conservative party’s headquarters, because the party has instead managed to involve the entire country in its bitter little civil war over Europe. But economies can survive some rough handling by politicians. Amid the Westminster turmoil, how is the UK economy doing?

The stiff-upper-lip response is that it’s fine. There were some grim forecasts of the short-term impact of a referendum vote to leave the EU, most prominently a shock scenario presented by the Treasury under George Osborne, and they did not come to pass. The UK economy sailed through the surprise result, demonstrating that Project Fear was nothing more than scaremongering — right?

The truth is not so rosy. As independent experts predicted, the economy has been disappointing since the vote to leave. By “disappointing” I mean relative to pre-referendum forecasts that assumed a vote to remain, relative to other leading economies, to “what-if?” models, and to historical trends.

Alone, each of these comparisons is open to question. Put them all together and they start to look persuasive to anyone with an open mind. The unpredictable Brexit process has created enormous ambiguity for any business dependent on investment or trade across borders, and knock-on uncertainty for other businesses that work with them.

One index of UK policy-related economic uncertainty has a baseline of 100. It hit 500 after the referendum and has exceeded 300 again this year. But we don’t need an index to tell us that the outlook is unclear. This lack of clarity matters. Some businesses are delaying investments while they wait for the fog to lift. Others are choosing countries where things seem more predictable.

Further trouble awaits. Agreeing a variant of prime minister Theresa May’s deal now would resolve uncertainty at the cost of isolating the UK’s service economy from the single market; a long delay offers the hope of stronger connections with the huge European economy, but prolongs the confusion; leaving without a deal would not only cause short-term disruption, it would restart the interminable process of negotiation as we try to figure out the ground rules on pretty much everything.

Yet, like Boris Johnson when foreign secretary, one might simply declare: “f**k business”. Who cares about disloyal corporations when our concern is with ordinary, hardworking citizens? The trouble is that while UK residents are indeed hardworking — the employment rate and the unemployment rate are both breaking the right kind of records — they are not seeing much income in return for their hard work.

As the Resolution Foundation think-tank concluded in February, Brexit has hit living standards even harder than it has hit growth. Annual household labour income has been falling for two years and is around £1,500 lower than it was projected to be before the referendum. (Memorious readers will recall that during the referendum campaign the Treasury predicted that a vote for Brexit would lower household incomes by £4,300 a year by 2030. In this respect, at least, Brexit is slightly ahead of schedule.) Not all the disappointment can be attributed to Brexit, but much of it has been caused by higher inflation as a result of the Brexit-induced drop in the value of the pound.

We should remember that all of this occurred while the international economy has been buoyant. The consensus now is that the world is due some sort of slowdown. That isn’t going to help, except perhaps to make the UK look a little better by comparison. Alas “better by comparison” does not pay the bills.

Of course, the news hasn’t all been bad. The UK’s jobs market remains genuinely impressive. Given what we know about the depressing effect of unemployment, even low-paid, low-productivity jobs are better than no jobs at all.

Another bright spot has been the public finances: the deficit is under control and tax receipts have outperformed (modest) expectations, albeit because of a surge in the incomes of the richest 0.1 per cent of taxpayers. It is worrying that inequality may be starting to increase. Still, revenues are revenues, as well as being a reminder that high earners do have their uses.

The awkward truth that Remainers and Leavers alike need to face is that the UK’s economic performance was disappointing long before the referendum. Measured by gross domestic product per head, many regions were worse off in 2015 than in 2007. London’s growth, while modest, was far better than the slump in Wales, the north of England, and particularly Northern Ireland.

And overall, in the wake of the financial crisis, the UK suffered a decade without growth in average earnings — the worst performance since the 1860s, according to Paul Johnson of the Institute for Fiscal Studies.

In brief, then: the chicken of economic weakness produced the Brexit egg, from which further economic woe is hatching. As problematic breakfasts go, this one is the Full English.

Written for and first published in the Financial Times on 5 April 2019.

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.

Political change can feel elusive, until the dam bursts

Deus ex machina was the ancient Greek theatrical convention of resolving the unresolvable by crane-lifting a god on to the stage to make everything better again through divine fiat. Right now, a bit of deus ex machina sounds pretty sweet.

Many people hoped that special counsel Robert Mueller’s Russia probe would play that role in the US. Its conclusions would be so damning as to sweep away the knotty problem of Donald Trump without the grinding task of finding support for a different president next year. But it was never likely that congressional mathematics would allow impeachment, nor even that Mr Mueller’s report (assuming we ever get to see it) would contain anything to sway anyone either way. We all, surely, know what we think about Mr Trump by now.

In the UK, some Remainers have been hoping the divine plot twist would be supplied by a record-breaking petition. Almost 6m people have demanded that the UK revoke Article 50 and walk out of the Brexit tragedy before the final act. On Tuesday, the government gave its response: get lost, Citizens of Nowhere. (I paraphrase.) Perhaps the following day’s “indicative votes” in parliament would resolve things? They were indicative of something, at least: gridlock.

Still, change can happen, and sometimes with astonishing speed. A few years ago, the project of Brexit was the pipe-dream of a few obsessives. The percentage of Britons naming EU membership as the most important issue was in the low single digits. Now Brexit is the official goal of the two largest political parties, albeit one they are finding it rather hard to hit.

Similarly, the changes that Mr Trump has wrought upon American and global politics are too numerous to list. True, most of them are changes for the worse — but it is hard to make the claim that stasis is inevitable.

What explains this curious sense that we are somehow dealing with chaotic change and futile stasis all at once? One explanation — offered in Cass Sunstein’s recent book, How Change Happens (UK) (US) — is what he calls “partyism”. The name deliberately echoes vices such as racism and sexism; Professor Sunstein argues convincingly that many of us now dismiss entire groups of people on the basis of their political affiliation.

For example, views of interracial marriage have become dramatically more tolerant. Yet cross-party marriage is now beyond the pale for many. Prof Sunstein reports that in 2010, about 49 per cent of Republicans and 33 per cent of Democrats would feel displeased if their children married outside their political party — up from about 5 per cent in 1960. A similar trend has taken place in the UK.

Political scientists Shanto Iyengar and Sean Westwood used a common (if controversial) measure of subconscious bias, the “implicit association test”, to examine partyism. They found party affiliation produced stronger measures of implicit bias than did race.

One might argue that there is nothing intrinsically wrong with partyism. Rather than unjustifiably judging people based on their gender or ethnicity, we justifiably judge them for the choices they have made. Still, an environment where parties command unswerving support from their own base and unswerving loathing from the opposition is not one conducive to rational discussion. That, perhaps, accounts for the feeling of stasis: we feel that nobody is listening and nobody wants to compromise.

Despite the sense of gridlock, it is clear that dramatic change is possible. A hostile takeover of an existing party structure can turn partyism from a force for inaction into a force for radical change. The Brexiters have managed it, as has Jeremy Corbyn, the leader of the Labour party, and, most spectacularly, Mr Trump.

Existing political parties aren’t the only agents of change. In countries where the voting system permits it, new parties have surged forward. Even in the UK, where the electoral system gives an enormous advantage to large established parties, Leave and Remain have become stronger sources of political identity than traditional parties.

Outside the realm of traditional politics, consider the #MeToo movement — a catalyst for a dramatic and overdue reassessment of what behaviour society will tolerate from powerful men.

These changes are so sudden because we are social beings. We often don’t know how we feel until we see that other people are taking a stand. It seems that nothing is changing and nothing will ever change until a critical threshold is reached, and the dam bursts. Issues that were ignored become salient. We go from shrugging our shoulders to marching in the streets. These changes are unpredictable, and we often mislead ourselves after the fact into thinking that they were inevitable all along.

This, then, is the process of political change: long periods of stasis, sudden bursts of activity, and a good deal of luck. Behind it all, a long slog of persuasion, mobilisation and frustration — less a glorious pilgrimage than an endless treadmill. No wonder most of us would prefer divine intervention.

Written for and first published in the Financial Times on 29 March 2019.

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.

Alan Krueger, a master-economist for our age

Written for and first published in the Financial Times on 22 March 2019.

At the start of John Maynard Keynes’s obituary of Alfred Marshall comes a question: why is it so hard to be a good economist? Keynes’s answer was that “the master-economist must possess a rare combination of gifts . . . no part of man’s nature or his institutions must lie entirely outside his regard.”

This week the profession is mourning another great economist. Alan Krueger killed himself last weekend at the age of 58. What would be a bewildering blow under any circumstances is heavier still because the professor was an authority on happiness and pain.

He discovered, for example, that prime-age men who had quit the labour force were twice as likely as employed men to take painkillers. He studied how unemployed people spend their hours, and showed that actively searching for work was an intensely sad task.

With Nobel laureate Daniel Kahneman, he collected evidence on happiness that remains my benchmark for social scientists’ ability to shed light on wellbeing. Prof Kahneman once warned me that expert advice can go only so far. Much happiness and sadness is genetically determined: “We shouldn’t expect a depressive person to suddenly become extroverted and leaping with joy.” Those words are much on my mind this week.

Yet Krueger’s life invites us to reflect on what economists at their best can achieve. The most obvious fact to note about his career is its breadth. He studied pollution, inequality, social mobility, terrorism, the gig economy, and the music industry.

This is a vivid illustration of the versatility of the economist’s tools, but Krueger used them to make a lasting mark. The most famous example, with his colleague David Card, was a study of the impact of minimum wages on jobs. It stands to reason that every increase in a minimum wage will destroy marginal jobs, hurting some of the most vulnerable people in the workforce.

Profs Card and Krueger, however, weren’t content to stick with the theory. They wanted to know how big the effect was. This is a tough problem. While minimum wages might cause unemployment, a booming job market might influence politicians to raise the minimum wage, so cause and effect are tangled together. Their research, therefore, looked at fast-food industry jobs in two neighbouring states: New Jersey and Pennsylvania, only one of which had raised the wage floor. They found the rise hadn’t dented employment at all.

Not every economist was convinced, and by itself that result might have been a fluke. But the pair had developed a powerful method that could — and would — be repeated. Economists are now far more willing to allow that minimum wage increases can make sense.

Perhaps just as important, economists now believe that evidence can complement or even overturn theory. Economics was once theory-driven for a reason: the data was patchy and controlled experiments were rare. It was almost unheard of to produce evidence that was credible enough to outweigh theory.

Krueger was at the heart of what became known as the credibility revolution in economics: the idea that evidence could be powerful enough to make a difference — and that economists should gather and analyse it with that aim in mind. In a tweet last year, he declared: “The idea of turning economics into a true empirical science, where core theories can be rejected, is a BIG, revolutionary idea.”

However, while voraciously curious, Krueger had no interest in clever studies for their own sake. (Even his whimsical investigation of the music business, fuelled by personal enthusiasm, teaches broader economic lessons. “I think Taylor Swift is an economic genius”, he said.) In general, he wanted to answer the big questions about human wellbeing.

His work on the gig economy is a case in point. With the rise of companies such as Uber it became clear that many workers were putting in highly irregular hours. He promptly started surveying workers about whether they relished the flexibility or suffered from the insecurity. He showed that these contingent work arrangements weren’t new — the Uber workforce was the new tip of a long-hidden iceberg. He chased down the answers to questions other people were only beginning to ask.

“He wouldn’t speculate,” says Betsey Stevenson, who, like Krueger, is a labour economist who held senior positions in the Obama administration. “He would gather the data.”

That data could then be used to influence policy, as he showed during three stints working for the US government, including as the chairman of President Obama’s Council of Economic Advisers. He was also admired as a generous mentor of other economists: his influence goes well beyond his publications.

Were Keynes to be writing about the “master-economist” today, his list of requirements might have changed little: intensely curious about the human experience; energetic in gathering the data; willing to let the evidence change his or her views; a persuasive writer; determined to influence policy to improve the world. Nobody could have matched up better than Alan Krueger.

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.