Is life in the UK as bad as the 1970s? Look at the misery index. The misery index is an economic indicator, created by economist Arthur Okun. The index helps determine how the average citizen is doing economically. The index is calculated by adding the unemployment rate to the inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation create economic and social costs for a country.
On this measure while unemployment remains low, inflation has risen making matters arguably worse for the average citizen. But, the situation while rose than the 1990s and 2000s remains better than the 1970s.
If unemployment can remain low and inflation moderates then the picture will look much better. Some economists (cf. Hanke) might argue that unemployment should have a more important weight as a lack of a job is more costly than inflation. If you agree, then the situation seems better.
Chris Stark: 2023, climate policy, NetZero, adaptation, incentives | Podcast
Chris Stark is the Chief Executive of the UK’s Climate Change Committee. The committee is an independent statutory body which advises the UK and the devolved governments on emissions targets and preparing for and adapting to the impacts of climate change. I think he is one of the most important and thoughtful thinkers on climate change policy today. This is his second time on the podcast. We covered many topics in 2022 which you can check out here.
This time I ask on:
How does it matter that we will pass 1.5c ?
What did we learn after COP27 (climate conference in Egypt in 2022)
How do you think we should think about NetZero at the corporate level
How should we be thinking of adaptation and the CCCs latest report
the CCC work on UK domestic energy rating
Heating and building strategy
Some of the recent politics decisions and discussions such as the UK government decision on a Cumbria coal mine.
What the US IRA (inflation reduction act) might mean for climate policy:
“Now you asked me, has anything changed since last we spoke? And yes, it has. Something quite substantial has changed in the United States of America. So we have this inflation reduction act which is an unfortunate act in only one sense, really. It's the IRA. So in the UK of course it's very difficult to talk about the IRA being good. But it's just a kind of game changing piece of legislation. At the core of it I think is a fairly simple thing really which speaks to our last discussion about the difficulty of implementing carbon taxes. The economic logic of making dirty stuff more expensive than clean stuff is still there.
But it turns out that the effort of putting carbon tax on something that you actually need in the present society is enormous politically and maybe it's best at just to make the green stuff cheap. Broadly, that's what the Inflation Reduction Act has done. It has done so in quite a controversial way. We're having a discussion now about the protectionist elements of the Inflation Reduction Act. It is a very protectionist piece of legislation but it has lit a fire under some of these green technologies. It's because of that simple thing that people I think are more willing to move towards things that have been made cheaper and move away from things that are more expensive. But I feel I want to add a note of caution on that. That we can't walk away entirely from the need for carbon taxes. They're still very, very, very important. It's very, very important to send a signal about the need to use less of the dirty stuff.
I’ll give you one example of that back in the UK. We are on the way to having fully decarbonized power system and that's very exciting. We will shortly produce a report I think that will really help explain what that fully decarbonized power system looks like. Super pleased about the modeling that we're going to put into that report and use. But the challenge shifts a bit I think now on power to actually consuming it being the main challenge. So you've got to push people towards having devices and technologies that use that electricity more. Then when it comes to something like heat or when it comes to an industrial process, you're right up against the problem that gas is cheaper than electricity for the consumer.
So you've got this kind of incentive issue and that's really what carbon taxes are about. We do need to maintain the incentive to move towards electricity as a fuel. We will probably be able to do that if we can have a policy framework that is aimed at making electricity cheaper than gas for the consumer. “
Chris outlines some of the challenges of a carbon tax and why a carbon tax and dividend may also not work.
Chris ends on advice on to think about climate impact and future projects.
Listen below (or wherever you listen to pods) or on video (above or on YouTube) and the transcript is below.
Transcript (only lightly edited)
Hey everyone. I'm super excited to be speaking to Chris Stark again on the podcast. Chris is the Chief executive of the UK's Climate Change Committee. The committee is an independent statutory body which advises the UK and the devolved governments like Scotland and Wales on emissions targets and preparing for and adapting to the impacts of climate change. I think he's one of the most important and thoughtful thinkers on climate change policy today. Welcome, Chris.
Chris (00:32):
Hi, Ben. And hello to the listeners again.
Ben (00:36):
How does it matter that we will pass 1.5 degrees? Some climate scientists’ model that we are likely 90% chance the world will move past this 1.5 C as a point estimate, but also many scientists are communicating and pointing out that doesn't mean we should stop our efforts. Social scientists has also weighed in and have said this 1.5 degree has a lot of communication and political roots to it rather than also just some of the science roots. How do you think about these temperature alignment numbers and how this interacts and how we should be thinking about policy?
Chris (01:12):
This is so complicated, Ben. The kind of core of what we do really is defined in the Paris agreement. So for those of you who don't think about this stuff as regularly as I do, there is a global treaty on climate change which was finally reached in Paris just a few years ago; 2015, I think. It talks about temperature goal of keeping global warming above where it was pre industry when we started burning fossil fuels to well below two degrees centigrade is what it talks about. So that was the kind of goal that many policy makers had in their mind prior to that Paris Summit when it was agreed. But quite later on in the process, this extra temperature target of 1.5 degrees was thrust into the discussion. And rightly so, I think, but it was a sort of stretch goal. So can you keep temperatures even lower than the two degrees that most people had been thinking about as a sort of global goal for this?
That led then to this other really amazing piece of work brought together by the UN's scientific cleaning house; the IPCC. Looking at just what it would take to hit or to keep temperatures to that 1.5 degrees centigrade target, it led some of the key stuff that we now take for granted like net zero being an important goal to reach globally, that for net zero CO2 you need to get there by about 2050. They've become really embedded in the discussion now. This 1.5 degree centigrade target has become, I think, a catchall for all of that. It's the target we should be aiming for.
When the UK hosted the Climate summit in Glasgow, it was the 1.5 degree summit. It was the kind of catchall thing that the US and the UK together were really pushing for. The trouble with it is it's really bloody difficult to get to that kind of ambition and it is very likely that we will go beyond 1.5 degrees centigrade. In fact, I will say confidently that we will hit 1.5 degrees centigrade. In fact, the only uncertainty is whether that's as far as we go. The chance of reaching something lower than that is probably now gone. 1.5 degrees itself gets further and further the more that we don't have rapid emissions reductions. Broadly, you need to have emissions by the end of this decade if you'd really think you want to be on track for that 1.5 degrees. And that's a global goal. Of course, global goals are harder than national goals or goals at the level of any single corporate or individual. So it's very difficult.
The two degrees centigrade goal by the way, is very much on the table. My own view--and it's a personal view, is that I think we will keep our temperatures to that because there's all sorts of good things happening in the energy market. But this question of what you do if it looks like 1.5 degrees is sailing out of view is a really critical one because each COP comes around each year, it becomes more obvious that 1.5 degrees is harder. I don't think I have an easy answer to that question of what you do as it slips out of view really. My view is that we stick to it really. That 1.5 is still a useful thing, a useful framing device because it's a temperature goal but it's also this catchall way of describing the need to throw everything at it. That is still useful to talk about that.
And if it's not 1.5, then we go for 1.6, and if it's not 1.6, then we go for 1.7 because every fraction of a degree matters. Every fraction of degree causes misery and cost to the economy becomes more difficult to manage. We get into quite difficult points as you reach the very much higher temperatures where it's quite difficult to describe the impact because they're so catastrophic. But one more thing on this, Ben, there isn't some special significance to 1.5 in the literature of the impacts. It's a temperature. It will come with costs. There are awful things that will happen to the natural world at that kind of level of temperature increase but it's not special. It's not particularly a special target.
One of the things that often is pulled out of the lecture is that coral reefs are quite likely to bleach more extensively above 1.5 degrees centigrade. Why do we obsess about the coral? Well, partly it's the visual metaphor of it, but also it's because it's one of the very few natural systems that we think is then genuinely impacted above 1.5 degrees centigrade. The point is that it's a slightly artificial threshold. Basically the goal here is to keep the temperature as low as we possibly can. And actually the trouble with all of this is that the communication of that is really difficult as probably I'm showing you today. It's not an easy thing to talk about keeping something that hasn't happened yet as low as possible. That's how we've got to work and frame it and work hard at. So that's the challenge. I think we're probably going to have to come up with a different framing technique than 1.5 degrees centigrade. But 1.5 has been very helpful in pushing the progress that we've seen in the recent years.
Ben (06:36):
Yeah, a very useful simple message. Thinking about the coral reefs, climate warming is happening now. Coral reefs are being bleached at this moment so that's why it's a very apt metaphor. But what you said also echoes what you said last year and my conversation with climate scientist, Zeke Hausfather, who makes the same point. It's not a point estimate. There's nothing particularly special. It's a sort of spectrum. Different parts of the world have different things on averages and all of that and you kind of want to aim for as low as possible. I guess the silver lining out of some of that is if you look at maybe where the estimates on climate policy were 10 or 20 years ago. Maybe even 10 years ago, it looked like a four degree world or above was a significant probability.
Whereas if you look at it now-- Again, you have to execute on the policy. And we can talk about the differences between implementation and ambition. But if you look at the ambition, most of the models are pointing towards between two and three. 2.7 is a median that I'm looking at. Two, like you say, is actually very much still on the tables and there's error within that which is the silver lining. And again, it's a really nuanced thing to say you need to be able to on the one hand celebrate that you've gone from four degree at your mean estimate, median estimate to 2.7 because that's progress. That's good. You don't want to discount the fact that we've done something. But it's not below two and it's not as low as possible. So you've kind of got those. I think people sometimes lose hope or whatever that is if they feel there's no progress being made. But you also can't be complacent. So the messaging has got trickier.
Chris (08:15):
It has. You put that very well, I think. As we went into the Paris COP before this global accord was finally agreed, we were facing best estimate then. The con-central estimate was 3.6 degrees centigrade of warming by the end of the century. And now today, as you see, a relatively conservative estimate of where we stand is if you add up all the pledges that we've seen in the cut process, it's something that's about one degree centigrade less than that. Now, that progress has been achieved in less than a decade. I think that is progress. People should be angry about the fact that we're in this position, and I understand that. So we've got to keep that process going. I think the 1.5 degree framing does help with that but it is very lightly to slip from view. I think we've got to be realistic about that.
Ben (09:08):
That's fair. Your climate change committee have produced some really excellent reports over the years in my opinion and a lot of people I know. So you've had quick hits post COP conferences to work on voluntary carbon markets, this really big piece on adaptation, and of course assessing the UK government's strategy. I'd love to touch on many of these, but it might be worth highlighting on the COP things. We last spoke about the Glasgow COP26 being a corporate and finance COP to some degree and that businesses and corporates as enablers definitely seemed to come to the fore as an idea. My outsider's impression of the COP27 in Egypt, it was perhaps a little bit more niche and targeted and was looking at maybe more of the developing world. What did you take away from the COP in Egypt and how have things changed over the year?
Chris (10:06):
I find Egypt COP really interesting. I didn't go to it. I have slightly regret not going to it; not because it was a really interesting place to actually go. I mean, a lot of horror stories about some of the things that happened at COP this year; accommodation wars and lack of sanitation and food and those sorts of things. But the reason I regret going to it is because I think it was right at the crossroads of a whole host of stories, some of which you've just talked about, Ben, and it's not quite clear to me what the theme really was in retrospect to that COP. So you had this ongoing interest from the UK and the US particularly to push what we call the mitigation agenda. That is the need to cut emissions which is a big part of the story. It's what we often look at in my work in the CCC and what we're best known for as work on net zero.
But actually for many countries in the world, what happens on emissions within their own country is not that important to the story of climate change. What they are grappling with is the impacts of climate change itself which are largely outside of the control of some of the smaller countries. So this question of what you do about that really came to the fore. There has been several attempts at getting something called loss and damage onto the agenda at COP. COP happens every year. It's always hosted by a different country. There is always a push to discuss the kind of reparations as it's sometimes called that are due to some of the countries that are experiencing the worst impacts of climate change but had the least to do with the problem.
Each year it's raised and then sort of taken off the agenda at some point. So scrubbed before the final agenda is agreed, usually. This year that didn't happen. It remained on the agenda all the way through. And then remarkably there was an agreed text which included the words loss and damage and this idea that there should be some sort of facility in there which is really a kind of UN code for transfer of resources from the richer economies that have been largely to blame for the problem of climate change, and those poorer economies often in the global south that are now experiencing the worst impact. What's interesting is that these meetings each year are really hard going. So you get this moment where loss and damage gets put into the text and agreed, but there's no money behind it. So the next COP then has to work out what the money behind that looks like.
Those of you who follow this will know that there has been for a long time a discussion of what's called climate finance which is a really bad term; very difficult term because it doesn't really describe the finance challenge in my mind. But this idea that there should already be a hundred billion dollars of climate finance largely coming from those rich economies to help with the issues of climate change and decarbonizing and all the other things that need to go on. And that a hundred billion dollars was a figure that was being discussed back in the Paris COP and still has not been met. So we're in a world where it's quite easy to get these things agreed or the effort is there to get the text agreed, but the money behind it is a much more difficult thing. And each COP, it becomes more and more difficult I think to get the financial facilities agreed.
So that's how I'll think of Egypt as this sort of struggle where you got this kind of push still from the western economies to talk about a mitigation and 1.5 degrees centigrade in the UK sort of outgoing COP presidency prior to the Egypt COP saying 1.5 got to stay on the agenda. And then this kind of really interesting and pretty successful movement from the African presidency to get loss and damage on the agenda and successfully landing the idea that it needs to remain there. So it sort of sets up the next COP and the ones after it to now have to tackle these things together for the first time. I think in the end it was about as good as it could be actually. The next COP is particularly interesting because it's in the United Arab Emirates and it'll be another COP talking about energy issues. So really interesting to see what happens next.
Ben (14:25):
I think we spoke last time about this sense of fairness being one of the major political economy issues to deal with which has no simple resolution. I have to say post pandemic, I got a little bit more negative on it in the sense that if you had a benign rational dictator of the world, it would probably be obvious to that entity that some sort of fund which would've funded Covid vaccines or treatments for the whole world would've been a great net benefit. And that was kind of quite clear over a pandemic. Climate's actually more complicated. But the root of that problem about where you have the resources and how to allocate it seemed to me to be similar and you couldn't get richer nations easily agreeing on that, although they all agreed kind of in the messaging and in principle.
Having said that, it's a longer going process and it's still being worked upon and it does seem to have a little bit of progress. So there is a little bit of silver lining. But I do wonder about that particularly with where everything's going on in the world. That just at this moment in time nations have got a little bit more inward looking as opposed to global looking. But it does change with the times and can change quite quickly. And in history particularly if you're looking at five year or 10 year periods, it has changed quite quickly.
Chris (15:42):
Yeah, I very much agree with that. Markets need to come into this discussion. I think the framing that I've often put around this is that we are going to have to tackle climate change in an increasingly divided world, at least for the immediate term. This multilateral approach that the UN is just about holding together on climate it doesn't do much to hide the divisions now that you see across the world on some core issues; not only the energy issues. I think what points in the favor of good things happening, I suppose is the fact that the market dynamic has been harnessed on energy at least. That you've got this one way directional thing now happening on energy that points away from the use of fossil fuels towards a cheaper cleaner energy system which is irresistible in the end, I think. So that the markets in the end pull you along that way. But that's the mitigation story I talked about, that's about cutting emissions. It's much more difficult to consider and work out how you can harness markets on the adaptation side because it's fundamentally more difficult to monetize adaptation benefits if your adapting to climate is often not such an obvious return to investors for the big upfront capital investments that are required. So it's tricky.
Ben (16:59):
Yeah. So the adaptation piece where you've done a really big report recently I'm definitely going to touch on that. But perhaps as a segue into that would be maybe thinking at that corporate business level, particularly on thinking around net zero or net zero commitments. So I'm hearing debate about the value of corporate net zero commitments or not, and particularly so-called scope three commitments. So for listeners, scope three is often considered outside the control of companies. That's maybe one of the easiest ways of thinking about it; whether that's downstream or upstream. On the one hand, some people argue there is signaling power and corporates can direct strategy and cash flows to be part of the solution.
On the other hand, corporates do not have direct influence over the power grid where they take their energy from. So you want to be on a green grid, great, but you've got no influence on that. Perhaps they can influence transport or fleet and maybe heating to a degree, maybe land use if they got supply on that. And some also critics worry about greenwashing. On the other hand, at a sector level and on country level, net zero and that kind of thinking seems to make quite a lot of sense. I guess there’s some climate economists who also question about this carbon budgeting on a corporate level. The econometrics don't hold up as well versus a sector or a country level. So how do you think we should be thinking about net zero at the corporate level and maybe some of your worries or pros and cons about the situation?
Chris (18:27):
I've got lots of worries but also some positive things to say about the recent move towards all of this in the corporate community. It is worth just stepping back from this. The discussion that we are having about corporate commitments to net zero is completely remarkable. We would not be having this discussion five years ago. So something has shifted in the corporate community that has meant that there is now a need, I think, whether it's for reasons of social license or whether it's-- I think probably a lot to do with the fact that if you want to hire good staff, particularly young staff, you've got to have solid climate commitments in place and customers are looking for that too. So what we have now is in one sense really, really good.
We've got a lot of very strong and I think legitimate commitments to achieving net zero at corporate level. My concerns come from mainly the fact that it's actually very difficult to define how most corporates get to net zero unless you are an enormous multinational. I'm going to make a notable reference for a corporate like Microsoft which is way ahead of this as a really good plan for not just reaching net zero, but also getting negative and actually undoing some of the harm that has been done over the time that they've been using their energy particularly. That's great. But for most corporates, they're not in that kind of position.
So you see this kind of rush to adopting a net zero target often with a date and often that date is ahead of the global goal. That's kind of what you want really. You want corporates to be aiming for something that is more ambitious. Some of those dates are pretty punchy to put it mouthy. 2030 is a common one. Often you see 2040, some of them are even 2025 astonishingly. But actually if you look at how those will be achieved, you need to look through as you call them the scopes-- and I won't go through all this. But as you move from scope one to three, you have greater agency at the lower scopes to actually tackle the emissions that you are responsible for. Scope three is mostly what's happening in the wider supply chain that you are interacting with. It's difficult at that level to know where to draw the line and about what a good target should be.
And interestingly as we've looked at this, we start from the principle that net zero for a country like the UK will require lots and lots of corporate investment, lots of corporate support. In fact, most of the work that we will do as a country to get to net zero will involve investing at the private level. It's not going to be driven entirely from public investments. So you kind of want those corporates to be on side with it. So why am I concerned about net zero targets? Well, I'm concerned that at the moment you've got this rush to achieving net zero, but a rush to do so in the wrong way. So you've got corporates thinking, "Bloody hell, we've made this commitment. How can we do it?" They work out what those scope one to three emissions are and they find actually that they've not got a lot of scope to do much on many of those things and they'll do cheap stuff first. So they might put solar panels on the roof of buildings. They might have better travel policies for their staff.
But then they'll find that's not reducing emissions very much and then they'll turn to offsets. And this is the key things. You've got lots of very cheap offsets out there right now-- very, very cheap offsets, mostly forestry offsets and they're legitimate things. People are buying them I think mostly in the knowledge that they are useful things and want to be able to legitimately say that they're part of the answer. But they're so cheap and they're cheaper than the harder things. What you really want to be able to say to those corporates if I could sit them all down is, “Thanks for setting out your ambitions for net zero, but let's just talk about your place in the system.”
So mostly-- your emissions if you're a service sector dominated economy like the UK, mostly your emissions are connected with the energy that you will consume in buildings. Most of those are about the electricity that you might consume. And in that world you might think it's a good idea to put some solar panels on your roof. But I'm going to tell you, “No it's not.” It's quite interesting, it's not. Because in this country, in the UK, we'll probably have fully decarbonized para system over the next 10 years or so. In which case plan for that and make the harder steps now to decarbonize the fleet of vehicles that you use or to heat those buildings with a heat pump rather than a gas boiler. That tends to be more expensive and-- this is the crucial point-- it tends also not to get you to net zero today or indeed any time over the next decade But it's much, much more useful for the country and for the global effort if you do those things.
So it’s really interesting for every corporate out there that's got a net zero target. What I would like to see is some kind of kite mark, if you want to call it, for having a good transition plan. Something that marks you out as a company that is doing the best possible things now as part of the wider system change that a country like the UK or the US or the whole of Europe or anywhere in the global economy; as part of that system accepting some of the conditions in that system and recognizing that certain things along the way will shift outside of your control. If you get to that kind of world where actually you're getting more credit with investors, credit with customers, credit with your staff for being net zero aligned than for being net zero itself, then I think we'll be in a much better place because you're going to get a much better alignment from the corporate community behind the national goals that we have here in the UK for getting to net zero.
Ben (24:05):
That's really fascinating. I guess in investment world there are two pseudo kite marks but that don't really capture what you just articulated. So they would be what people use with CDP and also what people use for this science-based targets initiative; SBT, which look probably more primarily at carbon footprinting and glide paths. I really simplify something but they don't really capture what you were talking about. So I think that's quite interesting. I don't know whether you think those have some kite mark value or we really need something else which takes into account of that. And that also puts into question partly this value of carbon footprinting itself at a corporate level, but particularly at an individual level there's some interesting critiques about how that came about. Sector and national, yes, because the macro pitcher gives you good information. But I think people can't comprehend that even the largest company in the world is just a microcosm of what normally a rich nation would be. But how should we think about carbon footprinting and do you think any of the kite marks that you might know about do encompass maybe a bit of this more so there's room for another organization to really look at that?
Chris (25:24):
There are lots of really good organizations out there doing good work. SBTI that you talked about, the Science-Based Targets Initiative is one of the best ones. I think one thing, in the end they all need to come together and align behind some sort of accounting standard. That's the real goal here. So getting to a point where this is just a normalized thing is really the goal here and that kind of idea that corporates need to be net zero aligned rather than net zero themselves is very much at the heart of things. I think if you get that accounting standard in the right place then it'll just be done as a matter of course. So I think it's very important. Carbon footprinting and the assessment of it is hugely important so I don't want to undermine any of that trade. I think it's very, very important the tools that you will need to understand the impact that you're having on carbon are really important. I think what we lack is the next stage of this which is a sort of intelligent, informed discussion about what that's telling you.
So I had a discussion this week with somebody who works in the health system about the extent to which-- even in the NHS they really are thinking about this. But you've got pockets of the NHS… NHS is quite an interesting one because you've got lots of people worried about climate in the NHS. Very often find that actually in my trade that it's often doctors and nurses that are most concerned and come to me with questions about what to do about climate change.
So you've got pockets of the NHS just as an example, where they've got to the point in their carbon footprinting, where they've got this incredible understanding of the carbon impact of a particular operation in a particular building and you sort of wonder what is that actually teaching us? We've gone almost too far down the route of thinking about that whereas some of the fundamentals are being missed. Most hospitals, most NHS buildings are being heated with fossil fuels. That's a much bigger impact. But I think this speaks to the idea that we're all grappling around, we're all looking for something that we can really get our teeth into. So I think the more that we standardize this, the better, but there's still a bit to go on that.
I should declare an interest in this because I've been chairing one of the work streams for this piece of work that is commissioned initially by the treasury in the UK to look at coming up with a transition plan standard that could sit alongside some of the work that's been done particularly in the financial sector. So GFANZ which is a thing that may be known to you, this Global Financial Alliance for Net Zero is coming up with all sorts of very interesting ideas about how you align the right finance behind the green stuff. This is a sort of equivalent to that really that takes it into the real economy and asks questions about how corporates themselves-- particularly in the real economy, but also finance firms can themselves be better aligned so that investors know what they're investing in and banks know what they've got in their balance sheet. We're almost there actually with this. I'm quite pleased with how things are going. It's not easy at this, but we're not far off having some common standards. I think that means something.
Ben (28:25):
So I completely agree. I say a lot about this in overall extra financial data, whether that's environmental, natural, or even to do with the human and/ or the social. That the data is coming, the standards are evolving. You've got a lot of work streams, international standards accounting boards, GFANZ and all of that. But even today with the data that we do have, I can see the missing pieces to your point. The kind of analysis of it or what does it mean or what can you do or have you missed the whole-- there's a lot of this in your reports, the whole enablement piece. I always talk about, "Well, if the world is electrified, you're going to need a lot of semiconductors."
So you want to make your semiconductors well, but regardless of how intense they are, you're going to need vast more quantities of that. You might argue the same for copper and lithium and the like. Those are very obvious ones and there's a lot of unobvious ones. So I think we need to invest the time alongside of being able to interpret the data and tell us what that really means as well as having it. It's coming faster than it has ever been because financial standardization or financial data took quite a long time and it's actually happening much quicker within this area than I've ever seen. Even though it does seem sort of slow because it has taken years and years, it's still happening. It's happening faster.
Chris (29:49):
Yeah. But don't forget the bigger challenge beneath this is not disclosure, it's actual action. Perhaps I've been swept up in this over the last few years as well. Is this idea that if you just get the disclosure regime right, everything will click into place. Slightly ignores the fact that there's a lot of big stuff needs to be invested in and the disclosure regime is there to make sure that when that happens you should get good credit for it. But I think sometimes we forget that last bit and are being overly focused on the standards themselves. My worry with that is that you can really get in-- And again, I think I've fallen into the trap of doing this over the years. The minutiae of this is just there's never an end to it. You can fall endlessly down the rabbit hole. I worry that for those of us who are turned on, it makes sense. But if you are brand new to this thing wondering why you have to disclose all this stuff or follow some sort of counting standard is it is byzantine in its complexity and it will not be obvious why we are asking for that kind of level of details. So we've got to stick to the really important principles I think at this stage particularly.
Ben (30:57):
Completely agree. And I think it gets in the way of sometimes particularly smaller corporates which know what they need to do and actually don't need data to a single decimal point to enable that. That's where the data becomes a red herring and gets in the way of that real world action piece. I do think that can be problematic. And then actually the fact that you probably don't need to one decimal place anyway. So once you've got it and then you know what it's saying, this orders of magnitude and the action is the more important piece.
Chris (31:28):
Yeah. And just very briefly. This is why we over the years have advocated these really clear milestones for the decarbonization of some of the big systems in the UK. It's a model that most corporate, most western economies now are following. But it's really important to know that by 2035 we will have a fully decarbonized power system because it's such a clear offer to the whole country. So it means that whatever electrical device you're using from 2035 onwards is fully decarbonized. That means if you can decarbonize the heat to that building, then the heat and the light and all the stuff that you plug your IT gear in, that's fully decarbonized to that point.
That's not the end of the challenge, but for small-- and most corporates are small, most small corporates in the service sector-- and that's mostly what we have here in the UK. That's the majority of the job that is done. So right now we should be advising people to prepare for that moment. Back to my story of solar panels on the roof. If you want to put solar panels on the roof, do so for other reasons. Do so because it might make your energy cheaper, but you're not actually making a great contribution to the net zero goal in that world. That's a tiny, tiny additional amount of capacity that we're adding to a system that's already on the way to being fully decarbonized.
Ben (32:42):
That's a really good insight. Maybe we'll talk about some of the UK sectors and industries on that. I wanted to touch back on the report that you have which focuses on adaptation and maybe some of the enablement and that because there's a lot of talk about mitigation and actually, I guess there's a lot of talk about energy. But actually you make the point-- and I think a lot of people in the field make the point that the adaptation is a really big piece and is underdeveloped across all of the domains. Maybe partly because of where the messaging has and climate warming and everything is happening now. So we are actually having to adapt now as you say. There's also these milestones coming up. Private sector needs to be mobilized. Maybe that's where policy can help create markets for private sector to help develop. Do you maybe want to highlight why we are where we are on adaptation and some of the things in the report that you think are perhaps most misunderstood?
Chris (33:48):
Yeah, good. This is going to be something that I'm going to make a big push to talk more about actually. Adaptation is a word that I'm not a big fan of. It's a very complicated word but there isn't a better one, sadly. I'm happy with resilience. I think we should maybe talk more about climate resilience, but it's not quite the same as adaptation. And when I talk, I often talk about preparing the UK for climate change which is also not quite what is implied there. But broadly, the key thing is we face big risks from the changing climate. Actually in the UK we know more than most places in the world about those risks because we have some of the best climate forecasting in the world from the Met office. We have some of the best scientists working on climate and climate impacts in the world. And we have a climate change act and an institutional and legal framework for tackling climate change that has pushed the various institutions that matter to think about the risks that we face in quite a lot of detail.
So we have over the years led that. Every five years we do an assessment of climate risks and we've identified 61 risks that the UK faces. I'll tell you now, most of them are flashing red. So there's a sort of question in my mind about why haven't we done more about that? Partly I think it's because there are 61 risks. There's far too many to really cope with. But also I'm afraid it's partly to do with the fact that most people and most corporates and most people in any authority are not really attuned to the reality of the situation that this thing is now upon us.
My belief is that every year when we have one of these moments as we did last year with the heat wave and the 40 degree day in the UK. Every year there's one of these now. I'm afraid that that kind of summer is going to very shortly be a normal summer. I think a lot of the work will be done by the weather that we've experienced and the extreme events that we experienced to raise awareness on that. So we've been talking more about what we need to do in response to the risks which is the adaptation story of how do you adapt the economy to the risks that we face from known climate change. There's a big challenge in this. So adaptation is a whole host of things; it's behavioral, it's the way in which you plan for those kind of moments like a heat wave.
But there is another big challenge of investment here. We know a lot about the net zero investment challenge. Net zero is mainly a capital investment challenge. There is another investment challenge for adaptation and we know less about that because we haven't been thinking about it. We, in a report that we published just recently looked at just a handful of the investments that we've needed and some really key systems as we call them. So flood protection, public water system, how we retrofit houses to be ready for the warming climate and restoring nature. And then infrastructure generally how you make that more resilient. When you look across those systems as we call them, you can see very obviously that there is a massive investment need in each of them to prepare for the kind of shift in climate that we'll have in the future. So just think about something like housing retrofit. We are already thinking about how we need to retrofit houses to be decarbonized, making them more insulated so that they're more energy efficient.
Well, we also need to prepare them for the fact that each year there will probably be extreme heat particularly in the south of the country. There may well be a need to reserve water and to conserve water in a better way in those houses. So very obviously, lots of investment there. But thee big problem with it is that the value of that adaptation is difficult to monetize. So investors may well see the needs to invest but are not going to get a return for it very easily. So what we're trying to do in the report that we publish is just shine a light on that. Say that, "Yes, there is of course a need for public investment and many of these things, but there's also a need for households to invest in this stuff.” There's a big need for regulated infrastructure investment. So that's particularly helpful because you can actually encourage regulated industries through their regulation to invest in it. Think about flooding for example.
Then there is also a need for private enterprise to make some of these investments too if they can be led to that and to see the value of reducing the risk that they face from climate change. It's really interesting. Just to give you a sense of it, a very conservative estimate of the investment needs for the country is 10 billion a year of extra investment just in adaptation. So that's a lot. Not all of that can be met from the public purse. So we're talking about really interesting area where it's flashing red as I mentioned. But there are massive needs now for some creative policies to in particular overcome some of those barriers and give a return to investors for making these investments.
Ben (38:44):
Yeah, completely agree. So I live in a lower ground flat and we refurbished it over 10 years ago. The flat mostly stays quite cool in the summer and doesn't need as much heating. It’s underfloor heating in the winter because actually at that point in time it was worth doing it when you're going to do a refurbishment. That was kind of adapting for the future even being at that and you kind of need that on an unbelievable scale on that. I was interested on the adaptation piece because there's some talk about these creating markets and things. What do you think of our institutional robustness here in the state of our institutions and governance? In some ways I think it's really great. So climate change committee your reports are some of the best in the world. Like you say, we have some of the best information. You get to work on the really important things. We have some frameworks. We had [Chris Skidmore review recently which looks at that so government does look at it. With respect to adaptation I don't feel we have a particular organization or market around that and maybe that's one of your points of having that. So I'd been interested in that.
Chris (39:57):
Yeah, I agree with that. We've got this pretty good institutional framework on the other side of my job; on the net zero side thinking about how we decarbonize. We didn't used to have that, but the Climate Change Act has been one of the things that's helped with establishing that. You've now got a set of very important institutions around things like the regulated industries. They're all broadly except they have a need to act on net zero and are doing most of the right things now. I regularly complain that things are not happening as quickly as they need to but at least it's there. There's almost none of that apparatus on adaptation. I kind wonder why that is really. I think it is partly the thing I mentioned earlier about people not really accepting the reality of the situation which I think will change.
But even those institutions that really have an interest in it-- you look at the water companies for example. Some of the best planning for adaptation is in the water companies but it's still not at the kind of level that you would expect planning for the potential. Remember we are at the mercy of the world's approach to climate change more generally here. So it's not off the table that we might get to four degrees centigrade of warming. And in that world, water becomes incredibly scarce in some parts of the country. So you would expect water companies to be planning for that broad set of scenarios and scenario outcomes, yet they don't really. You find that also in other parts of the energy sector. So even in regulated parts of the economy, they're not planning for realistic and sadly pessimistic climate outcomes and they do need to.
The other bit of it I think is that we haven't got the same corporate disclosure regimes in place yet that we have urging on net zero. That will help create the kind of market that we need to see around some of these adaptation outcomes eventually, I think. But we're still quite far back from demonstrating why it's important for corporate disclosure regimes to reveal some of this stuff properly. I think we and other institutions that think about this more actually need to be better at helping those financial regulators and the people that put these rules together to understand some of that.
Ben (42:07):
I think we need something catchy a little bit like net zero. Like you say, adaptation doesn't quite do it; resilience preparedness. I guess there's a sense that-- and this comes through in the report-- that the government or someone is going to step in and solve it for you. Like, "Oh, London's at risk of flooding. We have a temp barrier. Sure, we'll create another 30 billion and someone will build a bigger barrier. Surely that will happen." Without kind of thinking, "Well, 30 billion's quite a lot of money, takes quite a long time." And so it's theoretically doable, but who is going to do it? "Oh well, someone will step in." I mean, that's a kind of more extreme slightly silly example, but I think that's part of it.
And even when you’ve spoken to the water regulator, it's obviously on their radar and it's part of the strategy and plan, yet when you think about that adaptation isn't quite rolled in. I guess there's also the politics of it. One thing which is perhaps worth commenting on, in the UK we had a recent decision in government and planning on a coal mine decision. On the one hand some would argue on the specifics of the planning and on the locale and putting one coal mine in the context of world energy. And there's all sorts of arguments that you could make there. On the other hand you have this kind of clear, political signaling and the climate change committee already had advice around that. How should we think about the power of signaling and leadership which kind of ties into institutional governance and that? Do we underestimate the power of those type of signals that are peril? Or is it-- I don't know about the complexity of that. I'm really interested if you have a view.
Chris (44:04):
Yeah. I've been in this job for five years and I definitely feel the signal value is understated. Again, back to my story about net zero. One of the reasons why naming a date for stopping the installation of gas boilers, one of the reasons why that matters so much is because everyone understands what they need to do in that world. We were amongst the strongest advocates for a switch over date-- I'm going to call it a switch over date rather than a phase out date-- a switch over date for electric vehicles. So naming a date when you stop selling petrol and diesel cars in this country. At the time that was very controversial. Turns out once you name it, people know what to do. Still lots of concern about that. But we're having a different discussion about that now.
We're having discussion about whether the charging infrastructure will be ready for that moment, not whether the moment is going to come. So signals matter. You mentioned the coal mine in Cumbria. That is a massive mistake. It's that simple. If you are in a world where you are trying to give signals to the world about what the UK is trying to do on climate change, that matters, it's titanic. But never mind that, that's debatable. If you are a steel company in the UK and you see that we are opening a new coal mine in Cumbria to produce cooking coal for the production of steel, then that is a signal that your government wants to see you use that substance. It completely undermines the effort that then of course two months later is what we're talking about, about how we decarbonize the steel industry with hydrogen in this country.
It's just silly. So we've got a government that cannot speak with one voice on an issue as important as this. I don't think there will ever be a coal mine in Cambria because the investing community is not interested in that kind of uncertainty. So I think probably on that coal mine, the biggest and most problematic signal is to the people of Cambria themselves. I don't think there's kids in school in Carlisle right now thinking, "Oh thank God I've got a coal mine to go to when I graduate from-- when I finish my school education." It's just ludicrous to talk about that. So these signals really, really matter and I think the more that we can align them, the more that we can step away from the expensive policies that you've got to put in place if you want to change to one of those signals that you've wrongly put in place in the first place.
So yeah, I think signals do matter. And I have to say back to my top story about what signal we've sent to the rest of the world. We have completely undermined what we did at COP26 when we projected to the rest of the world what needed to be done to take ourselves off fossil fuels. So I very much regret what Michael Gove did. I don't know what will happen. I'm sure it'll go through the courts after this. But the chances of there actually being a coal mine is vanishingly small. I've never spoken to Michael Gove about it but I think he was playing politics with that. I think he probably saw that there was a corner of the country that wanted to see him accept that and that there was some minor political advantage in green lighting that coal mine without thinking about these broader signals. Or if he did think about them, he had a very cynical outlook on it.
Ben (47:13):
Yeah. So for people in the finance world, financing coal mines is probably the hardest piece of debt you'll ever try and get or debt inequity. I think one of the last funders of that which was the Chinese state or the Chinese government has pretty much said they're not funding any coal mines outside of China. And even that is on the way down. So very hard to get the money and you need a lot of money.
Chris (47:39):
They do. I think it's an Australian that's behind this one. They've got no interest in actually developing the coal mine because that's not the way these things work. So you get a consent, you package it up and you pass it on at that point. So anyway, all very silly and I hope it's all eventually erased from history, but we shall see.
Ben (48:00):
That's an interesting segue around the points that we have in the future when gas boilers won't be used, when all vehicles will go electric. Last time we were chatting we were probably both a little bit cautious on carbon tax or carbon; that sort of thing. Essentially we discussed that while the economic models might work-- and there's sort of a lot of sense and certainly there's a sense for having a carbon price. The political economy is very tricky and broad-based carbon taxes-- the practicalities of them are a bit contested and a bit hard to know. Whereas sector led policy could be quite effective which doesn't necessarily need the kind of carbon tax to get going. So for transport we need to electrify trucks, buses, and cars. We can put that in place and then you need everything which goes along that. We need to green the grid. I think you're going to have a report out this year on that power.
So although carbon tax could help that, you could actually do something directly with transport policy and when we have heating industry land use and the like. Has anything changed your mind more positively or negatively on carbon tax or that sort of view? Or as you were sort of suggesting actually the way that when you have put in what seemed controversial, say 2035 x is going to happen, that actually the way that people have got around it now that they have done... I've actually been positively surprised by that. I thought there would be more pushback and that there would be more of that. But actually it's like, "Oh, alright. Let's see how we can achieve that." That kind of up an atom attitude actually has probably put me in a more positive space. So as I was a bit negative on the kind of global cooperation side, I've been more positive about, "Okay, give people something to gun for." And suddenly they're gunning for it which was not maybe my initial expectations.
Chris (49:57):
Yeah, and I'm glad to hear you say that, Ben. It's always good when you can admit you're wrong. So I think the idea of laying out these dates is just that isn't it? It gives you something to gun for. That's a really good way of describing it. Now you asked me, has anything changed since last we spoke? And yes, it has. Something quite substantial has changed in the United States of America. So we have this inflation reduction act which is an unfortunate act in only one sense, really. It's the IRA. So in the UK of course it's very difficult to talk about the IRA being good. But it's just a kind of game changing piece of legislation. At the core of it I think is a fairly simple thing really which speaks to our last discussion about the difficulty of implementing carbon taxes. The economic logic of making dirty stuff more expensive than clean stuff is still there.
But it turns out that the effort of putting carbon tax on something that you actually need in the present society is enormous politically and maybe it's best at just to make the green stuff cheap. Broadly, that's what the Inflation Reduction Act has done. It has done so in quite a controversial way. We're having a discussion now about the protectionist elements of the Inflation Reduction Act. It is a very protectionist piece of legislation but it has lit a fire under some of these green technologies. It's because of that simple thing that people I think are more willing to move towards things that have been made cheaper and move away from things that are more expensive. But I feel I want to add a note of caution on that. That we can't walk away entirely from the need for carbon taxes. They're still very, very, very important. It's very, very important to send a signal about the need to use less of the dirty stuff.
I’ll give you one example of that back in the UK. We are on the way to having fully decarbonized power system and that's very exciting. We will shortly produce a report I think that will really help explain what that fully decarbonized power system looks like. Super pleased about the modeling that we're going to put into that report and use. But the challenge shifts a bit I think now on power to actually consuming it being the main challenge. So you've got to push people towards having devices and technologies that use that electricity more. Then when it comes to something like heat or when it comes to an industrial process, you're right up against the problem that gas is cheaper than electricity for the consumer.
So you've got this kind of incentive issue and that's really what carbon taxes are about. We do need to maintain the incentive to move towards electricity as a fuel. We will probably be able to do that if we can have a policy framework that is aimed at making electricity cheaper than gas for the consumer. So if we move in a-- I hope we are in this world by the way. If we're in a world where the gas price is high today as a result of what's happening in Ukraine, as the gas price comes down-- and hopefully it is coming down, that's the moment to start putting some tax on it so that you start to create that incentive to move to electricity instead of gas. So as the price comes down, let it come down slightly more shallowly than it would otherwise by putting a tax in place at that point. That would work. So then you would push people towards electricity to heat their home or to fuel their car. I think we got to think about that. So we can't abandon entirely the idea that these price incentives have got to be there. It's really interesting to see what the US has done which is largely about incentivizing these green things, but let's not abandon entirely the carbon tax thing.
Ben (53:41):
But it's more specific and better thought out. It's using more as opposed to just broad brush. I've always been quite partial to this idea of some sort of tax like that and then giving that back to-- Well if you want to be just broad, people like universal benefits. So I've always thought a sort of carbon dividend or some sort of universal benefit which is actually progressive. So whereas the tax is kind of regressive, actually in the net you can make it progressive. But people tell me the political economy of that doesn't work and that there's all sorts of other issues. Tell me why it doesn't work.
Chris (54:21):
Well, I mean it's lovely to think about putting a tax in place and then dividend to hand it back again. But if we are successful in this endeavor of decarbonizing the economy, what happens to the dividend? Well, it shrinks to nothing. So you create a new political problem, aren't you? Right now today you can put a tax on those people who use fossil fuels and then hand that back to people who are doing the right thing or who can't afford to use those fossil fuels in the future. But if you've got a position in the future where as a result of our success on the transition we no longer hand out those handouts to those people who need them now, then I think you've got an even bigger challenge actually politically. So I'm not a fan I'm afraid of the tax and dividend policies that are often proposed for that reason. It's a political economy reason. I'm aware that other views are available, but that's my take on it.
Ben (55:08):
Okay. That's interesting. So again, that's because of the political economy piece rather than the so-called rational model bit. In some ways it's a distant relative to the issue we are having now about the fact that we probably need something like a road pricing tax type thing because you give all of these subsidies to EV. But then if something is a hundred percent EV, what happened to all your so-called car tax revenue or whatever the tax was? And so again, the economy said, "You could use some road price and something." But whatever it is, you probably need some substitute. Now, this is a slow enough change that I'm hoping that you can figure out something to do with it. But actually it does create this type of problem which it would be similar. So you create it, but your success will be your downfall. It's the same if you overnight change the EVs; then all of that tax money is gone. It's the fact that it's actually transitioning.
Chris (56:01):
That's right. And I think it depends on your outlook really. Are you implementing this particular tax because you want to see behavior change or is it revenue raising? So that has always been-- The historic problem is that the environmental taxes have mostly really been about revenue raising and when they start to work, that's when you get problem.
Ben (56:18):
Yeah. And that's our point. In fact, that's our last one about behavior change. That we didn't really like the term behavior change because it's really due to cultural technology habits as opposed to people doing the wrong thing from the wrong place. But that's exactly right. It's the price signal to change how people think and act as opposed to whether you are using that money for something.
Chris (56:40):
Yeah. And just before we leave tax, it's really important to think this through. The other thing with tax is that you can't escape the electoral cycles when amongst the UKs. Taxes are hard to implement whenever you try to do them and usually you'd implement them at the start of a political term because that's when you've got the greatest political capital to do it. We're actually at a newly interesting point with net zero where some of these new taxes which will almost certainly be needed-- you've raised one of them and probably the most obvious one which is some form of new transport tax that can cope with the fact that electric vehicles are on the road. Looks probably like road pricing. That's one of the most obvious ways to do it. If you want that tax to be implemented, it's probably going to have to be at the start of the next term really for our UK government. It's never going to be popular.
If you don't do it at the start and then you start to wonder whether you will ever do over the course of that parliament-- And the interesting thing with net zero is that it's this parliament that matters. So it's quite interesting. The tax stuff probably needs to have more oxygen as they say in think tank land because we're going to have to create more of a discourse about the need for some of these big tax changes so that come the election, there is government discussion in politics about what to do about it.
Ben (57:54):
Yeah. I guess people always think it's always maybe this decade or this next five years. But I think it kind of really is for all sorts of policies.
Chris (58:03):
It really is for transport. You can see the movement towards electric vehicles. We're in a world now-- I'm very pleased to be in this world. But mostly it's about what barriers there are now to a faster transition rather than pushing it harder. It's more about the fact that you have to use the public charging network. I have an electric car and I use the public charging network. It's awful. So that's a bigger issue now than the underlying problem of encouraging it in the first place. So in that world it's likely to be a tidal wave. Most people are thinking about electric cars we know as their future vehicle. In that world tax revenue starts to dwindle quite quickly and it's a fiscal risk for the chancellor.
So we've got to have a government that's willing to tackle that. If you want to tackle that particular tax challenge, it's probably better that you do it in a strategic way looking across all the taxes so that you reach this kind of fairer outcome and distribution of costs and benefits that we want to see. And if you want to do that, you need some political capital in the bag to do it. That points to the start of a term. Next election is probably 18 months away so it's pretty important to think this through.
Ben (59:13):
Yeah. And I think they will need to look at tax in the round because there will be some taxes which you want to do which in isolation will look regressive. But if you pair them with other things, will either look progressive or at least also achieve; be maybe neutral and achieve the outcomes that you need to achieve.
Chris (59:29):
That's right. And a final point for me on this because mostly people talk about spreading costs and a fair way which is of course a challenge. But actually I think in this discussion one of the biggest challenges is spending benefits. So if you are rich enough now to have an electric car, to have a heat pump with a time of day tariff that allows you to store electricity when it's cheap, to produce all that stuff, basically you can remove yourself from some of the big costs that those who are not rich enough and have to deal with what they're given currently incur. And I think that issue of spreading benefits fairly is actually a harder one when it comes to some of this because we need to think that through properly.
Ben (01:00:09):
Yeah, I've always thought that. It has happened in all sorts of things. People who only need to borrow small amounts of money but desperately need it at the end of the month are always paying through the nose on it. People who are having to use for their heating or their electricity paying either by the hour, by the day, by a meter or something like that are not seeing any of these benefits and have the highest costs which never seems-- Well I don't think anyone really thinks it's fair, but it's really a difficult problem to solve.
Maybe just finishing on a few couple of items and then advice. We talked about some of the other sectors a little bit, but I didn't know whether you have any comments on work that you've done or thinking about buildings, heating and cooling. And I know power grid and also fairness to the worker where it might be coming up. I think it's probably too big to talk about all of that.
Chris (01:01:04):
That's for the next podcast. I'm very happy to do that if you'll have me on. Why don't we talk buildings? I'll try and make this as succinct as possible because there has been a lot of interest in policy towards buildings in this country which is very welcome. So we now have a heat and building strategy from the UK government. There is a similar strategy in Scotland. Wales are working on one as well. So it's very good to see the focus that's been given to buildings. Buildings are-- depends how you look at it. But they account for roughly a fifth of the emissions that we have each year in this country and it's worth thinking through why that is. It's basically because we have to heat that building up and then there's only a question of how quickly it cools back down again.
So it's a big challenge because we have a climate here in the UK that requires you quite often to heat a building up quite quickly. Those buildings are often very old as well. So gas boilers which is what roughly 80% of us use to heat buildings are very useful in that world because you can flick them on and off quite easily. The fuel can be stored in this very extensive gas network we have at the moment. And turning that over, which I think is probably the biggest challenge in climate policy for the UK is not easy. And still there are lots of choices ahead of us with what you want to do about it. Sorts of real interest, for example, in using hydrogen as we use natural gas in the future potentially. Or the question of heat pumps, of course, whether electrical heat might be able to do the job.
I suppose that's where I start with this. Is that even though there has been lots of policy focus on this, no one's really grasped the central issue of heat and what you actually want to do about it. We are desperately lacking a clear decision from government on what to do about domestic heat especially, but also commercial heat and even how we use heat in industry. Some decisions have to be taken on that. We talked about tax and that being a big decision for a new administration. This is another one. What do you do about hydrogen for heating, for example? Are we going to go down the route of just electrical heat or is there going to be some room for hydrogen in there? Where is that hydrogen going to come from if that's a discussion you want to have? Is it safe? Is it manageable? It's a greenhouse gas so it will leak. That's another problem there too.
So at the core of this is the heat question. How are we going to decarbonize heat? By what point and through what means? How is the democratic process going to arrive at that decision? Is it going to be distributed to the regions of UK or are we going to have a central decision on it? So that's where I would start and I'm afraid I don't have good news there. We haven't got a full decision from this government but hopefully that will come with whatever flavor of government we have after the next general election. The area where we've seen most interest is in energy efficiency and in home insulation where there's been I think more efforts to kind of start the engines on an industry that was shut down by a change in policy back in 2012 removing the subsidies for energy efficiency that were in place then.
It's a big challenge. You're going to scale up this supply chain to install all this home insulation that we could really be doing with worth knowing in error modeling. What we have really in the challenge of decarbonizing buildings across the UK is broadly a strategy before 2030 across the economy of doing as much insulation as you can in buildings. So sort of reducing the size of the problem of decarbonizing it really by reducing energy needs. And then after 2030, the whole strategy kind of flips towards replacing the heating source in those buildings. That's very simplified but that's roughly how we viewed it in our models. So do as much as you can this decade to make buildings more energy efficient. And then after 2030, the big challenge is what you do about the gas grid and what you do about decarbonizing properties with different heating sources.
And I still stick to that. I think that's broadly what we need. Again, the home insulation challenge is a big one because we still don't have a policy. Most homes are unoccupied and we don't really have much by way of an incentive for those homes. So lots to do there. The thing I really wanted to just flag is that at the core of this whole challenge is this question of what we actually know about the building stock and how energy efficient it is and how prepared it is for this transition. It turns out we have this system of EPCs as an Energy Performance Certificates which anyone who's bought and sold a house, any of your listeners will have been through the process of getting an EPC and you get this kind of rating in it. You actually get a couple of ratings which people don't know that. It turns out its spectacularly unuseful in describing the challenge of what you do to improve the energy efficiency of that building or indeed to prepare it for low carbon heat.
So we've given some advice which if you're at all interested in this, it kind of sets out, I think a simpler way of looking at this challenge that helps with the kind of metrics that sit behind that EPC and which would allow EPCs to play a more useful role in the question of decarbonizing buildings. I would encourage anyone who has an interest in it to look at it. It's a really interesting thing actually because in terms of the financing of this, the bog-standard mortgage products, we really do need EPCs to mean something so that the mortgage products can help with decarbonizing buildings. At the moment, broadly the problem is that EPCs are about energy cost rather than carbon value or energy efficiency of the fabric of the building. So we've got to tackle that and we give some advice in a letter to the department called D-Lock which is my favorite of all the acronyms known in White Hall.
Ben (01:06:49):
So I would definitely go and check out that letter which is available on the Climate Change Committee website. I found it really fascinating. We briefly discussed this before because this is a key piece on the homeowner which could potentially try and catalyze this issue that you have on there and on the retrofit. Two quick ones on that. Is it too crazy to think that we could have some sort of district heating network in the same way that we put the gas grid in? Is that too crazy or is that possible?
Chris (01:07:18):
No. I would say that is probably my favorite route through. Let me add further craziness to your suggestion. So you could have a world where every building in the UK-- Let's assume every building in the UK has a gas boiler. It doesn't, and many of your listeners will probably be in one of the buildings that doesn't have a gas boiler. Let's assume for the purposes of this discussion that every building has its own gas boiler. It's quite interesting. What you have is a gas network bringing you gas but they're actually a very atomized heating system for the UK. So every single property has its own heat system. That's a bit weird when you think about it because there's lots of inefficiency. Even the boiler itself is very efficient. It's slightly weird that we all have our own one. So if you look at other countries in the world, it's not like that.
I think there is a world where every one of those properties has a big heat pump sticker at the back. I have an image in my mind of a sort of New York tenement with all the air conditioning units at the back next to the fire exits. It's not a very appealing world. Particularly in high density cities there is a better option here which is that you run hot water around and every one of those properties instead of having a boiler has a heat exchanger which is a much smaller thing. There are plenty of places in the world that have just that so I would love to see that happen. I mentioned the bit of craziness if I can add it in, is that we could heat those insulated pipes in the ground by taking the heat out of rivers.
So you can have one very big heat pump rather than a million heat pumps sitting in big rivers taking low heat from a water source, very efficient source of heat. It doesn't need to be warm by the way, it just needs to be not zero. You can take the heat from that and then turn that into the heat that heats the whole town or the village or the city. You need a few for a city of course. But that's quite appealing actually because it's not an atomized system at that point then. It's a very efficient system to do that and 80% of us live next to water body that would allow that. I'm in Glasgow today and I'm very proud that I had some hand in this amazing project in one of the towns that's near Glasgow called Clay Bank where they used to make very famous ships.
The ship building community there was shattered in the 1980s when the John Brown shipyard closed. This dock that they left behind is where we put one of these river source heat pumps which is now heating this brand new housing development on the site of the John Brown shipyard. And each of the lovely properties that have been constructed there on the Clay-- genuinely nice, is being heated with this wonderful heat power. I find it quite a romantic thing. You've put the river back into the community and it's now supporting the community in a different way. I think it's lovely and there's loads and loads of scope to do that. So I think we could have district heating, we just need to kind of imagine it and do it. That's a Bjork quote; imagine the world, no be in it.
Ben (01:10:32):
That sounds great. That sounds a perfect kind of government private partnership. Could be GovTech, could be something. It seems doable, but yeah, imagination. Okay, so last two questions. Although actually one quick comment on the efficiency part. There is this paradox that when you make homes more efficient, people use more energy. It's kind of the same from the candles to the light bulb. You thought, "Oh, we've got candles and the light bulb would just use more light." So it's a little bit like the gas thing. You do need some pricing thing that as you come more efficient you just don't overuse things because you are there which is-- I think it's the Jevons paradox, but it's a paradox which policymakers haven't quite got their hands around and all that.
Chris (01:11:11):
Yeah. We call it comfort taking. It's sometimes called the rebound effect. But yeah, it's a real thing and indeed that is what happens. It's hard to say that people shouldn't do. It’s because they can afford their energy bills and they make their homes warmer and that's fine. It's an interesting thing. I think a very brief point on this is that-- The dark secret of my trade is that it's difficult to decarbonize the buildings that we have in the UK through fabric efficiency alone. So I know there are a bunch of really prominent people in the field who would like to see what they call a fabric first approach to decarbonizing. But actually in our view, it doesn't take you that far.
That's kind of the point that some of the economic evidence supports actually that you should certainly make buildings more energy-efficient. But it's not really about the carbon challenge, it's more about the fuel poverty challenge or the fact that people living in those houses just should get a better deal. They shouldn't be living in drafty crackled houses. We should be helping them to live and have a better quality of life. The carbon bit of it, I'm afraid that that needs to be tackled. That's swapping over the boiler. That's the big challenge. That's where the big returns come from. Part of the worry I have with all this is that when it comes to the heat pump discussion which has become quite a live thing, the government's approach to all this if it has one binding approach, is heat pumps. We attached a slightly higher standard to the use of heat pumps. We don't do it with gas boilers.
Before we rolled out gas boilers particularly over the seventies and eighties we didn't say, "Ooh, you could have a gas boiler but you've got to make your home much more energy efficient before we'll give you one." And that's this sort of weird discussion we're having with heat pump. You could have a really big heat pump. It's probably not the best idea for the whole energy system to do that. But we might need to get to the point where we're more tolerant of drafty leaky houses because we've just got to get on and decarbonize them. Some of the people living in those houses are going to have higher energy bills and it's for them to worry about that. I don't want people who can't afford their energy bill today to be in that position. So we should be thinking most about those who can at least afford their energy bill when we think about this transition and the energy efficiency, I think.
Ben (01:13:21):
Yeah, I think that makes a lot of sense. We put in the gas networks when most people don't have gas, right? So there's a lot of things like that. Okay, last few questions. So one is an ask for what you would have for people and then what people ask us. So people ask me a lot about what they can do on climate change and my answers tend to be specific and quite long and complex depending on who is asking and what their background is. But often policy influences an important component of my answer whether that's a political or a corporate level or some thinking on this. Maybe there can be tech. So I don't know what do you say to that question and what can people do or maybe what can people do to influence policy or influence corporate or how should they be thinking of this? Because actually there's some household things that we can do, but we know at the household level it's great to have a signal if you can afford a heat pump or go vegetarian and the like. But that isn't this kind of system policy change with the big levers as well. So I kind of don't want to do it down, but obviously we need to do these other things. What's your advice or thoughts there?
Chris (01:14:29):
Well, I'm aware of your audience, Ben. I don't make claims to know who listens to your podcast but I imagine some of them do have a lot of influence in this area. So I think the really important thing to say at the top of this is think through what influence you have particularly on the policy front because conversations you might have are really important there. I think the one thing that really matters when it comes to that is if you are in a circle with influence. Just talking positively about this is a thing that is actually going to happen is the most important thing. There's a general-- I still get it. There's a sort of disbelief that it can't be done. It can be done. All these steps that we've talked about and the reports that we've produced illustrate them even further.
They will be done. So any talking in a sort of constructive progressive discussion about those things as an inevitability I think it's probably the most important thing actually. If you want to be vegan, go for it, but it's not going to make that much difference. I think the really important thing that I often say at the top of this discussion is that we can't make this about individuals. The big systems that need to be shifted are not going to be tackled just by making personal consumption choices. But those personal consumption choices probably make you feel better about it and therefore they will matter too. The one that probably matters most is the move towards or rather the move away from kind of red meat consumption and processed meat.
So if we can find alternative proteins, for example, George Monbiot is very good on this, then that would make a real big shift. So actually being willing to consume some of those things might be more interesting. I'm going to give you two things to try and cut this as short as possible. If you make an investment to have an electric car or a heat pump, tell people about it. Turns out that that matters a lot. We've done very well with electric cars because they've become quite desirable. I think we probably need to have the same thing happen with domestic heat. So if you make that kind of investment to make your home warmer, put a heat pump in it, tell people about it, feel proud about it. That will matter because particularly in the community around you they'll all want it too. So that's the first thing.
Then the second thing, think through what wider impacts you can have. Probably the two biggest impacts you can have are how you vote. And I'm not telling you how to vote-- make that very clear. But take an informed view on that. If you care about climate, those parties that you may or may not vote for will have a position on it and it matters. Where you invest is the other. Even if you think you don't invest, you've probably got a pension and you probably can have a say on that. So directing that is probably very, very important. That if we can get some of the big institutional investors behind this transition-- most of them are, but really actively behind it, that will make it sing. So this ratified audience of yours, Ben, I bet they've got more influence than most. So do think those things through. We need to be proud about decarbonizing, I think, and proud to make the investments that will make it work. We need to build the idea that these are desirable things in life and alongside that, these wider choices about the political system we have and the financial system and how you invest really matters.
Ben (01:17:53):
That seems like excellent advice. And then last one, current or future projects. Anything you want to highlight or you're particularly excited about?
Chris (01:18:02):
Very excited about all the things that we do but this is a particularly interesting era for us so we've got lots of exciting stuff coming up. Briefly on the CCC, my institution, we've changed quite a lot in the last six months. So we've built for the first time a set of integrated teams that are looking across the net zero challenge and the adaptation challenge. So got a team on the built environment which is not just thinking about how you decarbonize buildings but it's also thinking about how you prepare them for the likelihood of flooding or overheating. It's really good to have that and the transport systems that we'll need into those buildings. We've got a team now on the energy supply that's not just thinking about decarbonizing; it's also thinking about making it resilient. We've got team on infrastructure doing similar things. We've got a really exciting team doing something on nature, on land, on agriculture, on the seas, bringing together biodiversity with adaptation and mitigation.
So we've got this kind of new facility to look at things which we've never had before. So we're kind of using that now in anger to produce some new analysis. Stuff I'm really excited about. We're going to do something on work and skills coming up, looking at the nature of the transition that's coming up and the nature of the workforce change that goes with it and the skills challenge. That's going to be really interesting. Some very interesting and actually maybe controversial stuff in there about which sectors of the economy expect to shrink and which ones will grow and the slightly uncertain nature of all of that. So that's really interesting. Big thing coming up which I'm so excited about is that we've done some amazing modeling work over the last 12 months on the power system looking at how we decarbonize the electricity system in the UK in particular to give a better sense of how we cope with a world where we are using renewable electricity as a sort of backbone of the whole electricity system and increasingly the whole energy system.
And in that world how we cope with long periods without wind which will come. This wonderful German phrase, dunkelflaute, which explains these kind of long periods of dark and often cold periods without wind. We will be exposed to that in the UK. What do we do in that world? Without spoiling the surprise, what we've done with this modeling is illustrate what kind of system you need alongside that very extensive offshore wind system and onshore wind system, solar system that we have. It's really good. So big story there on hydrogen use and storing hydrogen using it in the para system. The really cool stuff is that we've used actual weather data from an actual year where we had low wind that year and then stress tested it with very long periods without wind and looked at what we can actually do.
So it should answer the often stated point from people on Twitter that we haven't thought about; point when the wind stops blowing. Turns out we have but we've kind of illustrated it. So that's coming up. Got a big report to do and then progress report should do every June. Then the very final thing I say is that at the halfway point we will then begin these really big strategic pieces of work that we do every five years. So the seventh carbon budget which is the emissions target for the UK which will take us into the 2040s, we have for advice on that every five years and we'll start the process of thinking about that properly in the last six months of this year. Really interesting because the 2040s we should have reached full decarbonization in some sectors and we may not have actually done so. So how do we cope with that uncertainty? It is going to be a big thing.
The question of what the right data is for net zero is not really in the discussion at the moment, but kind of interesting questions that do come up about how would you go faster on this? Maybe an interest from future governments and things like capital scrappage. So we might look at some of those issues moving more rapidly off fossil fuels. We're going to explore some of that. And then the very final thing-- we've already begun work on this actually. But the other thing that we do every five years is an assessment of the climate change risks that we face as a country. This will be CCRA4; Climate Change Risk Assessment Four and we've just got the commission for that agreed. It's really exciting.
So yes, we are going to look at the climate risks, but we're going to do something that I've always wanted to do which is to look at defining what a well-adapted UK looks like. So that's the kind of really interesting piece of work to actually define what we mean by a well-adapted UK across some really important issues like overheating and the natural world and how we do deal with big supply chain interruptions globally. All sorts of interesting stuff there. And then actually giving advice on adaptation itself; not just on the nature of the risks that we face, but how we put policy around it. That's the other thing that we're going to do. So it may seem a long way away. It's probably 2026 maybe we'll bring that together, but actually three years not that long in bringing together that kind of program of work. So we'll get that going properly this year. There's a host of other things too, but look out for it. We're always busy in the CCC but we've got a load of stuff this year that's been in gestation for a while.
Ben (01:22:51):
I highly recommend all of the reports. If you don't have super time, the executive summaries are extremely good and give you the heart of the matter. But all of the technical and the backup evidence, I think they're some of the best reports on climate that I ever read. So on that note, Chris, thank you so much for joining me.
Chris (01:23:10):
Thanks Ben.
Mark Koyama: How the World Became Rich, economic history, intangibles, culture, progress | podcast
Mark Koyama is an Associate Professor of Economics at George Mason. Mark researches comparative national state economic development and the rise of religious tolerance. He is interested in how historical institutions functioned and in the relationship between culture and economic performance. His 2019 co-authored book, with Noel Johnson, is Persecution and Toleration: the long road to religious freedom and his 2022 book, is on How the World Became Rich, co-authored a book with Jared Rubin. Book link here (Amazon).
I ask why it has taken economists and historians so long to form central views on how we have become rich?
Mark discusses what historic progress might tells us about economic development today.
One part on current policy ideas:
”...We didn't talk about this in the book because we deal with things historically. But I think in a country like UK and many parts of US, planning and housing are the biggest constraints. So I've really subscribed to the housing theory [of everything] where the high price of housing which is constraint largely by planning restrictions is a big problem in terms of getting people to productive areas. So you need to get young workers and ambitious workers and innovative workers to cluster in places like San Francisco or indeed London. If they can't do so, if it's very costly to do so, that's a big drag on productivity.
I think allowing people to match, so allowing people to move to locations where their particular skills are in demand that is crucial. So that's critical. Housing wasn't a central issue in the pre-modern period because it was largely unregulated. So London became a monster. It became a ginormous city fairly early on; like in the 17th century already. There was no vocation whatsoever. People lived in horrific conditions and there was a lot of overcrowding, a lot of negative externalities, a lot of slum housing. That was obviously bad, but it was also good because it allowed productive, ambitious people to come together and work together. You see similar clusters in the industrial revolution in the north of England. I think actually in British economic history, the last major episode of housing building was in the 1930s. That was critical in getting Britain out of the Great Depression.
So that’s something often missed because our understanding of the Great Depression is totally biased by what happened in the United States. But in Britain, housing is crucial in getting people out of the Great Depression. So I think that's what I would emphasize in terms of most important thing that I can currently think of in the modern world. I would also say that in general, adapting our institutions for the new productive technologies is important. So it's in ways it would be intangible economy and having the right institutions which are appropriate for that. I kind of sometimes feel very copyright, and intellectual property right laws are not really best suited to fit the current technological environment we live in.”
I ask about the interaction between the main factors behind economic progress such as: institutions, culture, infrastructure, geography, energy.
I question the role of common law and ask about living constitutions and Mark discusses his reading of the literature and how the UK is relatively unique in its living constitutions.
I query the role of intangibles and the patent system and briefly lay out the case (after Brad De Long) for importance of industrial labs and the corporate form. Mark discusses these factors and their importance from the 1870s but also what was important pre-1870.
We chat about culture (using Joe Henrich’s terms) as a set of heuristics. Mark discusses the literature on the importance and role of slavery (probably not the most major factor in the UK’s industrialization, but still heavily argued), and the role and roots of social progress such as women’s rights.
We cover impacts of war and also the black death from an economic history view and we discuss the challenge on climate.
We play over/underrated on : GDP, carbon tax, representative democracy governance mechanisms, universal basic income.
Mark ends with current projects and advice.
….So podcasts; everything is online basically. The young person who's ambitious and interested can actually get to speed quickly. So you can teach yourself econometrics by watching tons of YouTube videos. Most people won't because there's other stuff to watch on YouTube, there's other stuff to do. I could be teaching myself foreign languages on YouTube and I'm not doing it because my opportunity costs I guess is maybe high. But if you're young and wanted to study this stuff, you can get a huge head start just by use of the internet cleverly. Tyler Cowen’s advice is find the right mentors. Find some people and learn from them. But you get a huge amount early on to give yourself a head start before you go to university because to be honest, the university experience isn't necessarily going to be all that…
Podcast available wherever you get podcasts, or below. Video with captions on YouTube, or above.
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Transcript (only lightly edited) Mark Koyama: How the World became Rich
Ben
Hey, everyone. I'm super excited to be speaking to Mark Koyama. Mark researches comparative national state economic development and also the rise of religious tolerance. His 2019 co-authored book with Noel Johnson is "Persecution and Toleration: The Long Road to Religious Freedom," and his 2022 book is on "How the World Became Rich," co-authored with Jared Rubin. Mark, welcome.
Mark (00:30):
Thanks Ben. Great to be here.
Ben (00:33):
So first up, why do you think it has taken economists and historians so long to form central views on how we have become rich? Is it simply that historic data has been hard to reconstruct or is it to do with the complexity of the interactions between these main various factors? We seem to have been slightly slow to really understand the causes of progress. In fact, some of them are still a little bit contested.
Mark (01:01):
So I think there are two elements to this. One element is for one you mentioned briefly, which is the quality of the historical data. So even as recently as late 1980s/1990s, there are great books on the origins of economic growth historically. These are books I've learned a lot from. Eric Jones, "The European Miracle." Birdzell and Rosenberg have a book on origins of economic growth. They were great books but those were not really informed by very anchor estimates of per capital GDP in the past and not informed by real wage data, not informed by kind of the data on heights. So there has been a revolution pioneered by other historians in terms of how much we know; like in terms of quantifying economic history. So to give one concrete example, Angus Maddison was a pioneer of historical GDP data and you'll see a lot of books quote Maddison's numbers. But actually, Maddison's original numbers were quite vague and really guesstimate.
It's really in the last 10 years where people have created I think much more credible estimates. Others call it building on Angus Maddison. So that's part of it. There's another part of it which is... Sometimes the way I think science and even social science progresses is that early on we might have quite a good understanding of the topic, but using methods which are quite ad hoc or subject to criticism. Over time, what scientists and social scientists try to do is refine our methods. But as we refine our methods, we have to throw out a lot of what we previously knew. Paul Goodman has a famous essay on development economics about this where he compares it to a map of Africa.
So before the explorations of the 19th century, people didn't really know what was going on in the interior of Africa. But we had a vague idea where rivers were and where Vietnam's mountain ranges were. The VSA thought there were monsters in places and unknown regions. But as we refined our knowledge of maps, we got rid of the stuff we didn't know for certain and actually we lost knowledge. We forgot about certain rivers and where certain places were because we only wanted to rely on scientific evidence. So I think in economics and economic history of just something of the same development. So Adam Smith and John Stuart Mill actually understood quite a lot about economic progress and economic development relatively, and actually with the formalization of economics in the post-World War II period, we actually got rid of a lot of insight to that institutions about culture and so on because we wanted a more rigorous framework. We wanted a solo model. Now, what the research in the past 20 years has done is relearn some of those lessons.
Ben (03:52):
So it really does seem that we've had a little bit of step change in the kind of history and the science here. I was wondering maybe stepping forward before moving back, if we think of becoming wealthy as a form of progress, what do you think this history teaches us on where we might go next? You lay out in the book strong arguments for the intersection of several prerequisites such as infrastructure, institutions, culture, geography, represented democracy of sorts, energy. Do you think these same factors will broadly apply to, for example, poor parts of Africa or developing nations, even a country specifics will vary, or do you think it's so complex and nuanced that those individual factors will always vary depending on the locale and where we're thinking about?
Mark (04:39):
The lesson of Alexander Gerschenkron was the path followed by later industrialized is different from the path followed by the early industrialize so we can definitely see that. Even in the poorest parts of the world people today have access to cell phones and the internet, which obviously, equivalently, poor countries didn't have in the past. So you can think about jumping over what were previously important steps along the road to getting rich. I'm not a prognosticator. I don't think like a super forecaster. But what I would say is one of the main routes to getting rich in the last 150 years roughly has been manufacturing. So that's a route pioneered by Britain, by the United States, by countries like Japan, by China.
Often you move through the value chain from lower value to a value added manufacturing goods like textiles, and up the value chain more sophisticated products. One of the issues in the past 13 years has been that China had such a cost advantage, but other countries saying Sub-Saharan Africa, whatever parts of world struggle to get onto the ladder even. So that factoring route is difficult. Now, China have started to increase so it's a possibility for other hubs to emerge below cost manufacturing. Perhaps you could say Bangladesh is already doing that. But the broad principles still seem to apply. We're trying to articulate some principles about institutions and culture. So when we talk about infrastructure we're talking about infrastructure which supports markets and trades. I think broad lessons still apply, but as you suggest, it's nuanced in a sense that how it applies is different in each case. That's why development economics is rich. That's why development economics is complicated. It's why people can make flaws of themselves with two strong predictions.
Ben (06:57):
Great. Maybe again just before skipping backwards, I'd be interested if you had a view on the richer nations themselves. So there's a lot of talk in the UK or the US or many other richer nations about how productivity may be more diminished recently and how we should be aiming for more growth or more productivity. I'd be interested if you had a view whether some of those same factors; so new institutions, a building culture or innovation culture, anything to do with infrastructure, do those lessons of history still apply to potentially getting some of this better-- because there's debates on supply side progressiveness or whether we've got too managed regulations or whether like you say, once you've industrialized, you're kind of into uncharted territory and the lessons of history may not hold.
Mark (07:50):
So when it comes to calling of current policy advice-- We didn't talk about this in the book because we deal with things historically. But I think in a country like UK and many parts of US, planning and housing are the biggest constraints. So I've really subscribed to the housing theory [of everything] where the high price of housing which is constraint largely by planning restrictions is a big problem in terms of getting people to productive areas. So you need to get young workers and ambitious workers and innovative workers to cluster in places like San Francisco or indeed London. If they can't do so, if it's very costly to do so, that's a big drag on productivity.
I think allowing people to match, so allowing people to move to locations where their particular skills are in demand that is crucial. So that's critical. Housing wasn't a central issue in the pre-modern period because it was largely unregulated. So London became a monster. It became a ginormous city fairly early on; like in the 17th century already. There was no vocation whatsoever. People lived in horrific conditions and there was a lot of overcrowding, a lot of negative externalities, a lot of slum housing. That was obviously bad, but it was also good because it allowed productive, ambitious people to come together and work together. You see similar clusters in the industrial revolution in the north of England. I think actually in British economic history, the last major episode of housing building was in the 1930s. That was critical in getting Britain out of the Great Depression.
So that’s something often missed because our understanding of the Great Depression is totally biased by what happened in the United States. But in Britain, housing is crucial in getting people out of the Great Depression. So I think that's what I would emphasize in terms of most important thing that I can currently think of in the modern world. I would also say that in general, adapting our institutions for the new productive technologies is important. So it's in ways it would be intangible economy and having the right institutions which are appropriate for that. I kind of sometimes feel very copyright, and intellectual property right laws are not really best suited to fit the current technological environment we live in.
Ben (10:18):
Very good. That's exactly what Anton Howes said. He was on the podcast a few months ago, on the institution side on copyright on patents. And actually Stian Westlake who was also on the podcast recently has said a lot about new institutions, particularly for the intangible economy but for other things or new bits of old institutions. But I think the housing point is really interesting.
Mark (10:43):
I didn't know either of them had been on the podcast. I know both of them. We share similar ideas I think.
Ben (10:50):
So it's good. You have not as yet contradicted either of them, at least on the forward looking part. That housing point is really interesting because it's so contested. I would say there's probably a broad consensus in the UK amongst economic or even economic planning people that if you could build a lot on the green belt, which they don't think is very valuable land, it would be enormously beneficial in economic terms. But the political economy, at least people reading of the political economy hasn't seemed to have made it happen, which seems to be a little microcosm for a lot of these things. So we'll see where that goes. Although there's some signs actually just today in September, the UK is going to try and do something about that with the new government.
So maybe then skipping back to your book, why I really liked it or if I got the reading of it right, is you seem to be arguing with your co-author that it was the intersection of so many of these prerequisites which was really important. So it's not just institutions and infrastructure. It's not just coal in Newcastle. It was not just a parliamentary representative democracy or your geography. It's the fact that you had brought all of those components together. Am I right in reading that as a central argument of your book? Then I would add on top of that, you are quite careful to lay out the median theories about where all of this literature is and make the intersectionality of it all. Would you yourself wait any one or two of those factors or maybe some of that intersectionality perhaps different from where the median literature is?
Mark (12:33):
Complicated question. So from a scientific perspective like an actual science perspective, in some sense what we do you could say is not fully satisfying because if you want to propose a theory of economic growth, you want it to be parsimonious and you want it to focus on a few factors. So that's what some people tend to do, because I think it's a habit we have from if we've studied the harder sciences. But what we feel is important here is that we're not articulating theory of growth. We're documenting how the industrial revolution, how modern economic growth began. So then it's important to be broad minded about the causes and it's important to give a full coverage and give equal weight to certain views.
My positions on this are open to debate and change. I think there's a lot of room allowing for multiple channels of causations. To be clear, for example there's some scholars who really emphasize the role of the energy transition. So they move from an organic economy to a mineral based economy, particularly the coal. So they'll say coal is central to the British industrial revolution. Those who push back will say, "Look, Britain didn't have to have a coal. It could have important energy. And even if there hadn't been coal, there were enough incentives to utilize other energy sources and maybe growth would've been different or slower, but they still would've been something that we would recognize as industrial revolution without coal.” My own reading of it is not to overestimate the role of coal or other product technologies, but I'm aware of ongoing research.
There's a paper by Kevin Oakes on culture I think, which is showing a correlation between coal and city growth. So coal might play 5%, 6, 7% contribution. That's not trivial but it's not all of the story. Another example is the role of slavery in the Caribbean in the British economy in the 18th century. In our book we review this hypothesis which is associated with Eric Williams, but we kind of come down on the side of the skeptics because we didn't see evidence at the time we were writing of strong linkages between the sugar nexus. So the British economies in the Caribbean based on slavery basically enriching a lot of plantation holders and they're making some people rich, but we didn't think there was a lot of evidence for links between what they were doing and then industrialization later. So we downplayed it.
Now there's a new NBER working paper by Hans-Joachim Voth and Stephen Redding arguing that there is evidence for this link. But it turns out if you read that paper-- and they say this is support for the Williams hypothesis, but you find even in this paper they find this statistical link between slave wealth basically and local levels of manufacturing. But even on this paper, the effects are actually small. So I think that we wanted to present an account which we thought was fair to other literature, is up to date as we could possibly make it given when we were writing, and that which we'd be happy with in 10 or 15 years as people do more papers and more studies. So we're waiting to adjust things on the margin and we do think it's a multi causal process.
There's no single factor that was critical. You could imagine industrial revolution happening a little bit later or a little bit slower or a little bit faster minus or added some of these factors. So none of these factors to me is super decisive. If England had missed several of the factors that we identify as important, you could imagine industrialization not happening. You could imagine 1700s, 1800s Britain as a comparatively rich commercial trading society, but one which doesn't produce an industrial revolution.
Ben (16:56):
Great. That brings up so many thoughts. I would reiterate that means you think there's no one factor for instance, which would make even 20 or 30% the routes of getting rich because it's unlikely to be one of the slightest factor that's still a multifactorial thing. Maybe we'll go through some of them about how you potentially waited.
Mark (17:20):
Yeah. If anything's critical it's the science, in terms of preventing the industrial revolution from petering out. So if any one thing is critical, you take away the scientific revolution and the connection between scientists and engineers, then you start to think that maybe even the first industrial revolution still could have happened because many of the inventions type of things didn't depend on science, but then you get stuck there basically.
Ben (17:47):
Okay. That makes a lot of sense. Maybe skipping back-- Actually, this is kind of a question from Anton Howes which is, so why do you think then some older civilizations like the Romans or the Greeks or the Chinese-- Was it that science part or was there something else which meant that they couldn't sustain their industrial revolution? Maybe you can go one step further if you think about between Britain and Holland which you cover in the book, that you kind of think that Britain really did sustain it and the Dutch didn't quite make it in the half mini age before that. At least that's what I get of your reading of the literature.
Mark (18:30):
Yeah. Certainly. This is a longstanding puzzle which I don't think we have a great answer to. The Romans and the Greeks had amazing [technology] in many respects. But many of the things they used it for seemed to just be for toys. So early steam engines in the era of Alexandria they use basically to move things in temples. They're gimmicks. Why are they not using it for industrial purposes or profit making purposes? You can tell a cultural story for why that is. You can tell a story where slave labor is sufficiently cheap, the mechanization is not appealing. You could tell a story where the engineer-- I think that the tool making was there. So if you look at the Antikythera Mechanism, this proto computer calculating device which was discovered in a shipwreck off a Greek island; Antikythera Mechanism. They had the engineering tools to do it.
I used to think they didn't have the engineering capabilities; like the ability to make reliable clocks and so on. They had it undoubtedly now. So that makes the puzzle starker and I don't have a great answer to it. But I think culture is plausible and I think the slavery factor is also plausible. Then when it comes to the Dutch, they are participants in the scientific revolution. I would mostly say it's a scale thing. I think part of it is a political economy story in where the Dutch is just too affected by their war with France; too devastated by their war with France, but it was huge tax burden, huge debt burden. They have to pay off revenue 18th century and it leads to bit of... They have relatively stagnant high levels of income 18th century. But you could also say that Amsterdam's a trade and finance capital. It doesn't seem to have quite the population of skilled mechanics and manufacturers that you see in British cities, particularly obviously Birmingham and then later Manchester and Liverpool. So that could be another factor, but there's not this tight a link as we've see in England between the scientists and the people actually improving things on the ground and making machines.
Ben (21:00):
That makes a lot of sense. I wanted to touch on two things which don't appear so much in the book, maybe because it's slightly later. But I was reading what Brad DeLong has written. Two things that he mentions quite strongly in his more grand narrative-- So you've kind of put a lot of things together, is the rise of the corporate form and also the rise of the industrial lab. Although I guess the industrial lab is putting science into action. So in that way it's just perhaps slightly later on view. Do you think that perhaps from-- Well, he dates it from 1870. So maybe from 1870 onwards, did play this kind of role in the sustaining part of the industrial revolution and do you think maybe there's a little bit more weight on those?
Mark (21:48):
It's part of what people call a second industrial revolution. So it is a core part of that. In the second industrial revolution we're seeing some of the most decisive technological innovations. So in some sense, the industrial revolution traditionally gets weighted very heavily because it's the first and it is a breakthrough. But it's true that the decisive improvement in living standards and additionally the period where something in the modern world is created is the second industrial revolution. As DeLong and others have mentioned, that's when you get electricity, that's when you get your automobile. So the really core technologies for the modern world come about in the second industrial revolution.
I'm reading Brad DeLong's latest book right now. He emphasizes the corporate form more than we do. We do mention it at some point [we] think it’s very important. I think it is important. He emphasizes it because it allows a division of labor. So now you could be a Tesla in a corporation and you don't have to worry about the management side effects. So I can buy into that as important. It doesn't strike me as being as critical as DeLong maybe suggests. The research lab is definitely important. Technology was already being brought for market before the research lab. So whether or not that's decisive or just a part of this overall process of making innovation profitable is debatable. I don't have a problem with emphasizing. It's just a manner of emphasis.
Ben (23:41):
Sure. That makes a lot of sense. Maybe we can argue a tiny bit or delve into this corporate form thing because I guess some people put a lot of weight on that. The British East India or maybe the Dutch East India and this corporate form. I think it is interesting that the world now is very much this kind of corporate form that you have. The other observation I have is really on what some cultures or country-- and we can be slightly careful about how we talk about culture because we don't mean it in any sort of dismissive way. But I think of this as the kind of view of credit or the corporate form within some Islamic way of thinking because actually even today, the securitization of assets and how they deal with credit is a little bit difficult in terms of that kind of securitization. So I do wonder whether maybe there is something more to that corporate form or whether that may be just kind of as an emergence from this idea that you had saying in the first one about institutions. So you simply needed some sets of institutions to carry forward these ideas and actually the corporate form was that. But really it's just a kind of extension of institutional thinking.
Mark (24:53):
Yeah. Certainly, some scholars have emphasized it more than we have it. [ ] this development of the corporate form. It is a decisive thing in the 19th century. It's important for risk sharing and it's important for innovation and [ ] emphasize the idea that you have long lived organizations which is separate from the states. I think that is important. I think because we focus a bit more on the industrial revolution than on the second industrial revolution and we focus a little bit more on developments in Britain and Europe and on America, that we're a little bit less kind of, “This is the key innovation.” But yeah, I definitely think it's important. Credit is important. Banks are important. I just don't think they're the decisive thing. I think by the time you get the modern corporate form, the genie of economic growth is in my view already out of the bottle. So that's why I'm not emphasizing it as much as perhaps obviously.
Ben (26:05):
Yeah, well that's good to know. Well, I think you might be right and DeLong might be wrong. But obviously, there's still not necessary a settled debate. I guess this is one of the other things you mentioned in passing, but don't put as much weight on. Actually, I haven't seen too many, but I do wonder about the role of the creation of markets for intangibles at the time. You particularly see this in patents and you see this strangely because actually where you have certain companies formed today seem to depend on patents and patent laws. In some ways I do view this as an extension of institutions and you always had trade secrets and those sort of things. You mentioned it as a factor, but again, not a decisive factor. But I wonder because there's so much inferences on intangibles today, whether it adds actually one of those foundational aspects which actually if we didn't have, we might have been very hard for us to sustain. Very hard to know about the counterfactual. But I was interested in whether you thought more about the role of the patents or the institutions around intangible ideas and copyright and the like.
Mark (27:12):
The literature in economic history has tended to be a bit down on the role of patents in industrial revolution per se. That's what we follow. A lot of important innovations and industrial revolution were not patented. There's debate-- I don't take a strong view on this. But there's a debate about James Watts patent on the steam engine. Did it block subsequent intervention or did it not block it? People have made strong claims they blocked it. Others like [inaudible 27:44] it didn't necessarily block it. So there's a debate on patents in the industrial revolution itself, which I think even if it's not fully settle doesn't point towards patents playing a particularly decisive role. Nonetheless, patents could still have mattered later as we go into the 19th century.
So people are innovating for a bunch of reasons in the 18th century and 19th century and obtaining a patent of innovation is only one and potentially a minor reason for it. Now going to the 19th century and adding 20th century, you need some monopoly rent to reward innovation. Can trade secrets do as well as patents? For some things. Coca Cola still have kept their recipe a secret. So I think patents are not decisive or that important in the industrial revolution. Did they make a positive contribution towards innovation in the late 19th century, early 20th century? I believe the case could be made for it, but I'm not more expert than that.
Ben (28:55):
Yeah. Okay. That makes sense. So the median literature downplays it certainly in the first industrial revolution, but 1870 onwards and sustaining might have had a bigger role. Another thing I picked up in your book and I hadn't really seen the literature on it so I was really interested, which was this idea-- I'm going to put it in my language. This kind of idea of nation states which had come through perhaps a common law route or a sort of living constitution route which you see in the UK, versus those nations which had more of a fixed constitution and fixed laws and how they might relate to progress. In fact, I see this debate a little bit in the US today-- actually everywhere, but in the US today between a kind of more literal reading of old constitution law and more of a kind of progressive reading and more of a living constitution. But it seems to me that some literature which is maybe suggestive that if you represented a democracy, had a little bit more of this flex, it made it a little bit easier to sustain their initial catalyst. Have I read that right? Is it maybe just a little factor or is it potentially more important and how does this extend to other nation states?
Mark (30:03):
I think it's a little bit of tension here between... So there's a literature about common law versus Roman civil law which we review. That's not so much about fixed constitutions versus variable constitutions because on that divide, US and UK both come down as being common law. So there's this literature arguing for benefits of common law over particularly French legal traditions. [ ] There’s this more recent 20, 30 year old econometric empirical literature arguing for some benefits. That literature is quite heavily criticized particularly by economic historians. So I don't want to put too much weight on it in a sense that there do seem to be some particular benefits to how financial markets might have developed better when you have common, or common just seems to protect shareholders better and things like that.
One weakness of that literature, I think, is they really emphasize legal origins. What's happened in the last 30 years is that there's actually been a lot of amalgamation of law. So Britain's a common law country but when it was part of the European Union, they actually imported in a lot of continental civil law. Similarly other countries-- So in Sub-Saharan Africa, you have countries with French civil law due to their county origins and countries with English common law due to their county origins. But over time they're just taking law from each other. So the difference is its shrinking. So there is literature on that. Now, how that relates to fixed constitutions versus living constitutions I actually haven't seen explored in the economic research. In general, my view is most countries follow the US. A lot of new countries or fresh democracies want to have a formal constitution. So I think Britain is almost on its own. It's quite rare in its living constitution. The power of the monarchy is far greater than anyone realizes. They didn't exercise any of those powers.
Ben (32:27):
Yeah. Okay. That's clear. So the common law arguments seem relatively weak although there is a literature on it. Property rights obviously important but not necessarily common law. The UK's a little bit odd in terms of its living constitution and actually still has ramifications now. So I know First Nations tribes and Aboriginal tribes in Australia and Canada are pulling out contracts that they made with the monarchy going back. There's some arguments around that which actually potentially have legal force so that is quite interesting. I guess that pivots me to another element you talk about and put some weight on, although it's a bit complicated around this kind of elements of culture and particularly interested in what you make of trust, because that comes up a lot; this ability to trust. I guess there's two or three things here.
One is, did you only have view on the kind of Quaker movement and this kind of handshake trust element and was that important or not? And then-- you touch on it briefly, the kind of so-called frontier culture in the US or perhaps that's like the building movement today. But I'm not sure whether that's just a nice story or if there is something more to it. But it does have something which actually Anton Howes has called about. This kind of innovation mindset or people who kind of tinkered or entrepreneurs around about particularly this first industrial revolution, but maybe the second as well. All of those kind of things together going making elements of cultural mindset. I was interested to know how much weight you put on that and what your view is. Some of the literature is obviously a bit mixed.
Mark (34:11):
So the way we view culture is through this language that Joseph Henrich has pioneered, goes back to Hayek which is to see culture as a set of heuristics. So in a complex world we rely on heuristics, and these heuristics we've learned from others; even from our parents or from our peers. They're not fully rationalized, we can't fully rationalize. So who we trust is one of those things. Some people be more trusting than others. If you grew up in a more trusting society, you're probably going to trust more. So all else equal high levels of trust are going to be good for an economy because they just allow you to do things quicker. I'm going to assume you are going to go pay me for some service.
We're not going to do everything as a spot exchange. We're not going to just assume that other people are going to play by rules. That actually lowers a lot of transaction costs. But of course, trust is endogenous. In an economy which is doing well, people are more likely to behave in a trustworthy manner. So there's a big econometric problem in disentangling causality. So trust is one example of a cultural trait and cultural traits we think of these have learned heuristics. So in a low trust environment, it could be in equilibrium. So if you're in a society where crime is rife, people are dishonest, you're going to be suspicious to people and your suspicion to people is going to make other people suspicious for you and it's going to be self-reinforcing.
That's a barrier to economic development and economic growth. In a British story, there does seem to be a role for religious minorities. So particularly Quakers in the industrial revolution. So people said, “Why was that? What gave them that advantage?” There's a story where trust gives them an edge in terms of expanding their businesses. So there are a lot of Quaker businesses in industrial revolution Britain. But I think it's plausible. It's hard to find... There's no econometric paper which nails this, but John McNair has written about it so I think it's plausible. Whether it's decisive is another matter as we've already mentioned. That's quite different to frontier culture that Americans are said to have, which is all about individualism, about going it alone and actually might have some plenty negative correlate.
So I think for scholars who did the frontier paper in these counties with more frontier people, there's lower take up of vaccines, for example. Cultural traits persist for long periods of time and they shape economic outcomes. So mindsets matter. Anton's stuff on innovation-- There does seem to be a cultural element to innovation for sure. If a lot of your peers are innovating, you're more likely to innovate. If everyone you know thinks very low risk jobs and doesn't push the boundary out then that's your incentive as well. So I do think a culture matters for innovation, for sure. It's not something you can pull a policy lever and just fix by lowering interest rate. It's something which is hard to see on the ground, but it matters.
Ben (37:51):
Yeah. That makes a lot of sense. So like you say, if trust is that foundational element, maybe you could argue in the frontier culture. If you're going under alone, you maybe have less trust as less of a community. Arguably, we could see what you say about Quakers. Then the heuristics, you kind of do what everyone else is doing. So people are innovating in that mindset. I think the Quaker piece is interesting because some of the stuff I've read suggest that they were kind of foundational an element such as the end of slavery within that. I was interested in some of your views about where social and moral progress may or may not fit in here. Maybe we can reiterate it again. Your reading of the literature is that slavery was actually quite small and probably didn't have such a huge role in terms of industrial revolution.
But I'm thinking if you've got slavery, if you think about maybe women's votes or women entering the work world more, maybe more modern day times you've got minority rights and things. So if we think about where we have a moral and social progress, does it run separately or does it interact? It obviously kind of helps some way and it probably has this complicated interaction. I'm not sure you can necessarily say which one comes first or they influence one another, but has anyone tried to look at this and has come up with anything which can actually be reasonably substantiated? Or I find it's probably quite a hard thing to know either counter contractual or have the data.
Mark (39:19):
It's very hard. No one's been able to do it yet. It's an interesting question. So I think in my book on religious toleration, most economists will tend to push more materialistic views of these things than non-economists. The very materialistic view about this is that when you're starving you're poor. The circle of people you can really care about is also pretty small. So if you're poor in medieval Europe, you're going to care about your immediate family and your neighbors and people in your village. You're not going to really care about people being enslaved in other parts of the world or other areas.
In England in the early modern period, people's moral circle was smaller. So the fact that slavery was atrocious and abominable, but it was happening in the Americas, it was happening in the Caribbean Islands and we're not seeing it, made it seem less bad to the British at least. The materialist view would be to say like, “It's only when you get rich enough, you get some surplus income and you're no longer thinking about where your next meal is coming from, then you have the resources to think about wider moral issues.” So that's a very materialistic view. It's to say, first you need to some economic growth to get going. Then as you get richer, you're going to care more about people who are not in your immediate circle.
That materialistic view I think to a large degree is quite true, but it's also missing a lot of things as well. It is missing a cultural story. The cultural story would say that probably something like Christianity is at the root of this because Christianity does teach a particular moral code, but then it had to be implemented by groups who were fairly radical and willing to go against a conventional wisdom. So because Christianity emerged in a world where slavery was just ubiquitous and inevitable, early church fathers reconciled themselves to the existence of slavery even though it goes against the idea that people are equal and they all have a soul. So it took a group like the Quakers to really think that this was abominable. They were far out from mainstream Protestants and Catholics in all their views.
They're pacifists, they believe in religious freedom, they're willing to be ostracized and punished for this. So the Quakers are important in this moral revolution that happens in the 18th and 19th centuries, and then they may manage to convey their revolutionary further to other people; both religious and secular in a way that generates the abolition movement. It's fascinating. So clearly the materialistic story I gave you isn't sufficient. It’s part of the story, but it doesn't quite capture what's going on with abolitionism.
Ben (42:25):
That makes a lot of sense.
Mark (42:30):
I think it helps that the people in the south can't become abolitionist in some... It's harder for them to be abolitionist in the following sense. They grow up with slavery. Say the south of the US; the Confederate states, they grow up with slavery. They even know about all the crimes of it and all the horrific things. They can't judge their friends and family who are slave owners too harshly. It's hard for them to do so. Morally, if your dad and mom own slaves and so does your cousin, even if you don't think slavery is a good idea, it's a bad institution, it's hard for you to accept the world view which says that your parents are criminals. So it's easier for the northerners and for the British who live in Britain to think of slave owners in the Caribbean, of slave owners in Virginia and to develop that set of views against slavery. And then they can convince other people. So I think it's a fascinating topic, but it's not one that economists are best place to solve. It's going to be difficult to track the change in cultural values. Maybe there's a way to do it looking at abolitionist newspapers or looking at using text search. Maybe someone could scan thousands of documents and see how abolitionist sentiment arises over time and where it arises.
Ben (43:55):
That's one for the puzzle PhD or postdoc students out there. Yeah, I can see that. So these cultural qualities are hard to measure, hard to get a sense of and therefore falls out of a lot of economics today. But I do hear you on your narrative of saying, "Well, you need to have a certain level of richness maybe as a prerequisite, but then you also need some cultural change story maybe by a minority or wherever it comes from." So like you had richer nations before that haven't maybe had a prerequisite, but you need that narrative as well.
That has made me to reflect if you fast forward to today and I think particularly around climate and those externalities and maybe around about inequality as well. If those lessons still hold, it seems to me that you would then need nations to become extremely rich, everyone to be as rich as possible, and then also need a narrative about how important that might be. Actually, that maybe sort of fits today. You got some people with that narrative, but you also have innovation and the techno optimist or realist saying like, "No, we need to be wealthier or we will be wealthier to handle this." So it kind of even fits today. I don't know what you had any thoughts about the climate piece or maybe the inequality piece about fast forwarding that, because obviously it wasn't such an issue a few hundred years ago.
Mark (45:23):
Yeah. I think it works with climate change. You need some level of moral universalism. People in rich countries care about climate change and they are willing to pay a price. People don't want to pay a price if they think they're the only ones paying it. So that's why it's hard to cut down your own emissions without too much if you think everyone is also sacrificing. But people in rich countries are willing to pay through taxes, they're willing to accept that. That reflects moral universalism. In fact, they're rich, but it's much harder to sway people in poor countries to sacrifice economic growth to reduce their emissions. So that's certainly the case. I think inequality is a little bit of a different story so I'll leave it there. It's got different motivations I think in a quite bit moral universalism which motivates concern about the slave trade, concern about genocide in other countries, or concern about climatic catastrophes.
Ben (46:29):
Sure. Okay. That makes sense. Maybe skipping back or one thing on going back to the history part, I read your book is kind of suggesting that the role of war was maybe via second order impacts on technology and the like, rather than war in and itself in terms of its contribution to economic growth and technology and things. Do I read that right and what is your thoughts about all of the wars that we used to have?
Mark (47:03):
Well, there's a view where war is good for economic growth and I think that's wrong mostly because war is probably destructive. We're seeing that in the Ukraine right now. Some of that comes to this misplaced Keynesian notion that war gets the economy product revved up which is just bad Keynesianism. Then it also comes from the fact during the 20th century, there have been important spillovers from particularly American military innovation is spilled over to the domestic sector. So that's true, there have been spillovers. But I'm not aware of such spillovers for the pre-industrial period. So net war is probably bad, but then there's this argument the war is weeding out weaker states or war is encouraging urbanization or war is prompting in some sense, certain change which is good for growth. The destructive effects of war are probably the more important ones, but of course without the pressure of war, you wouldn't get a lot of institutional changes that we talk about.
So that's where war comes in. You're weeding out weaker policies and that is a proving ground for certain institutions. That's what happens in Britain like the Glorious Revolution. All these institutions are really driven by competition with other powers particularly France.
Ben (48:36):
Yeah. And maybe helps drive representative democracy and all of these other impacts. I could see that. So if you had another mechanism which could achieve the same ends, you'd definitely want to choose that over war. And maybe is that also going back to some of your earlier work on the Black Death, because obviously that's simply like a bad thing happens and maybe you get these short run impacts, but maybe the second order on institutions. What do you find was most misunderstood or you find most surprising on your work on the Black Death? I guess you made the Black Death able to be one of these kind of discontinuity type of semi causal type of experiments. What did you find there?
Mark (49:21):
Well, the main story of the Black Death is obviously 40% of the population die so you massively change the labor capital land ratios. I don't know if we're revolutionizing our understanding of Black Death. More is clarifying. You could take what I would call crude Malthusian view where the Black Death is just great. This is kind of the view Gregory Clark promotes in his book, “A Farewell to Alms.” It’s great, real wages soar, peasants get tweet and it’s all great which is kind of strange given that. If you care about living standards in general, you care about your life expectancy, you care about life expectancy of your friends and families. So this elevation of a death rate was probably pretty horrible for overall living quality even if your income and wages go up. The increase in wages actually took some time to take place.
It was to some partially offset by disintermediation over all economies; a decline in trade and so on. But it's still true. It's still true that wages did go up. It just took several decades to do so. So it wasn't like an instant adjustment. Wages did go up and it did eventually produce something of a golden age for those workers who survived. So I don't think there we're overturning the caricature of the Black Death. It's not just clarifying it. For example, it took until the 1370s for real wages to really start rising in England. So Black Death a watershed moment? I have to admit I'm still unsure about this after all this research on it. There are scholars who argue that the origins of both the great divergence between Europe and Asia and the little divergence within Europe can be trained through a Black Death. We discuss those arguments but I'm not sure if I really fully endorse them. We have a paper under review right now looking at the impact of city growth on the Black Death and we don't find evidence for a total reset of European economy. So that's a bit of a partial answer, but that's what I feel about it currently.
Ben (51:40):
Yeah. Okay. So not the feel and end all. I guess this refers to also some your stuff on geographies. It's definitely a factor, but it's certainly not the be all and end all and you can see this with various geographic things. Well, I thought we'd maybe do a short section on overrated and underrated if you’re game, and then end with a couple of questions. So you can do a quick answer or you can pass or make some comments. We just got three or four. So overrated or underrated, GDP as a measure?
Mark (52:13):
I think underrated now. The HDI (Human Development Index) of the other measures just correlate with GDP very well. We have a few exceptions like you have golf states which are very unequal and do badly on some of the other aspects. Basically GDP is good. Growth is good. All the criticisms and caveats that people have, they're not that important relative. The overall message with GDP is good, growth is good, and ordinarily people underrate how good it is.
Ben (52:46):
That seems fair. I guess that probably means you underweight maybe natural capital and happiness researchers then actually just correlates with GDP.
Mark (52:55):
Yeah, basically.
Ben (52:58):
Great. Carbon tax or carbon pricing?
Mark (53:00):
I think it's underrated because it's seen as like a political economy, like no go error, especially in the US. It tends to say carbon tax failed. I tend to think that a lot of the policy mistakes over the last 20 years which goes to housing as well, have been maybe due to politicians failing to lead in a way that maybe they could have done. I'm not an expert on politics. I'm intentionally naive on this. But I kind of think that sometimes politicians are too differential to be electorate and they're too differential to the media. So they're too differential in the UK to the BBC and to the way BBC phrase things. So getting onto current politics I guess now, I think it's refreshing to have government policy where they're just like, "No, this is what we think. We could be wrong and it could be disastrous. This is what we think. You've elected us. This is what we're going to do in some sense."
So I think carbon taxes should just have been-- I think that you should have had politicians brave enough to campaign on them, run on them in their elections and say, "We're going to implement a carbon tax and we're going to make it revenue neutral. So we're going to cut income tax and charge carbon taxes." It just didn't pull well. People don't like the idea of paying more for energy or more for petrol gasoline so they don't get implemented. In the US they're seen as this neoliberal elitist policy. So both Republicans hate them and Bernie Sanders democrats hate them. So that's why there's a coalition against them. But I feel that politicians need to listen to experts more and they need to trust experts and risk political careers. This is a bit of a tangent away from the context specifically and away from history.
American politics is a little bit different so I won't comment on that. But if you look at British politicians, they have very short shelf lives. David Cameron and George Osborne are not old; they're young, relatively. They've been out of office now for like six, seven years and it doesn't look like either of them will ever get a political comeback. So we're not in the age of political comebacks. Tony Blair had an amazing opportunity and did a lot and reformed many things, but didn't reform maybe as much as he wanted to.
He was out of office when he was in his early fifties, I believe. No political comeback for him. Rishi Sunak, again, super young may not ever come back into headline politics. So if you have a current chancellor or Prime Minister, in some sense, if you really genuinely believe your policies are best for the country, you might as well implement them. If they don't work or if you get punished at the polls and you lose the election, in some sense so what? Your shelf life is short anyway if you look at all our recent political leaders. None of them have come back in frontline politics unlike in the age of Gladstone or Disraeli or Churchill.
Ben (56:23):
Yeah. There's a part of me which agrees because particularly in the UK, we don't have midterms. So you have your four or five years, probably that's it. You might as well do it. My two big things would be carbon tax and actually building on the green belt. It shouldn't even be called the green belt. It's mostly brown belt. That's because there's relatively few things that actually you can get 80 to 90% of economists to agree upon. We talked a little bit about this in history. There's always balance and nuance. But in the UK, 80 to 90% of economists agree on a carbon tax and actually give the revenue back some way while they're dividend or tax cut so you can make it revenue neutral. And actually, most people agree on a lot of the green belt is really useless and you should build houses on it. So when your technocrats have that degree of consensus, you should probably listen to them. Other things obviously is a bit more 50/50, but that's kind of fine. Okay, a last couple on here then. Thinking about innovation then, do you like these innovation institutions like DARPA? Here in the UK we have ARIA. You got H-ARPA and things like that; overrated or underrated?
Mark (57:33):
I think I have to pass on that one because I don't know enough about them.
Ben (57:37):
Sure. That's fine. We'll pass. And then current governance mechanisms. So current mechanisms of representative democracy. Let's maybe just say UK or US. Do you think they're about right or overrated or underrated?
Mark (57:49):
Overrated. Something obviously is a bit broken in the system right now in both US and UK in different ways. I touched on it earlier. In both countries on different margins there have been major policy failures in the last two decades. I'm not saying I was smarter than anyone else. I'm not saying I would've made better decisions than anyone in office, but I suppose we can say there've been major governance failures. So I think we have to think about how these work. One example which is just obvious and I think everyone agrees with though we don't know what the solution is, is that it's really hard to be a politician, particularly it seems as a British MP in the age of social media.
You get a lot of hate mail. You get really hassled by crazy people. So if you're a British MP, you don't want to build on the green belt if your constituent is in the green belt. They can make your life hell if you do something they don't want you to do. So there does seem to be an issue with how our democracies are functioning in terms of delivering good policies. I don't have a solution for how to improve it, but I think people should be willing to think about it. People will differ a lot on what the proposals are. I know in the UK, for example, more than 10 years ago, there were discussions about proportional representation of the alternative vote which may or may not have been good. My views on that change. But I think we should be open to the idea that we don't have the best system. We could improve.
Ben (59:46):
That seems fair. But you don't have any intuition about what you might experiment with.
Mark (59:50):
Well, in the British case, the House of Lords is pointless right now because it's purely advisory and it's purely filled with ex politicians. On the face of it you have basically a parliamentary dictatorship because parliament gets whatever it wants. But on the other hand, there seems to be a struggle that you get policies through. I don't know exactly what to do there, but it seems not quite right. The thing I mentioned on social media, politicians are not experienced enough. They seem to leave office too quickly. There are plenty of effective cabinet ministers from the Cameron and Osborne era who basically left politics in 20 after Brexit. Then you replaced some with a bunch of people who were [Johnson , May]… very few survivors. So I felt in the British case compared to even 1990s, you don't get longevity of cabinet ministers. People move around so much so they don't get expertise in their role. So there are a lot of small things I would consider.
Ben (01:01:04):
Yeah. My radical solutions would be something to do with the Upper House here in the UK. Something like give them a single 10 year term or a single 10 year term with a five year extension. So it's longer, but kind of limited. So they feel like, "Okay, 10 years we can get something done, but we're only going to get those things done." You have to be elected or some sort of thing. The second really controversial one is I would slim down the number of MPs but I would pay them a lot more. No one likes this. I would even pay them whatever it is. Whatever you think it is to be the equivalent CEO of your mini state. Maybe that's even a million pounds. People would probably really want to do it for a million pounds. But maybe like they do in Singapore, if there's any graph or any bribery, maybe you have to evoke the monarchy. That would be treason and you go to jail for a really long time. It's unacceptable to have this second job graph thing, but will pay you a lot of money. Therefore, if you are a poor person or have some other radical ideas, you could be, "Well, a million pounds would be life changing and means that more people could go for that." Hopefully you would get better talent. Maybe it's too materialistic, but I do think incentives matter and we don't pay them very well.
Mark (01:02:13):
I do think there's a huge, weird difference in the British system between your average local MP who stands up in PM queues and just says something stupid about their local constituents. They're like, "My local constituents really want to park basically." Sorry, we're going totally off topic. I'm in danger of ranting. So the locale MPs are really fixated on local issues and have no training or expertise in what's going on at a larger scale. They don't have access to high quality advisors or so on. So they really are quite trivial in terms of what their concerns are. Then being a cabinet minister-- Suddenly you get to be the cabinet minister and you're in charge of a national health service. How can one person be in charge of a national health service? It's like the science of a small country basically. It's got so many issues, so many complexities. So the idea that you can go just from being an MP to that position, it seems wrong. I think bigger constituencies, less localism might be a way forward. I'm just totally speculating.
Ben (01:03:18):
On the NHS as well, they generally have neither healthcare training nor economic training nor healthcare economics trainings which is a huge profession in itself. So last one on the overrated, underrated; universal basic income, UBI?
Mark (01:03:35):
So I think that's overrated right now at least by its proponents because de facto... Well, two things. Firstly, I think work is an important component of human existence. On the one hand I appreciate the idea of it. It could allow people to pursue work they're passionate about whether it's like podcasting or YouTubing or something like that. But I do worry it could just support indolence. I also think that its de facto will not replace... Milton Friedman’s idea of a negative income tax was to replace all over welfare and really to slim down all other programs and replace it with something like UBI. I think in principle that would be potentially an improvement. But in practice, it's not going to be like that. It's going to be another form of welfare and I just wouldn't focus on it basically.
Ben (01:04:28):
That makes sense. Would you prefer a universal basic infrastructure? That's something that Diane Coyle who's also been on the podcast has mentioned. Or maybe more controversially, I hear sometimes a kind of job guarantee system have no idea how that would work but to get around this problem about actually jobs do mean something to people.
Mark (01:04:48):
Yeah. I'm not too in favor of a job guarantee because I think it's too much messing with market incentives. I don't know what Diane Coyle means by the universal right to infrastructure, but I think that you want people to not fall below basic minimum which is set by your society. So it's going to be higher in a richer country than in a poorer country. You don't want that to have too many disincentives to work. So in that sense, maybe some basic payment could be justified but it would have to be small. The problem is there's always a tradeoff between setting the incentives not to penalize people who want to work, and also not penalizing people who cannot work. But in some sense you can't square the circle.
Ben (01:05:42):
Yeah, that makes sense.
Mark (01:05:45):
The current UK welfare reform seems to be in the right direction. I know they're unpopular but I can't remember what they're called, which are trying to minimize the tax incentive you face from going from welfare to work. I think that's important to any scheme.
Ben (01:06:01):
Yeah. It is a universal benefit. I think Diane Coyle meant by infrastructure essentially very good public services. So rather than give people income, you're giving people a more equal opportunity. It's that sort of concept. So final two questions. One is, are there any current projects you're working on you'd like to share or anything we haven't mentioned that you want to highlight?
Mark (01:06:27):
Well, I've got a Templeton Grant with Desiree (Desierto) this year-- that’s my wife. We’re working on the origins of liberal institutions in England; which was not just us. We have several graduate students at GMU as well. So that's a big project, but it won't come to fruition for several years because it's really in the data collection stage. So that's the first thing that comes to mind. I've got some other projects on things we've touched on like the Black Death. This one on liberal institutions. Basically from Norman Conquest, Magna Carta all the way up to Glorious revolution. So it's very historical, but it's going to be more data intensive than anyone's done on all those topics, I think. So it's quite ambitious. That's the big project.
Ben (01:07:14):
That sounds really exciting. I was recently speaking to Jacob Soll (Jake Soll), and he put a lot of weight on thinkers thinking about Cicero influencing these institutions. But anyway, there seems to be a lot there.
Mark (01:07:27):
Yeah. It's a more history of ideas way of thinking about it. People have asked us if we are going to integrate it with a history of ideas. In principle I'm open to that. I like reading about Cicero and so on, but it's not something… Even though I like that stuff, my research tends to be more on the material side of things.
Ben (01:07:47):
You like the data?
Mark (01:07:48):
Yeah.
Ben (01:07:51):
Great. And then last question. Do you have any life advice you'd like to share or maybe you could have an advice for a policymaker for one policy-- although it sounds like your policy is carbon tax and maybe we discuss that. Or maybe advice for other people who are interested in becoming an economic scholar and the route you've taken. So any career or life advice you want to share?
Mark (01:08:15):
I'm not sure I'm the best person to ask. It's easy that we put amazing resources online. So podcasts; everything is online basically. The young person who's ambitious and interested can actually get to speed quickly. So you can teach yourself econometrics by watching tons of YouTube videos. Most people won't because there's other stuff to watch on YouTube, there's other stuff to do. I could be teaching myself foreign languages on YouTube and I'm not doing it because my opportunity costs I guess is maybe high. But if you're young and wanted to study this stuff, you can get a huge head start just by use of the internet cleverly. Tyler Cowen’s advice is find the right mentors. Find some people and learn from them. But you get a huge amount early on to give yourself a head start before you go to university because to be honest, the university experience isn't necessarily going to be all that growth. It depends on where you go. You don't know what you'll get into and you'll be distracted by other things. So I would start early and try and learn as much as possible on your own and then you can be ready for your PhD program by the time you're an undergrad.
Ben (01:09:43):
Okay. That makes a lot of sense. So basically, use YouTube and the internet very well. Did Tyler interview you coming through? Did you have a classic difficult Tyler question?
Mark (01:09:55):
Yeah. He interviewed me for my job; this job, but a long time ago now. To be honest, his questions-- I can't remember exactly how I did. He asked some good questions. Yeah, of course.
Ben (01:10:07):
Nothing really tricky that you remember to this day.
Mark (01:10:11):
One of his questions was, “What's the most important thing in economic history?” Then when I said what it was and it wasn't exactly what I was working on, "Why aren't you working on it?"
Ben (01:10:23):
That's tough. At least said, “Well, now I've written a book,” so…
Mark (01:10:28):
I just said I was. Basically, my answer was just what I was working on indirectly shed light—although it’s really important thing, even if it wasn't it. I can't remember all the others, but he obviously asks sharp questions although they're slightly different I think the ones you ask in those days, the ones you asks now.
Ben (01:10:47):
Do you still think it's the same, the most important thing in economic history today?
Mark (01:10:51):
Yeah. I basically said the question of his book, “The origins of economic growth.”
Ben (01:11:02):
Yeah and you've written on a book on it. I do think maybe you should extend it slightly into thinking about what the lessons might be for today, but I guess that's for the forecasters to think. But I think it's really intriguing because the way you put it all together and it has made me think about some of these things that if you go back to some of the historical roots, that maybe some of them you could just do more of or maybe radically more of and we should try that. So I highly recommend everyone listening to get a hold of the copy of the book available from the internet and all good bookstores and the like. Mark, thank you very much for joining me.
Mark (01:11:41):
Thanks Ben. Yeah, it's been a pleasure.
Jacob Soll: the history of free market ideas, Cicero, Adam Smith, Hamilton, Machievelli | Podcast
Jacob Soll is a professor of philosophy, history and accounting. His latest book is Free Market: The History of an Idea. Jake has works on the history of accounting, The Reckoning: Financial Accountability and the Rise and Fall of Nations (2014); the influence of Machiavelli, "The Prince" (2005) and Louis XIV’s First minster, Jean-Baptiste Cobert, The Information Master (2009). Jake works on accounting standards and financial transparency as well as the history of ideas.
We discuss if better accounting can save the world by looking at externalities, natural capital and human capital better.
We chat about the central role of Cicero and stoic thought in the history of free market thinkers, and how Cicero was in this respect more influential than Aristotle.
Aristotle's the philosopher with a capital P so he's kind of everywhere and everything, but he did not understand economics. It's almost sort of funny to read him on economics. You really have to understand the context he's coming from being Alexander the Great's tutor in Greece, hundreds of years BC. Aristotle believed in an idea of exactly reciprocal exchange, but what he writes about it is very odd. He writes about the idea that if you have an exchange, then you have to make sure that the thing you exchange for is the exact same measure. He compares shoes to houses. Now that tells you something about the Greek economy or his lack of understanding about the Greek economy. What Aristotle does bring that is key to Cicero is his Nicomachean Ethics and the idea that you have to have an ethical framework for society and for the common good.
So both of them are looking for concepts of the common good, but Cicero is the one who really-- and this is almost a thousand years later. I mean, hundreds and hundreds of years later; societies and changes. Cicero is really the one that comes up with the concept that a market of exchange is based on an ethical exchange that's disinterested and based on a search for the common good. His first analogy for market exchange is philosophical discussion which I think is fascinating. I don't think I made enough of that in the book. That for him, the first thing that one has to do is exchange ideas and that has to be done in good faith in a quest for the truth. When Cicero goes on to talk about what will make a sustaining market, he says its love and friendship because only he believes can truly equal friends who respect and love each other, have good philosophical exchange based on good faith and exchange things together disinterestedly.
And if one just exchanges disinterestedly-- and this is highly idealistic and not perhaps realistic, then you have a sustaining system that will just keep working on its own based on the ethics of good farming and more or less exchanging agricultural goods. So they're related in this quest for the 'Supreme Good' as they call it. But Cicero is much more specific. By the way, his Supreme Good was actually civic service, service to the state. So that's very interesting that he believes that you have to have disinterested exchange amongst like-minded friends who love each other, i.e. members of the senatorial class, which was a very idealistic characterization of Rome at the time. Then the final goal is to serve the state well for the common good. That's his idea of exchange and his idea of how exchange will continue in a self-perpetuating market system.
Jake talks about how Christian thinkers, and Franciscan monks thought about free markets and also Alexander Hamilton and Machievelli.
We discuss the role of institutions in shaping thought. Jake argues for the importance of patenting ideas and if UK’s patent office gave the country an edge when the industrial revolution started.
We debate if “idea” or “dream” would be a better word to encompass the historic thinking on free markets.
We discuss the role of culture, to what extent protectionism and some tariffs helped economies develop historically.
We play underrated/overrated on: GDP as a measure, carbon tax, standardized sustainability measures, and UBI, universal basic income.
We end on Jake’s current projects and life advice. Study more serious humanities books!
Don't read easy to read books. I think they are the most destructive thing on our culture; these CEO books. “Pull up your boots and tie your shoes in the morning. Don't let the government give you eggs.” I read some of these books and I'm like, "How is this helping anybody?" Go back and read the kind of books we were reading when we were actually building big states and building things that have proved sustainable. If you don't know what they are, just go back and read great literature and great novels. What is that? Well, you can make a decision. It can come from any country. It can come from any religion, but there are great books. Over centuries I see traditional books that we've decided over time are extremely useful to us. Go back and read those. For me, it's the 19th century novel. It has become Roman and Greek philosophy. It's also become the early works of the fathers of the church which never ceased to fascinate me. The writings of William of Ockham… Those are fascinating books. Read serious books. I really think it's time to put down the Harry Potter and get challenged.
Amazon link to book here UK site, and to the US site here. Jake’s site is here.
Transcript below, video above or on YouTube (captions available). Podcast available wherever you get podcasts or below.
PODCAST INFO
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Transcript : Jacob (Jake) Soll in conversation with Ben Yeoh on Free Markets, History, Adam Smith, Hamilton, and Cicero (only lightly edited expect typos etc.)
Ben
Hello, and welcome to Ben Yeoh chats. If you're curious about the world, this show is for you. Where did the idea of the free market come from? On this episode, I speak to Jacob Soll. Jake has written a book on the history of the free market idea, tracing its philosophical roots back to Cicero via Adam Smith, Machiavelli and Christian thinkers. We discuss what the free market means and to what extent has the state always been involved in shaping markets? Hope you enjoy the show. Please like and subscribe as it helps others find the podcast. Thank you. Be well.
Hey everyone. I'm super excited to be speaking to Jacob Soll. Jake is a professor of philosophy, history and accounting. His latest book is "Free Market: The History of an Idea." He has works on the history of accounting, the influence of Machiavelli, and Louis XIV First Minister Jean-Baptiste Colbert. Jake, welcome.
Jake (01:03):
Thanks Ben. It's great to be here
Ben (01:05):
Before we get to free markets or supposedly free markets, I thought I'd start with your accounting piece because in some ways I see free market history as an extension of that previous work. My question here is could better accounting save the world today? By that I kind of mean thinking about creating more and better human welfares-- perhaps it did in the past. I was wondering if our lack of accounting, for instance on carbon, human capital, intangible; some of these other things we kind of struggle towards, if we could somehow solve for some of these things, maybe we could do things better and perhaps that's what your history of accounting said. It’s that once we've got a handle on measuring and managing some of these things, it seemed to be a core component of actually then generating wealth in the direction that we want it to. Is that fair and what do you think about accounting?
Jake (02:01):
You got it. This book is an extension of that and it's an extension of my belief. I don't believe so much in business cycles. I believe in management cycles. I believe that we manage ourselves pretty badly. Anyone who's in the field of accounting knows that the laws on balance sheets are pretty weak. In fact, I'm writing a new book on the history of balance sheets called “Net Worth,” but that's a few years out. Everyone knows that the rules on auditing are weak and in Britain we're constantly seeing problems with this. With poor auditing leading to terrible scandals and the collapse of major businesses. The standards we have are low. I always point out that the American department of defense which has a budget of well over $700 billion a year barely uses cash accounting, if you can imagine that. That's one measure of bad management.
You mentioned intangibles and other things. We don't account for damage to nature, which is literally madness. I live in Los Angeles and we are in the midst of the climate crisis. We now have to recycle water under our sinks. We can't have lawns or even plants. So water comes relatively cheaply, but it doesn't seem to have anything to do with its scarcity and we don't account for it in the way we ought to. Beyond carbon, do we account for the damage that we do, for example. So if we are tanners and we're making leather, do we account for the loss to the fisher folk down the river whose river we've destroyed using even medieval chemicals for tanning purposes?
These are hard questions. It's very hard to get things onto balance sheets, but there's no question. It is my belief that accrual accounting, double entry accounting is absolutely an essential management tool and whenever we do see crisis, we usually see a massive accounting failure behind it. Economists really don't like to talk about that, but I believe that management is key. How does this connect to the new book? Well, it means that I don't think markets regulate themselves. I think humans have to do a massive job of managing markets. And for that, I see one of the most essential tools we use and I believe this is a beautiful one because it's impartial. Doesn't matter if you're on the left, it doesn't matter if you're on the right. There are points one can make about how we can account for efficiency, how we value things. That we have to talk about. And how we account, for example, for taxes. What we think they're worth or not worth or what their value or negative impact actually really is.
I do think that we have to manage ourselves better and the market has to be managed. In 2008, we saw a massive accounting failure. We did not see a cyclical failure. So economists who say it was some giant nearly inexplicable phenomenon of the market, haven't really looked carefully. And to finish up when you do, you actually can lay blame. You can see who has managed badly and dishonestly. I think that many writers in economic history and economics don't want to do that. It's a little too painful. I don't know if that answers your question.
Ben (05:51):
Yeah, it does. In some ways it kind of suggests that in some parts, sound accounting comes almost before sound financial management. I guess sound management of these systems in an ideal world would come first. But if you can't account for it, it becomes really tough on systems, on nature and that. So in some ways, having an advanced measurement system audited that people believe in, that people have agreed on the value system as well would kind of come first. That's interesting because when I flow that into turning to your ideas on free markets, looking at the sweep of history that you seem to have done, is that actually those ideas about how people want to socially direct markets seem to have always been intertwined and in fact, came out first.
If I read it correctly, you also lay out strong names for the influence of Cicero's writings and the Stoic and laying the foundation for the first set of modern free market thinkers like Adam Smith. But perhaps going back, I also noted some of Aristotle's work influencing Cicero and some of these other thinkers. I was just interested in although it's primarily Cicero, there does seem to be a little bit of Aristotle. Does that mean Aristotle and virtues and that is also somewhat underappreciated for going into Cicero or do you think Cicero was really the foundational area for this?
Jake (07:18):
Aristotle's the philosopher with a capital P so he's kind of everywhere and everything, but he did not understand economics. It's almost sort of funny to read him on economics. You really have to understand the context he's coming from being Alexander the Great's tutor in Greece, hundreds of years BC. Aristotle believed in an idea of exactly reciprocal exchange, but what he writes about it is very odd. He writes about the idea that if you have an exchange, then you have to make sure that the thing you exchange for is the exact same measure. He compares shoes to houses. Now that tells you something about the Greek economy or his lack of understanding about the Greek economy. What Aristotle does bring that is key to Cicero is his Nicomachean Ethics and the idea that you have to have an ethical framework for society and for the common good.
So both of them are looking for concepts of the common good, but Cicero is the one who really-- and this is almost a thousand years later. I mean, hundreds and hundreds of years later; societies and changes. Cicero is really the one that comes up with the concept that a market of exchange is based on an ethical exchange that's disinterested and based on a search for the common good. His first analogy for market exchange is philosophical discussion which I think is fascinating. I don't think I made enough of that in the book. That for him, the first thing that one has to do is exchange ideas and that has to be done in good faith in a quest for the truth. When Cicero goes on to talk about what will make a sustaining market, he says its love and friendship because only he believes can truly equal friends who respect and love each other, have good philosophical exchange based on good faith and exchange things together disinterestedly.
And if one just exchanges disinterestedly-- and this is highly idealistic and not perhaps realistic, then you have a sustaining system that will just keep working on its own based on the ethics of good farming and more or less exchanging agricultural goods. So they're related in this quest for the 'Supreme Good' as they call it. But Cicero is much more specific. By the way, his Supreme Good was actually civic service, service to the state. So that's very interesting that he believes that you have to have disinterested exchange amongst like-minded friends who love each other, i.e. members of the senatorial class, which was a very idealistic characterization of Rome at the time. Then the final goal is to serve the state well for the common good. That's his idea of exchange and his idea of how exchange will continue in a self-perpetuating market system.
Ben (10:35):
Yeah. I got that from reading your book. I hadn't understood his deep interest in that moral law; the moral natural law element in his view before then going into agriculture because natural law, that being a source of wealth. Then I can see how you trace it amazingly to Grotius and how they're thinking about the Dutch East India Company and the forming of the stock companies. Thinking about using those and that any individual using some reason can figure out what these laws are. So a straight line to those first thinkers from Cicero straight to Grotius and those other thinkers. How did you draw that? Did you just read it and go, "Wow, this sounds so much like Cicero and thinking about it and draw the line about?" I guess it was a tiny bit self-serving because in some ways it's like getting sponsored by a corporate today. The corporate wants you to have some framework for what it's doing and it seemed like Dutch East India was doing that. But it seemed to me that actually you could see those ideas coalesce there.
Jake (11:40):
Well, the way I wrote the book was I've just been deeply dissatisfied by how people read Smith and by the characterization of Colbert, who are the two main protagonists and antagonists in economic history. I feel like people don't read Smith closely enough. Also, Smith is hard. It's not only the wealth of nations, it's not only a 1200 page book. He edited it many times. It was built on the foundation of the theory of moral sentiments. It's based around his other writings, which few people read his writing on Bazaar, his writing on jurisprudence, all of which really you have to read. His interest in Locke. But the thing about Smith is that he's a Ciceronian. He is a professor of moral philosophy. And what does that mean in Edinburgh in the mid-18th century?
Well, it meant the same thing to his mentor Hume. It meant that you were following Cicero and his reading of the skeptics and of the Epicureans and you were more or less following his very aristocratic agrarian vision of moral service to the state, which we just talked about. So I thought, “Hmm.” There are a couple decent books on Smith and the classics and Smith and Circles of Sympathy. So i.e. Smith's relationship to Cicero. But one of the things that intellectual historians do-- and I was trained in political history at Cambridge. What we learned at Cambridge was you looked for essentially genealogies of discourse. So when someone says something, they're usually citing someone and you go back as far as you can in all these different lineage of citations. It's not necessarily always easy in context to something we can argue about.
What happened with Smith is Smith was such a Ciceronian that while reading Smith I would see passages that were literally taken from De Officiis: On Duties and on Ends. From all his works I could just see that Smith was bathed in Cicero constantly. So I decided to just go backwards and start looking at economic thinkers and Cicero, and I kept going backwards and backwards. I kept finding him. Wherever I looked, I found him and I couldn't believe it. I was like, "Wow, this is crazy.” There's a whole Ciceronian strain in economic thought. In great part because of this discussion he has about exchange and about morals, and it took me back to him. All the way through the Middle Ages, Cicero is one of the only classical thinkers who doesn't disappear in the early Middle Ages and his thought parallels often in conflict. But in really strong parallel, parallel's Christian thought in the Western tradition. You can't really separate Cicero from Christian thought or from the Western tradition or from free market thought for that matter.
Ben (14:49):
This link to early Christianity or early Christian thinkers seems to me relatively novel. I had to go back and I read Hirschmann's “The Passions and the Interests,” and he makes some conclusions I think around Adam Smith's idea of this being a kind of moral view, and free markets can be used to deal with our base of passions. But he doesn't do this connection I think to Cicero or the early Christianity thinkers with that lineage. I think that's really interesting and this idea of the church and wealth. Do you think that Christian thread just goes to Cicero and they were thinking about that in terms of how to keep their own wealth and make themselves with that moral strand, or what do you make of that link to Christian thought?
Jake (15:36):
Well, first there's no monolithic Christian thought. What I show in the book is how Christian thought evolves quite remarkably over time. Adam Smith is not clear to me at all that he was a Christian. He never discusses Christianity and he uses an openly deus language. His mentor Hume was an atheist. I do not believe he was an atheist at all. He talks about the great architect of nature which is a deus concept of God and he talks about this great architect of nature in a very Newtonian sense as creating a clockwork universe that works partially on its own. Of course, Smith thinks humans have to have this stoic role in society where they actually have to train to be moral to make the clock work; that's the invisible hand. But Christianity is really interested in markets. There's a reason for this.
The early Christians, especially the fathers of the church were on evangelical missions and they used an evangelical discourse of trade for conversion. Their argument was, "Look, the owning of all goods and having earthly pleasures is more or less sinful and not a good thing." These guys were aesthetic. The early church was aesthetic. It believed in poverty and it believed in total service to the church. If you make the exchange-- and this is the language they use. If you make the exchange that Christ gave His blood for the salvation of humanity, if you make the same exchange that Christ did and you give up your goods and your pleasure-- and that would mean being a virgin. In some cases they argue giving up having children. Of course, the great church father Origen takes it so seriously that he castrates himself.
This is how strong this thought was. If you give up all your money to the poor and to the church and you give up all pleasure, then you will get the treasure of heaven in return. So there's this remarkably mercantile exchange that's proposed for salvation. It has to come from freewill. You have to truly believe this in your heart when you make the exchange. But that's the language that's used. As we get into the later Middle Ages, it's really fascinating. That same idea comes to the fore and the Franciscan order starts thinking very seriously about the idea. That it's taken a valve of total poverty. What does poverty then mean? This is working off the work of the great Italian economist Giacomo Todeschini who did the research and first found this. There's some other figures such as Burr and others who found this remarkable huge framework of Franciscan economic thought where they start wondering, “What's value? What is my shirt worth? Does it equal poverty or am I committing a sin by wearing a coat? I own a book. Is the book purely for spiritual use or is it a possession?”
So what they start doing is they start thinking of everything they can add to value and they start coming up with literal market explanations. Quantity, the amount of risk taken, the amount of skill involved. They start adding that into value. Interestingly by the way, that doesn't go on to many balance sheets which I think is quite remarkable. The Franciscans, at the very moment double entry bookkeeping is being invented. They're coming up with what could have been a very sophisticated approach to balance sheets, and that doesn't happen. But they do start coming up with this idea of market created value and they do it in the most sophisticated way. That then sets a chain in looking for market functions. By the time we get to Smith, he is involved with this argument, but at that point he has dropped the Christian element for a sort of post-Christian deus moral framework. So it's relatively a comparable framework, but he's still looking for the role that morals will play in a market. So in that way he is definitely part of the older Christian tradition.
Ben (20:20):
Yeah. That idea of having a moral law or natural law or some sort of exchange underpinning where you get all of this value, which I thought was really fascinating. And the linear tracing all the way back to Cicero, but seeing how it hands down with generations of thinkers just sort of twisted or pivoted for the time, but still very clearly with those same roots. I had not appreciated either both Machiavelli and Alexander Hamilton and how their roots also came from that. Particularly Machiavelli, I hadn't really appreciated having read that and had a view on that. Not really going oh, that he'd had quite a career full from great sorts of himself and where he gets to his position from this as well. That was kind of eye-opening. Is that something that you also came to sort of saying, "Wow, look at all of these echoes” when you trace back the lineage or was that something else from the work you'd done earlier?
Jake (21:19):
Well, I started as a scholar of Machiavelli. Most roads of political and economic thought in the west are going to lead back to Machiavelli. He's huge. He's one of the great secular thinkers though he has many Augustinian echoes in his lack of confidence in humanity to do the right thing. But he really is very clear that Florence-- and when you read the Quattrocento Italian writers; the writers from the 1400s in Florence, the business writers, all of them see Florence or see their other city states as great marketplaces. And that's really what they were. Machiavelli's great insight is that the marketplace cannot work if it becomes destabilized by oligarchs who take over the market so that it can't function freely-- He calls them optimists, or by a sort of dictator; a Lord or a ruler who will use the city in the market towards their own ends, and therefore undermine the balance of politics, ethics, peace, and therefore functioning markets. Machiavelli's insight is quite remarkable and will influence economic thought enormously.
The major French economic thinkers and political thinkers will all turn back to Machiavelli; not all of them, but really influential ones will turn back to this idea that income and inequality-- He doesn't call it that, but unequal wealth and the power of optimists can lead to faction, strife and civil war as they fight. So the idea of Machiavelli is that you needed a state... He says that the state needs to keep itself rich and its citizens poor. He doesn't mean poor. It means that they cannot become so rich that they overwhelm the state and cause civil strife. So the state needs to be able to keep the peace and in other words oversee a somewhat fair and functioning market that's implied in that. So I thought that Machiavelli is the father of modern political science. He is the architect intellectually of how to build a state in many ways. He gives remarkably influential insight in this long genealogy of the need to have a powerful state that oversees markets to make sure they function fairly.
Ben (24:08):
Yeah. I see two strands of that going all the way fast forward to today, and then go backwards with-- I guess you could see what's happened with Russian oligarchs or even Chinese billionaires. Then I see a strand in thought in the west about-- I guess they'll call it crony capitalism. That the idea that some of these markets aren't really free because they're these kind of either oligopolies or verticals and that actually you need more intervention to make them more competitive or something of that. That seems to trace some of this thought about, "Well, to what extent do you make these things competitive or not? To what extent do you need the state to be there," which seems to have also floated tracing it back to that Machiavelli thought.
Jake (24:53):
Look, it goes to a closed room and I have many friends in business and highly placed in business. One of the things I did for this book is I flew around the world talking about accounting standards, but I also asked very wealthy business leaders if they believed that the market was free. The most general response I got was a laugh. That was the first thing, they laughed. Second thing was a long conditional lecture on, "Well, it's free in this way." That often meant not paying taxes or not having regulations that stifle. But I didn't get one straight answer from a really serious billionaire-- and I know a whole bunch of them, or vast business leaders. Some of them would say, "Of course it's free,” but then go into all these conditional situations that we would need for market freedom.
Each time I came away-- this is sort of one of the ways the book came about. Was saying, “Look, the people at the very top, the people making the money don't believe in market freedom. They also have relationships to the government.” One of their main beliefs is that taxation undermines their own business. Many of them are paying historically low taxes. It was very interesting. That sort of struck me. I don't know if this answers your question. But one of the things we do see today is states are unable to... Well, this gets back to accounting. They're unable to pay their debts whether it be by cutting spending or taxing. By the way, there's no way you're ever going to pay a massive state debt without taxation.
That's just a kind of general principle. The market will not pay your taxes for you, pay your debt for you. This goes back to my chapter in the book about the first bubbles; the Mississippi bubble and the south sea bubbles, which were market attempts to have the market take care of national debt. It doesn't usually work that way. So we're left with this great conundrum in many countries that we have what I would consider to be dangerous and unsustainable debt. We can argue about what we need to cut, although with income inequality it's pretty tough to cut things for the poor who are in pretty bad shape and have a lot less than they did 40 years ago. We know in Britain we're having a crisis that will most likely take many poor people's lives over winter, and in America, wealth inequality is literally startling given the wealth that's here.
Then we have a massively influential wealthy class that... America definitely owns parts of the political process on both sides of the political divide and makes it impossible to tax the very wealthy at a rate comparable to those people who are just making salaries. We can argue if that's right or wrong. Some people might say don't tax the most productive or those who have the most money. Some people say look out for the poor so they can spend. There are different theories of what works. But we do have a situation right now where I think it's hard to argue that it would seem that the optimists have a great amount of influence to the point where the state cannot go to them for its basic needs, i.e. in aid in paying off its debt. Many would disagree with me on how I frame that. But the reality is there that it's hard to get very rich people to pay taxes. It's hard to manage our debt and we're in a Machiavelli crisis moment. How do we solve that problem?
Ben (28:49):
That seems to me part of what you echo in the book about the rise of the power of institutions. Perhaps you could say institutions and you could say companies as well. I know there's a strain in economic history thought which goes, "Yes, geography's important. Yes, culture is important. Yes, innovation was important." But actually the role of institutions being quite key, if you evolve those institutions to companies today, you get this sense of whether they're oligopolies or at least they're very powerful and they have a certain incentive mechanism-- call it profits or whatever, which they're designed to do and it's very hard to knock them off that course. So I was wondering about that power of institution and how that filtered into your thinking on the book as well.
Jake (29:42):
I guess in this sense I'm a kind of light Burkean. I believe in institutions. I also get incredibly annoyed by them. I find them closed minded and often corrupt, but I believe that we've built them over hundreds of years. I think of universities, I think of governments, I think of other institutions. I think they feel very careful about knocking them down and attacking them wantonly.
The question about institutions and free markets is what's the role of a private company institution? That's really complicated. I get into arguments about this with my friends in business. I'm often left perplexed because I don't completely disagree with them. I think these companies are amazing. I've worked for private companies. It can be an amazing experience. The speed which you can do things, the capacity for innovation, you just can't match that. It really is quite startling. But then you get institutions like Tesla. Once a California institution subsidized to the max by federal and state governments-- By the way, Elon Musk doesn't make any money selling cars. He makes it with tax incentives, with paybacks from the state. That's where his profit comes from.
So he's kind of a wealthy welfare baby. So the state in many cases creates these optimists and then the optimists go back. For example, he left California because he said there were too many regulations and too many taxes and he moved to Texas. He said, "There are too many taxes. This is absurd." We've paid well over 12 billion dollars in subsidies to Elon Musk. Have we gotten stuff back for it? Sure, we've gotten some battery technology which is really key. Also, if you take the state of California which has a very high personal income tax rate which is really a strain every year for businesses and many individuals, it does pay for the finest overall public research university network in the world, possibly more powerful than Britain's.
This is paid for and this is precisely why we've had so much tech in this state. We have so many hands on deck who are able from these phenomenal institutions-- many of which people haven't heard of. The University of California in San Diego is considered one of the finest technological and biological research institutions in the world. That's just one of many. So the question is, “Which institutions are important? How are they paid for? How does it all work within political discourse which has become simplified down to a tweet?--” Bring it back to Elon Musk. It gets pretty warped. This is where Machiavelli comes back. Here's an optimists, someone built up by the state. Should the state be building people like Musk? Well, maybe we do need people like Musk or competing with countries that are sponsoring quite successfully their technology sector.
I think obviously of China and Musk is a leader. The state has helped him. What is interesting is that he has the power economically at this point to kind of then sidestep the state in many ways. That seems to be a Machiavellian problem. That he's become so rich that he can influence things. He can move his operations and play the system and essentially not necessarily give back fairly. He also has the power to misrepresent the situation. Most young people that study Elon Musk or admire him don't realize this is a guy built on state subsidies.
Ben (33:52):
Yeah. That's really interesting. This idea that the state can build an organization or a person up and maybe even point them in the right way; green technology, batteries and things. This is the Machiavellian thing. There's almost a political economy problem. You become so powerful. I've heard commentators say that the court in Delaware is somewhat afraid because it's now in a case where you are not quite above the law, but you're certainly influencing on it because of your own power, which is a really interesting thing to be in. We can argue about how much of a net benefit or not. But just that cycle makes me reflect on another aspect which I think is touched upon only lightly in the book.
So I'd be interested if you had thought about this more. Maybe this is one of the elements that also didn't come to a fore, which is how this intersects with the idea of essentially patents or making some of these intangible things become securitizable, enforceable. It goes back to your comments on what you're saying about the Franciscans. I thought this idea of like, "Oh, what is value and what do we count for then?" It seemed to be there's a slightly mixed role, but this idea that you can patent things was the one element that you added to the market. “Oh, we've now got a market,” or actually not. You've got a monopoly for ideas or things like that. In fact, if you fast forward today, companies like Tesla-- and actually probably all of our technology seemingly would not exist without some sort of this patenting, copywriting element which seemed to be created around about this time when people were thinking about what do we need a market for or not.
Jake (35:42):
Yeah. I did not speak about this enough in the book and it's an amazing history. The first real copyright lawsuit is around the encyclopedia. The encyclopedia, much of it is actually stolen from-- or back then, they did not really have clear ideas about stealing intellectual property. It's taken from Jean-Baptiste Colbert's project dictionary of arts and crafts which then the encyclopedia takes and makes into its own giant project. There are lawsuits about this and some of the first lawsuits, if I'm correct, about copyright and patents. The other thing I didn't talk about in the book is we've always wondered why England gets the upper hand with France in the industrial revolution. We have a very simplistic story about this that's told the English are more virtuous. The English are more business minded. The English are freer.
France and England are the two scientific powers. They're both producing more or less the same amount of scientific discovery. England is able to apply it better. One of the things that we've seen is they have a much better patent office and that France, you literally had to just go to the monarchy and they would decide. That shows how absolutism is not great for such things. It's not to say that England was remarkably functional in the 18th and 19th century. You just need to read Dickens or any other author to find out what a Dickensian mess it was. But it did have these institutions that by the way, by the time we get to Dickens, Dickens will write about the patent offices and these other things as incredibly corrupt and slow.
But in the 18th century, there's no question that France does not have a good patent office. Therefore you have an evolution away from the practical in France, because it's just so hard to do. One wonders if the French monarchy-- and they were good at doing certain industrial and commercial projects quite quickly. The English were often extremely envious of the French centralized government's capacity to do industrial and commercial policy. If you read in the 18th century or even earlier, Samuel Pepys says the French can do all these things we can't do in shipping. He says that in fact, all standards come from France and the French government is the one behind this, i.e. Colbert. That's quite revealing. So it's not just this liberal versus absolutist and liberals always win. I hope the liberals do always win.
Wouldn't it have been interesting had France created an efficient patent office sometime in 1725, right? Well, that might have changed things. Obviously, it didn't happen. So that question of how markets function well and having a patent office which is not completely corrupt and is somewhat open and fair moves quickly and judiciously. I think that's one of the secrets to Britain's success. That's one of them. There are many other elements. I’ve worked with teams that study the origins of the industrial revolution. It's quite interesting and it's not always what one would think. But that is one thing. And you're right. I wish I had talked about the need for intellectual property in the book or the capacity to ignore it as China often does, and go very far with that by just simply not playing with the rules. But there's a back and forth with that in China. When I work in China and areas in the Chinese sphere in Asia, that's a huge question of, “What does China create and what do we trust?”
Remember, patents are also about trust and about verifiability. So China can create all these things. Do we trust them and do we desire them? We might need them and use them. Many of us or some of us might not want their Apple phone. However, when we buy it we're buying it for that American California brand. Of course it's made in China. It's also made with Taiwanese technology and skill. So what is it that we're trusting in getting within all these patents? It's very interesting. So I just wanted to go on that because I find that fascinating.
Ben (40:38):
Yeah. Well, maybe there's another book in it. I did think that was really interesting in you elaborating on that because it comes to this question of state capacity and where you want your state capacity or not. There's certainly one reading I have seen which echoes what you were saying about essentially the problems in France which moniker the nepotism corruption. In fact, the reason that some historians think that you have these really large Swiss pharmaceutical companies now called Russian Novartis in Brazil, was because they moved to Brazil from Germany and France because of issues around patenting and patent laws. You have Japan held up the semiconductor patent for many years in order to get a leg up actually on IBM, which kick started their semiconductor industry. I think in the early 1900s the US did not have copyright on non US works of literature, again, to kind of have a leg up. So it's kind of really interesting where states decide what is in their interest or not in this state capacity idea. Also, what is free or what is not free or what's free for us and things. So I think it's really intertwined with that thought which I thought was really interesting there.
Jake (41:52):
I mean, this just goes to this idea somehow. It is a free market, I guess when Switzerland gives people incredible incentives. Doesn't make them pay taxes, gives them easier access to patents and certain things, to invite them to Switzerland. I actually love being in Switzerland and would like to be there more. I love it. But those are big state decisions and really, we have to always remember--- This might not be the case with Switzerland, but almost every large military industrial power has massive amounts of debt. Every tax cut costs the state. Then also so does cheap money too. So the idea of a tax cut is not necessarily freeing up a market. It is a subsidy of a certain kind. Bringing someone in and giving them a freer trade zone is a direct tariff policy where you've made a calculated bet that you'll earn fewer direct tariffs and make more money through other means.
The Swiss have focused on elite sectors of the economy to do this and they've been quite successful doing it. I was actually just in Switzerland a few months ago talking about what a tiny state like Switzerland-- then we can go on. Hong Kong is not there in the same way. Places like Singapore and then even Taiwan, which is really I think the most interesting case of all. How these small states can become powerhouses by playing with the market in these incredibly smart ways and entering into the market in incredibly intelligent ways. Singapore is a master of that. By the way, I always have to throw this in. I spend time in Singapore. I have lots of friends in Singapore and I'm fascinated by Singapore. I'm aware of the limits of Singaporean Liberty and of the political system, but I'm fascinated that when you start looking up free market states-- I'd spend a lot of time on the web and reading through these studies, which when you read these McKinsey reports which are always a bit self-serving to McKinsey and whatever, which states have the best atmosphere for business and which are the freest free market state, Singapore always comes out on top.
I just get a belly laugh every time because the state owns Temasek Holdings. The state owns companies in Singapore. It might have fewer regulations and less red tape, but it out rightly owns companies successfully. Singapore Airways being one of the most remarkable examples, but there are many others since Temasek Holdings has 455 billion dollars of holding and is run by the Prime Minister sister or something like that. You're just like, "Okay, what do free markets mean?" If this is the ideal free market state and the state's running much of its own economy, what does that mean? I don't have an answer totally for you, or I don't want to give one facetiously. I just want people just doing that.
Ben (45:17):
Yeah, it's complicated. I always think the Norwegian government owns about 1% of every single company in the world through its things. It always blows my mind. I had a couple of small pivots on your book or just the absolute little wording of the book. I seemed to have picked up-- and correct me if I'm wrong, that potentially the original title of your book was going to be “Free Market: The History of a Dream” and you changed the word dream to idea. I kind of think that maybe in some ways dream is the more artistically correct, because this idea of the free market is this human social construct. I think as we've argued throughout this pod that actually the state or the people of society are really very relevant in shaping what a market is and to the extent of its freedom or not. Therefore actually, it makes it potentially a bit more of a dream. Something that you can aspire to or you can question on that. I guess it's similar to an idea or not. But I was wondering was it really a dream, and going from dream to idea is there some little phrasing that you wanted with that? Or am I reading too much into just one change of a word?
Jake (46:30):
No, not at all. It was thought that because I'm not against free markets-- I like market freedoms. I just think that they're not... I don't believe in general equilibrium. I just don't believe the market just exists on its own with supply and demand and no government. I believe the government is in there and I also believe that... I like individual freedom. I don't like the state coming around and messing with me. At the same time, I want to be able to open a carton of milk and not get poisoned. We can just go into these things rather simply. We changed the name at the last minute might have been an error because what we're seeing is people who are questioning free markets might think this is a confident defense of an old Orthodox free market idea. People who want to hear once again a backup of the old Orthodox idea that you don't need any government are actually buying the book and being disappointed. I'm a little worried now that there is a kind of misrepresentation about what you're going to get and that is affecting who reviews the book and how they feel about the book. So yes, what I thought was a kind of, "Yes, let's just make this a little more general and approachable” might now have been a grave error.
Ben (47:54):
I can see. You didn't want dream to sound fanciful or critical. You just wanted to be more balanced. But I hadn't I guess fully appreciated in my view how deeper work of historical scholarship the book really was, which I guess maybe-- I mean, it should be there because you have the word history in the title. But I guess there's so much debate around free markets.
Jake (48:21):
What someone said to me is that in many cases you're not talking about dreams, you're just talking about an idea. So this I think in some ways is a more technically accurate title. The problem is I asked one of my best friends who is frustrated with the Orthodox idea of free market. I said, if you walked into a bookstore, would you buy this knowing that it's not going to be a kind of new critical reading? He said no. And I said, if it said a dream on it, would you be more interested? He said definitely more interested. And I said, hmm. So who knows how it plays out? Who knows how much this plays out? But I will tell you this, that it's often reviewing institutions, people who pick the book up, read it and say, “This is interesting.” Or just say, “This is a big topic, we want the book reviewed,” will often send it to someone who they think might be amenable to the work. It's often being sent to people who are not amenable to the work. So I do think that the title... There's a question of whether that's an issue or not. I think it's a legitimate question. I don't know how much it really plays, but I do know in my short survey of friends, “What would you pick up at a bookstore?” they were less apt to pick up something that wasn't more obviously-- let's not say critical, but innovative.
Ben (49:36):
Yeah. A new way of thinking about this rather than the standard libertarian thought which we have there. So I have another slightly pivot question. This one from Diane Coyle, an economist who I had on the podcast a few months ago as well. She asks slightly controversially, "Do you think the end of history is here for the idea?" So I guess this is maybe referring to Fukuyama and end of history and where do things go. But I guess is this the end of the road for this type of idea? Can it evolve any further or not? She didn't give me any further details on the question, but I thought it was quite provocative of saying, "Well actually, is this something which has got to the end of its road or is there another version of it?" I guess another way of thinking about this perhaps is if markets are never really free or free in this sense of a dream or idea we've been talking about, how would we potentially or how would you think about reforming them or nudging them or things like that? So is this the end of history for the idea or what are we going to do for reformation?
Jake (50:46):
Well, Diane's a good friend and she's super smart and she's also good at pressure points. So that's a really smart question which there's no easy answer for. However, I will say we're always dealing in discourse and speaking with ideas. That's another reason I wrote this book. It's that people throw the word free market around without seemingly being in agreement what it is. You can get a California Democrat to say, "I'm a free market guy. I don't like the state in there, but I'm for taxes and public schools." Actually, we don't have great public schools here. I wish we did. And we don't have taxes for public schools either. But that's a bad example. The fact is we use ideas as part of the way we discuss things.
So one of the things I'd like to see is that when we talk about free markets, we get beyond this idea… I'm also constantly at business dinners where people say, "I just want to get rid of the state." I'm just like, "Oh, fancy that." That's like a dinner conversation starter that people think is legitimate or somehow real. When someone starts a dinner conversation with me like that in one of these business settings, I just try and be polite because I'm like, "Look, I've never seen it happen in history.” I've seen situations where there are low regulations, but in those situations like in the Reagan administration, we saw massive government spending and the juicing of certain sectors like aerospace through military contracts. There was not a free market in some ideal sense under Reagan. He even subsidized the space sector. He was dumping money into American agriculture as almost all American governments do.
I didn't want to go into all that, but I would like to get to a point where no one comes and says without having to back it up with some proof, “I just want to get the government out of there all together.” Because then as I note in the book, you get sort of South Sudan. You just get a warlord state. By the way, some of these people I talk to would like that. They just want their house on the hill with some armed guards and no one telling them what to do. That's a kind of militia libertarian view which is not uncommon in the United States. I'm terrified of that idea having traveled the world. So I don't know if that's a good answer. I think we really still need to talk about what ideas mean and how we use them.
It would be great to get to a point that when someone starts talking about free markets, we started a more sophisticated and productive moment saying, "Look, we know the state is always there. We know it's been there. We know that every time we claim to deregulate, the state is either in the background or comes in with a bailout because it leads to problems.” It can lead to great wealth too, deregulation, but that doesn't necessarily mean we have no government. So I'd like a more nuanced discussion of such ideas. The word free market is going away but I'd like it to be more nuanced. I'm not sure I'll succeed with this book, but that's what I'm trying to do.
Ben (54:17):
Maybe that'll be for the next one as well. I definitely picked up the strand of thought. I guess I'd call it-- I think you might have even called it. There's a tradition in free market thought call it the other tradition, which focuses on innovation, trade, industry. If you take it from the American view, I hadn't realized Alexander Hamilton was such a kind of advocate. This idea of strong government fosters innovation, fosters industrial development, fosters these domestic markets allowing nations to thrive and all of that. I guess I don't see it talked about and I think your book does bring it out for those who are looking at it. This economic freedom is really essential to wealth production and this pro industrial thinkers, but actually needs state direction for these markets which seems to me the way you lay it out in the book kind of obvious. But actually, obviously that's not really how it's talked about today.
Jake (55:17):
By the way, Hamilton's project for manufacturers which is one of the most sophisticated works of economics I've ever read, I wish I had written about it more in the book. I have a suspicion that it is written in 1791 that it's actually response to Adam Smith. It's a response to Smith's idea that wealth comes mostly from agriculture and also that we need to open up agricultural and industrial markets. Smith did not have a clear view of manufacturing. It was not something he seemed to know much about. He did not seem to understand the manufacturing world around him aside from a nail factory in his town. So Hamilton writes this long treatise saying, “If we open ourselves up to Britain in 1791…“ I mean, by that point, Britain is really the super advanced economy at a staggering level. Even more advanced than France which is the other great industrial power. He said we'll be wiped out.
So we need infant industries. We're going to have to-- This is what sort of startled me. His understanding of business was so specific that he said, "We're going to need tariffs, but they can't be too much. We can't scare off business and other industries, otherwise we're going to have supply problems. So we need to just do a small tariff and then take that tariff and use it for strategic industry development." You're just like, "That’s really smart." They're building from nothing. America barely even had a currency at this point. His heir, Henry Clay who continues his protectionist and his infant industry policies says that British free market thought is colonialistic. He calls it British colonialism. That's what free market thought is in the 19th century. If we open up, they will colonize us economically because we're not yet powerful enough. Now that's going to change by the 1870s, but it's going to take several generations for it to happen. So America was built on development economics, the very thing that many free market economists say that the third world or developing countries don't need and that they should just open their market straight up. Americans did not think that and built the foundation of their economy on a very pointed sophisticated strategy of protectionism and infant industry support or subsidies.
I think that might be one reason that some people are having a strong reaction against my book. There's a myth of America as this free market nation. It's just not the case. There are periods. There is a sort of great period between Reagan and Clinton where free markets were really sponsored and supported in the United States. Clinton actually was the only one that saw the government getting smaller in the United States and the deficit getting smaller. But that's a relatively short period that's then punctuated by economic shocks and government bailouts. These are hard questions. But is America a free market country? Historically the answer would be not much. Partially a bit, but altogether not necessarily.
I'm actually writing an op-ed about this right now. I did write an op-ed. I don't know if I'm going to get it published. America's history points to a back and forth and a much more sophisticated strategy. That's what I'm saying. I don't think there's one answer to all this. The only thing I know for sure is I've never seen a completely self-sustaining market. Do we need more government? Do we need less government? That's something we can argue about I think quite seriously. But the government's going to be there. It's going to play a massive role. What role should it be? That's the question. Not no government.
Ben (59:44):
Yeah. I can see that. I was just going to refer to a couple of our other early examples like Japan and how it basically made a play on semiconductors. It protected its own industry to give them a head start. You can argue about to the extent China's done that. You can argue to the extent South Korea has done that and various elements. I thought you even get people talking about a kind of state capacity libertarianism. Just this idea that, "Okay, even a lot of libertarian thought agrees you're going to need state capacity now.” You can argue about where you need it and where you want it which I guess is a legitimate argument. But I think a lot of those are thinkers. At least some of the most sophisticated ones agree that you are going to need it. And maybe you should lay your bets on where you want it to be; technology or healthcare or basic research. Any of these things.
Different countries might want to lay their bets differently because of culture or geography or whatever it might be. I think maybe that's the more sophisticated way to get down to the nuts and bolts. Have to put it in the context of history like you say. There's always been some form of state capacity. You can argue about whether it was good or bad and how much of it. So now today, we can also argue about how much of it, and good or bad, and more importantly perhaps where you want it. So if I were to sum up my reading of your book on the history of the nation's state and free markets, is that in the history of all of the nations that you've looked at, there has always been state capacity or government needed to make markets or some sort of free markets thrive. Is that a correct and fair view if we take into account the UK, Britain, America, Japan, and all of these industrialized nations?
Jake (01:01:28):
Right. If we take all the rich nations, this is the case. But let's take Britain which has always shown as the liberal alternative. Britain spends hundreds of years with protectionist laws and industrial strategies and tariffs. The most famous being the navigation laws of 1651 and 1660. By the way, Colbert will copy these. Adam Smith will call them the wisest legislation of all time. England has a massively long period of development where the state is involved in one way or another quite strongly. In the 18th century, even though there are people calling for free markets, figures such as Defoe and Malachy Postlethwayt and others say, “Absolutely no way. If we open our markets and we don't have the government working on, for example, shipping, we will get destroyed by the Dutch and the French, straight out. We can't have our industries compete for example with French wool-- and wool is really important. They'll just undermine us completely.”
The other thing I find sort of amazing once again is this idea that we should all just function with no government and everything's going to be fine. Well, let's look at rich states. America had a protectionist subsidized beginning. The German states followed suit. Japan looks and sees what these states are doing and it does it with remarkable speed often working off the Germans. The Germans are inspired by the American system of development. It's pretty funny. The Americans are looking at the French and the early English system. Japan is always interesting by the way because Japan seems to never really follow any rules.
It just does things its own way. Everyone's always writing Japan off and then Japan emerges better than anyone thinks it will for the oddest reasons. I think that's also something to look at. A country which does use ideology, but also just goes back to its own ways of doing things to be successful. I think local culture is very important in all of this. Then we get to China, and this I think-- there's a lot of anti-Chinese sentiment. Some of it is because of authoritarianism, fair enough. But some of it is just shock that China has arrived and is so rich and powerful. Why are people shocked? Everyone I know in business in the nineties was heading to China to make their buck. A lot of them came back and I had not been and told me, "Wow, you wouldn't believe it."
But there's been this sort of shock I think in places like America and Britain, that China, this place once colonized and once so poor just a few generations ago, is now by many measures the richest country in the world. I truly believe it's because we were told we could only get rich with free markets and without government intervention and that an interventionist economy like China's, was always going to be somehow subservient. Well, they’ve showed that's not the case. I don't know if it'll last. I must say that studying economies, I've rarely seen economies without tolerance and freedom produce wealth on a consistent basis for more than 70 years or so. But now we're moving into rising uncharted waters at every level. But I think there was a lot of shock that China emerged simply because it didn't follow that rule.
It followed the old rules which we were told didn't work. Who were we told by? Developed America and Britain who had already developed and used those old development methods. Now we're kind of on top of the world and wanted other countries to enter into free trade often for the right reasons and sometimes for the wrong reasons. It's very complicated. But I do think it's worth asking how China got there and can we actually learn from China's economic growth? I hope we're not learning from China's authoritarianism. I hope we're getting the opposite lesson. By the way, Taiwan shows that the Chinese people can not only be free, but love it and do it better than anybody. I love Taiwanese culture. Taiwan is also used as a kind of free market story, but there is a lot of state strategy and a lot of American support which also brings us finally to the Marshall fund.
How do we get Japan and Germany being these super mega states while somebody actually just subsidized it and built them back up? Then once they were back together, they could trade freely but they were already industrialized then subsidized and then they industrialized again. I just think it's time to get rid of sweeping ideas that are supposedly universal because I don't think they always are. I do believe in universal freedom for individuals and human beings. I believe that might not always work, but that it's absolutely essential. That I think is different than saying, "Should the state be involved in economics and economic development?" I do see them as two different things.
Ben (01:07:04):
That brings me to one point you raised a couple of times just now which is this idea of culture. Obviously, it's a bit nebulous. We can use it in different ways, but there does seem to be something very important. You go back in your book and you can talk about-- Although again, very different strands of it. But the Christian culture and then you fast forward and you've got supposedly the American frontier culture, which some of it might survive today culture in Japan and things. I guess some people say the idea of the representative democracy in the industrial revolution in the UK was an important part of that at all. I was wondering if you had thoughts or observations on that. I guess hard to measure, difficult to kind of say, but seems to be an important element in all of this history.
Jake (01:07:54):
I spend a lot of time in Asia and I spend a lot of time in my friend's Chinese families. You want to talk about business culture, just go to a Chinese family. Its business, business, business. So sure, culture plays a role, but the idea that somehow... There are certain cultures which like business less, I will say France, which still has a remarkably sophisticated business culture and has some of the most sophisticated corporate culture and is still the greatest center of branding in the world. Talking about business is still seen as tasteless even amongst business people, but not in China. I do think doing things locally and thinking about things locally is important. That gets back to that thing where I said, "What can we learn from China?"
Well, we might also want to learn some things about Chinese culture, but what is Chinese culture? People speak about China as a monolith. "It's enormous. It's ancient. It's complex." The west still barely has a handle on Japan. So I do think interaction, understanding, listening is super important. By the way, people who do well in business are often very international people who have an understanding of all these different cultures. That's one of the great advantages in international finance and business. So I think that's absolutely key. That's why saying that having a completely unfettered market with no government is the only way to go is not always the case. That's not to say I believe in protectionism. I really believe in international trade. I don't like tariffs. I'm horrified by wine tariffs and cheese tariffs and all these things.
But I do think it all has to be nuanced and it has to be done according to strategy pragmatism. I don't know if that makes sense. I benefit and love free market and free exchanges. I'm horrified that I can only bring two bottles of alcohol to Singapore or places like that. I should be able to bring a suitcase of alcohol to Singapore. It seems absurd to me. At the same time, those are questions about what are good for certain industries or what local customs are, or it could be just protection as a monopoly. But it's always, I think going to be particular. So I don't know if that makes sense. I just think sweeping concepts applied to all, just don't always work.
Ben (01:10:37):
That makes a lot of sense. I think that really comes through in your book that the thinking around free markets has been very nuanced. It goes back to Stoic and Cicero ideas and involves very sophisticated, has always involved the state. Has different strands on it; whether you call it the industrial innovation strand and the other strands, and that to just paint a simplistic picture of it doesn't correspond to historic record. Importantly, will probably not help you in thinking about how it needs to evolve and develop in the future.
Jake (01:11:09):
Exactly.
Ben (01:11:10):
So if you'd like, we have a short section here on a kind of underrated overrated. So I give you a little thing and then you can pass, underrated, overrated, or you can make a little comment. So we've got three or four of these and then finish with a couple of finishing questions on your projects and your life advice. So overrated or underrated, GDP as a measure?
Jake (01:11:36):
Overrated. Talk to Diane Coyle.
Ben (01:11:42):
Yeah. I guess some people argue that actually it correlates with these other factors quite well, but I think most people also admit that it doesn't encompass a lot of things that we talked about like natural capital and human capital. Okay. A carbon tax or carbon pricing, underrated or overrated?
Jake (01:12:01):
Complicated. I think that the problem with carbon is its being played by the markets and is starting to do the opposite of what supposed to do which often happens with regulations. But I do think we need incentives to move away from it, and California shows again and again that it can work. It's not going to be perfect, but it can work. But it will take a large state policy to do it. McKinsey is not going to solve the plastic problem. In fact, it seems to be making it worse, as often it does. It might just take a big state to say, "We're going to only use electric cars." That will cause huge problems in some cases, but it might actually move the needle. It's very hard to do these policies. I'm sorry, I can't use these short answers.
Ben (01:12:53):
No, that's fair. The complexity is a good answer in itself. So I'm going to go for standardized sustainability measures, overrated or underrated? You're probably aware-- I think that International Financial Reporting group has created this ISSB for Sustainability Standards Boards and they're trying to standardize some of these sustainability measures to the extent that they can. Do you think this is underrated or overrated project?
Jake (01:13:24):
That's an important project. Be careful that it's not used to smash poor nations.
Ben (01:13:33):
That's a pretty pithy answer. Yes. So I guess this is the problem about the fairness of things or not. Also, I guess to your earlier points about how nations develop. A lot of nations have developed with some form of protectionism or support or industrial strategy or tariff in their early days. There's a lot of emerging nations which would argue in their early days. Great. So underrated, overrated-- we'll do this as the last one, universal basic income or the idea of UBI?
Jake (01:14:05):
Worth thinking about.
Ben (01:14:09):
Very good. Would you experiment it somewhere?
Jake (01:14:13):
It already sort of exists in certain places, and we're going to see that with wealth and equality in the markets in capacity to actually get wealth to huge numbers of people or for huge numbers of people to live on the wealth that they earn… Look at the average salary of a French person. It's really low. It's not clear they can live on it. So it seems to me that if you want to avoid civil strife-- and France was unable to avoid that for a long time, it might be something really to think about. Economies are changing. We're going to have massive change with climate change-- that's an understatement. We'll see what happens with markets and how they affect income. One of the things that frustrates me over and over... By the way, there are lots of economists that think that the market works perfectly on giving people income. Talk to the people who can't buy groceries and who have rotting teeth and can't get cancer treatments. I challenge anyone in this country who is not wealthy to get functional health and dental care.
Ben (01:15:33):
So the critique of it would be that actually UBI is a kind of free market solution to something, whereas some people would argue that what you want… I think even Diane Coyle argues that. That actually over UBI for income, what you really want is universal basic infrastructure. So this is where you get health and all of these things. Rather than the income, states should build the capacity in whatever. I guess it comes to our earlier thing. We have to decide where you want state capacity, which is a relevant thing. And then where you do, you've got to give it. But for the US-- Everyone in Europe thinks it's kind of crazy the US healthcare system, because for whatever reason, US has not really decided that healthcare is a human right in the same way that Europeans view it as a very simplistic argument. But then that's reflected in the universal basic health infrastructure of Europe versus the US which is chosen to go a different route.
Jake (01:16:28):
Actually to get onto that, I think that we've dismantled the universal infrastructure that we used to have. By the way, that's what the gilets jaunes, the yellow jacket uprising was in France. A lot of it was because in France-- I grew up in France and other European countries, you could get just about anywhere on an affordable train. Anywhere meaning to the smallest villages in the countryside. Wonderful trains where you could actually have the doors open and your legs hanging out and you could smell the flowers; the old France that I partially miss. All those trains were taken away. People without a lot of money in rural areas had to buy used diesel cars. When Mark called upped the cost of diesel, it then became unsustainable and all the poor people in the country freaked out. He had no idea. He didn't know any poor people.
But the infrastructure had essentially been taken away. In France we're seeing the health infrastructure, the travel infrastructure all being cut back. We might need new infrastructures but one of the problems is-- When I grew up also in the United States, healthcare wasn't a big issue. People had it. So a lot of it has been scaled back and then we have falling salaries in the United States since the nineties. It's a long time that people are making more or less in the same dollars that they were making 30 something years ago and their social infrastructure has been cut back. I can even talk about state schools and public schools. Then we really do have a crisis. The other thing I was going to say is it's going to be pointed. I think that the infrastructure answer is right and it's going to have to be updated, but not everybody needs the same things in the same places. So right, you might get 250 euros a month and it might not solve your problem more, but it's better than nothing when you can't buy food. And I know that's the case for many people in Spain where salaries are very low. Getting a minimum wage raise of 26% is the difference between eating and not eating. I think the people that don't have those problems cannot relate to them. And I think that's a problem too.
Ben (01:18:43):
Yeah. I can see that. I thought that even real wages in US had been going up, but it depends on which decile of wealth you were.
Jake (01:18:54):
Exactly.
Jake (01:18:56):
I haven't seen all of the data, but it's a complex thing. And like you say, what different geographies, different communities, different people want or need is actually is more nuanced than you might think.
Jake (01:19:07):
Right.
Ben (01:19:09):
Maybe that one brings into a final couple of questions then. So if you were a policymaker in government or maybe you are kind of a business leader-- so you could see it from either the private side or the government side, what one or two policies or ideas that you think we should try out that maybe we haven't done enough of? I guess there's some ideas around human capital, some ideas around carbon and environment, something around what should be more free or not. But where do you think is most promising that we should look to in the evolution of where we are?
Jake (01:19:47):
So wait, you're asking a question of where I think governments should invest in a general thing?
Ben (01:19:52):
I guess it's either invest or it could be a policy idea. So something around climate, something around education or some focus. It harks back to what aspects of the market you think maybe should be adjusted or reformed. If you had a silver bullet on one or two policy ideas or laws, or you could do it for business, what's the arrow that you would shoot and go like, "This is what we should think about?"
Jake (01:20:21):
I have a few... Those are hard questions because remember policies have a way of turning around and doing the opposite thing in government sometimes. I say true, tried and tested, invest in public education. When you say it doesn't work, don't throw your hands up. Go in and make it key. Literacy usually seems to be a measure of wealth in many ways. There's the other idea. This is the old free market idea of not taxing the things that are the most efficient. So we have to now decide what efficiency is. Amazon is now our biggest company. Amazon and Apple are these huge companies. We're struggling with global warming. We're struggling with all these things. Are they the most efficient companies? What are they costing us? How should they be taxed? I don't know because I actually use both of those companies more than anything else and they work for me incredibly well.
But I do think that the idea of giving tax cuts to wealthy people, which is a serious arguable idea that you want to free up people that have serious-- You want to free up capital in large sums so it can be invested, is a credible idea but it does equal a government subsidy. If we're looking to the old market idea of freeing up the most efficient things, should we have a more sophisticated view? So what is the most efficient thing given the crises that we face right now? Is it this and Amazon, everything around me? Well, I'm not sitting on an Amazon couch, but I'm talking about books and other stuff. So I think that's a real question I'm startled by, for example. I'm still not convinced that the American private space race between Tesla, Amazon, and then to a much lesser extent, Richard Branson isn’t bringing anything right now and we have global warming. I'm really not convinced. That was heavily subsidized in many ways. Should it be, should it not be? That's a question.
And of course then I'm going to go back to my old thing. Just like education there are a few things that are no brainers. Accounting standards, people need to use-- Before we even decide how sophisticated our balance sheets should be, people need to use accrual double entry balance sheets to always measure loss with gain. Otherwise they cannot balance their wealth or have any understanding of what they have, how to invest it and how to use it and how to think about the future of the money that they have or do not have. So I think that there are a few universal things, education and accounting standards, which have worked and continue to work incredibly well. I've been harping on that now for almost a decade and I truly believe it; for the left and the right, for everybody. Then we can get more sophisticated about what gets on a balance sheet. But let's first use balance sheets.
Ben (01:23:43):
That makes sense. Education, we’re the tax; those sort of areas.
Jake (01:23:52):
We're not the tax. That was my sort of facetious point that if free marketers-- I believe in some of this stuff. We can't tax a productive class too much. That is a serious idea. The question is, “What is the most productive class given the challenges we have? Can we decide that?” Well, we are making that decision when we give tax cuts across the board to certain people. We give tax cuts to our oil industry all the time. It's great that America has a good oil industry right now because winter's not going to be terrible, but is that sustainable, et cetera. It's certainly a lot more sustainable than depending on Russia. So these are not easy questions. I'm a super climate guy, but I'm also someone that knows... This morning I read that European factories are closing down. They don't have petrol for this. This is really serious. So maybe some of those subsidies to American oil were security issues. Maybe it should have been based on making a certain investment in sustainables at the same time. Again, these are hard questions. I could go on and on. I'm talking too much.
Ben (01:25:05):
No, that makes a lot of sense. Final question then, what sort of life advice or advice that you would see in your career would you give to other people or people listening?
Jake (01:25:19):
Don't read easy to read books. I think they are the most destructive thing on our culture; these CEO books. “Pull up your boots and tie your shoes in the morning. Don't let the government give you eggs.” I read some of these books and I'm like, "How is this helping anybody?" Go back and read the kind of books we were reading when we were actually building big states and building things that have proved sustainable. If you don't know what they are, just go back and read great literature and great novels. What is that? Well, you can make a decision. It can come from any country. It can come from any religion, but there are great books. Over centuries I see traditional books that we've decided over time are extremely useful to us. Go back and read those. For me, it's the 19th century novel. It has become Roman and Greek philosophy. It's also become the early works of the fathers of the church which never ceased to fascinate me. The writings of William of Ockham, Duns Scotus. Those are fascinating books. Read serious books. I really think it's time to put down the Harry Potter and get challenged.
Ben (01:26:36):
That's a really good call. A call for essentially the serious study of humanities again. Well with that, thank you very much.
Jake (01:26:46):
Thank you so much, Ben. A pleasure.
Diane Coyle: Cogs and Monsters, book review
-Defends economics while highlighting many challenges economics have not grappled with
-Outlines the challenges of an intangible, natural and social world
-Remains skeptical of macroeconomics
-Discusses how economics itself is being disrupted
Diane Coyle has been a leading part of making economics relevant today. Diane has done this through public lectures aimed at real world problems grounded in present challenges but conscious of historic learning. She has emphasised the importance of a diversity of thinking across a range of dimensions such as culture, gender and class. Her public policy thinking has tackled big technology anti-trust and competition challenges as well as the difficulty in measuring an economic world so rich in unmeasured intangibles such as technology, the environment and social relationships.
Her previous works have tackled elements of her thinking. Weightless World on intangibles (and a forerunner to the work of Westlake and Haskel*, Capitalism without Capital), GDP: A brief but affectionate history, on measuring intangibles; Markets, State and People covering public policy, inequality, markets and social welfare. This work, in part, dives much deeper into the philosophy of economics itself.
“…this book reflects on the broader character of economics, not only its lack of inclusivity, and how the subject needs to change to be relevant for the rest of the twenty-first century. The issues covered here concern the fundamental paradigm—the subject’s philosophical roots in utilitarianism, the validity of the distinction between positive and normative economics, the character of dynamic socio-economic systems that do not conform to the standard assumptions, the role of social influence in a discipline built on methodological individualism, and the scope for a powerful social science to alter its own subjects of study…”
I interpret her arguments as:
A defence against many straw man arguments against economics that are unhelpful as they disguise from real problems.
Those problems include the diversity of economic thinking, measuring intangibles, dealing with nature and inequality and a focus on real world problems.
Diane explains:
“some key philosophical issues in economics itself: to what extent is economics performative, or self-fulfilling? Can a social science ever aspire to objectivity when its practitioners are part of society? What policy conclusions can we possibly draw from economics when it assumes people have fixed preferences—an assumption torpedoed by the existence of the advertising industry? Has methodological individualism run out of road as the structure of the economy shifts to activities involving every greater externalities and non-linear dynamics? A second thread is that the way in which the economy is changing, particularly because of digitalisation, means that our analysis of it needs to change. These threads explain the title of this book, Cogs and Monsters: the cogs are the self-interested individuals assumed by mainstream economics, interacting as independent, calculating agents in defined contexts. The monsters are snowballing, socially-influenced, untethered phenomena of … the territory where so much is still unknown (labelled ‘Here be monsters’, on mediaeval maps). In treating us all as cogs, economics is inadvertently creating monsters, emergent phenomena it does not have the tools to understand.”
Diane starts off discussing to what extent economics itself impacts the economy. This sounds like the meta verse but answers whether the economic agenda set by economists has a role in the financial crisis of 2008-2009 and why so many economists failed to see the crisis coming. Diane remains broadly skeptical of macroeconomic thinking which chimes with many a lay persons' views.
My long term pension fund manager boss remains highly skeptical on macroeconomics as well. Although to acknowledge the other side, macroeconomic forecasts are rarely meant to be forecasts in the betting sense, and she does gives the arguments from a macroecon correspondant.
Diane raises the idea that certain economic thinking led to “self-fulfilling outcomes” and in that sense critics are correct in blaming in part of the GFC (Great Financial Crisis) on economists. But wrong in underappreciating how broad a church economic thinking now is.
(As an aside, I would have liked to know her views on a range of other thinking eg, Hyman Minksy and a behavioural cycle; and the latest debates from investment practitioners over sustainability and environment social governance investing).
She distinguishes pro-business from pro-market and argues for markets as an important organising force that has proved better than central planning. (Pro-business can be very anti-market, as business dislikes competition). The benefits of markets as a discovery force are counterbalanced by their failure to value correctly in many instances.
Diane articulates an important distinction about when how to use markets and civic values describing the market innovation (no prices) of a kidney exchange (Roth) and how debaters on the role of the NHS may misunderstand the differing arguments on civic values over using market mechanisms to inform more efficient price discovery.
Diane extends this philosophical thinking into what it means to be “better” how to define that and for whom?
Before this, she does argue for a special role for the church of economics in government and policy due to the use of ideas on opportunity cost and cost-benefit analysis (even if flawed) and including Coase’s ideas of the analysis including the cost of the economist herself. She highlights many successful applied micro economic insights such as Irish taxi licenses, transport economics, telecommunications spectrum license and certain methodological innovations (such as random control trials although I note these had use in healthcare decision making decades of not a century earlier). She does emphasise “the map is not the territory it.”
She continues discuss a multitude of economic failings as well as successes, and the technocratic assumptions behind the profession. She expands on the idea that economists are not politically neutral and therefore “performative” on the system they are analysing.
One observation is that while aimed at the general reader and Diane gives a decent amount of background to her ideas, I do think it may lose a reader typically uninterested in these topics. My activist theatre friends, who I would encourage to read this, might (I think probably would) feel a little at sea. I note this only because not only should a classical male liberal or neoliberal read this to reflect on the arguments Coyle poses but those on the left who perceive economics to be too far divorced from their real challenges and concerns.
Diane on digital reveals the scope and breadth of her reading encompassing knowledge about drugs Avastin and Lucentis (which have similar biological mechanisms but different approved uses in cancer and eyes; and which most non-specialists would not have heard about), dark kitchens (how food delivery comes from specific kitchens that don’t serve as restaurants but for online), amd Andreessen’s view on software eating the world, this shows an economist grappling with the “digital reality” that modern life faces (and to my mind a good breadth).
Diane outlines how economics itself is being “disrupted” like book sellers have been and she suggests:
“… For economics itself, the agenda is clear. We need to build on the work that already exists to incorporate as standard externalities, non-linearities, tipping points, and self-fulfilling (or self-averting) dynamics. We need to revive and rethink welfare economics…We need a modern approach to the public provision and regulation of information goods, applying the rich literature on asymmetric information and older network industries to the non-linearities and externalities of the digital world. And we need to put the social, not the individual, at the heart of the study of economics, taking seriously the line often-stated about the importance of institutions and trust to economic outcomes. This means above all returning to the origins of economics as political economy….”
I’ve considered Diane Coyle potentially a radical centrist. She does not abandon markets so can not claim home with the left and the degrowth thinkers. She is critical of utilitarian and neoliberal answers although perhaps she may have more in common with a notion of state capacity Libertarianism (cf. Tyler Cowen) that it may at first seem. Many of her ideas are not mainstream ergo radical. Perhaps this makes her a radical centrist of our times.
Pre-Order for October 2021 (Amazon link)
I read an uncorrected advanced proof as I recently hosted Diane on my podcast.
State capacity Libertarianism (Cowen)
Capitalism without Capital. (Heskal, Westlake)
You can find my podcast (and video) with Diane below. On reflection after reading this book, I should have asked her more on her critiques of macroeconomics!
Apple Podcasts: https://apple.co/3gJTSuo
Spotify: https://sptfy.com/benyeoh
Anchor: https://anchor.fm/benjamin-yeoh
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Diane Coyle: innovation, intangibles, inequality, sustainability and measuring beyond GDP | podcast
Economist Diane Coyle is the Bennett Professor of Public Policy Cambridge University. She co-directs the Bennett Institute where she heads research under the themes of progress and productivity. Her work has touched innovation, technology and intangibles; sustainability, inequality and measuring beyond GDP. Her latest book, Cogs and Monsters is published in October 2021.
We discuss the challenges of the current narrowness in economics both in terms of the diversity of people it attracts and the paucity of wider ranging interdisciplinary thinking.
Diane’s 1997 book (The Weightless World) was prescient over many technology, innovation and intangibles trends but sustainability was a missing hole. We discuss sustainability and what she felt she missed and what she got right.
Diane critiques degrowth ideas while noting the challenges which catalyse that type of thinking.
We chat about measurement challenges in an intangible world and how while GDP might have measured more usefully in the past but that in the present it misses many areas of value. In passing, Diane critiques happiness indices and elements of the human development index.
We address the UK’s productivity challenges (but don’t expect we have solved it?!) and conclude it is not only a measurement challenge.
We discuss inequality and “superstar earners” across all sectors and possible solutions.
Diane over-rates / under-rates:
Universal Basic Income
A Job guarantee policy
Industrial Policy
Arrow’s impossibility theorem
Running the economy hot.
The New Zealand Prime Minister
We discuss minimum wage and tax policy. Win-win investment ideas and end with what a productive day looks like and advice for would-be economists. You can follow her on Twitter here and her blog can be found here.
PODCAST INFO
Apple Podcasts: https://apple.co/3gJTSuo
Spotify: https://sptfy.com/benyeoh
Anchor: https://anchor.fm/benjamin-yeoh
Transcript (unedited, typos likely)
Ben Yeoh (00:03): Hey everyone. I am super excited to be speaking to Diane Coyle. Diane is the Bennett professor of public policy at Cambridge university, and she co-directs the Bennett Institute where she heads research under the themes of progress and productivity. Her work has touched innovation, technology and intangibles, sustainability, inequality, and measuring beyond GDP. Her latest book, Cogs and Monsters, is published in October 2021. Diane, welcome.
Diane Coyle (00:32): Well, it's great to be here talking to you. Thank you.
Ben Yeoh (00:36): Great. So is there such a thing as a radical centrist and perhaps are you one?
Diane Coyle (00:45): Well, that's a difficult question to start off with. I don't think of myself as being left or right party political at all. So I suppose that ticks the centrist box. Am I radical? Well, I hope so but particularly if that means thinking in new ways about how to solve some of the challenges society's facing, which are big and complicated, social scientists causing wicked problems. What we've been trying so far very obviously hasn't worked. So I suppose by kind of deconstructing it, I'd have to answer yes to the question.
Ben Yeoh (01:23): Great. And so you've worked with Jason Furman reviewing competition markets but did you know he is also a fairly prolific book reviewer, which is another thing you might have in common with him?
Diane Coyle (01:37): I believe he reviews on Good Reads--
Ben Yeoh (01:39): Yeah, he does review [on Good Reads]
Diane Coyle (01:41): --Which I don't use very much and I review books on my blog. I read many more than I review. The blog is about economics and business books and technology and a bit of politics and I read lots of fiction and pop science and other things too.
Ben Yeoh (01:56): What's brought you to review so many books on your blog? Is it kind of just a way of remembering or are you trying to kind of reach a wider audience with your reading?
Diane Coyle (02:05): It's a bit of both. It's a bit of a service, so people who might be interested in reading some non-technical economics and business books can get a quick readout on what I think about them and if they know anything about what interests me that might help them. So it's a bit of that, and it's a bit as you suggest remembering myself, what it's all about. So it's a short note. I mean, obviously if it's a book I'm going to use in my work, I've got much more extensive notes on it and little stickies from the pages and these are quite short as they have to be blog posts and people can seem to find it quite useful.
Ben Yeoh (02:40): Yeah, I do particularly, and to me it also gives a glimpse of the kind of breadth of your work and thinking and I think this breadth is notable as I observe you've been critical of some of the narrowness of certain economic thinking, both in terms of output and thought, but also where economists are drawn from and like finance, economist seem to be fairly white, fairly male and not working class. Whereas you have working class roots and have kind of this kind of more broad outreach. As economics as a social science, how big a problem do you think this is and do you have any ideas on what can be done?
Diane Coyle (03:23): There are two big questions in there. I think one is about economics and one is about joining up thinking across silos more broadly than that. So starting with economics, as you say, it has become a very socially narrow subject, particularly, I think in the Anglo-Saxon world and I'm less sure about the kind of sociology of economics in other countries. I think it's a little bit different, but not much because it's a very international subject and you're not a social science if all your people are drawn from quite affluent white male, people asking the research questions, deciding what they think is important. You just don't know what questions to ask if everybody comes from the same background, that diversity of background is really important for social sciences. And a little bit of the problem with academic subjects more broadly but not entirely. There are some other subjects, computer science could be one or philosophy is actually quite male dominated and posh as well. And so that narrowness is a real problem and I think it maps on to a narrowness in a way of thinking about what good economics involves. I'm a really strong defender of economics. It's a very powerful mode of analysis. It's very empirical now and it's driven by logic and it has some really great insights, but it's very focused on maximizing models and a certain limit about how you think the world changes and very, very little looking outside the subject. It's really hard to understand how markets operate if you don't know anything about the sociology of markets or even the ethnography of markets and after the financial crisis, there was some great sociology published on the financial markets, economists had ignored them.
So there's all of that. How does it change? I think it's partly the good things that the professional associations are doing to go and talk to people in school and communicate better and put a lot of emphasis, particularly on women economics, but now more broadly on people from different minority groups or different kinds of backgrounds. But I think the subject itself has to accept a wider definition of what a good economics is about and it's not just the same top five journals doing the same kind of narrow small questions study with limited range of technique. Open economists don't even rate qualitative research techniques when they're equally rigorous and it's just a different form of data, really. So that's all the economics bit. I'm rabbiting on a bit, but I'll just go onto the other bit, which I feel really passionately about and that's joining up knowledge across silos because the university have become very departmentally siloed and all of the promotion prospects depend on publication, which is in disciplinary journal, but it's really hard to address global warming, loss of biodiversity grotesque income inequality, conflict. Any of these subjects, you can't do that just from one discipline. So everybody's sort of burrowing away, plowing their own furrow to mix the metaphors and we're not going to make progress and all of that money that gets spent on research will not deliver all it could if we don't manage to find ways to work together across subjects. And so our Institute here, the Bennett Institute is all about interdisciplinary working.
Ben Yeoh (06:59): Yeah, I think that's really valuable. I see this in my world of investing that too many, particularly of the older generation, but even now I'm taught sustainability investment techniques, I'm taught about thinking about intangibles. It was all sort of a very standard, let's do an accounting model, let's do a DCF discount and see what comes out at the end of that and therefore have missed all of these, let's call them extra financial capitals as well. And without people kind of challenging and thinking about them, it's quite hard to get that into a sort of mainstream thinking and techniques. I was rereading your, I think, 1997 book The Weightless World and it showed a lot of great foresight on many of the technology and tangible innovations we've had today but it seemed noticeable to me fast forward to today that there weren't so many words on sustainability and the environment. So I'd be interested in reflecting back what you feel you might've got most right and maybe some of those trends which are continuing and maybe what you think about what you might have missed and what, again, that is important for today and thinking about the longer term.
Diane Coyle (08:14): It's a real coincidence you should raise that because I was thinking about it as a gap in the book yesterday. I was rereading a book by John Urry and Scott Lash called Economies of Signs and Space and it's a sociology book that came out a few years before my book, The Weightless World but was on exactly the same territory about how digital was changing society. And I read it after I'd published mine, but they did pick up on sustainability actually and it does feature in there. As you say, I completely missed that. I think I did get some things right about the way the world of work might become more precarious and you couldn't use companies to deliver government policy so easily, or the welfare state would have to change its structure. The geography of the agglomeration economies, the way that things were clustered together, and some of the potential for digital currencies, which is, I guess, just starting to take off big time. And so there are quite a few things I think I did identify as a future trend but with that one huge exception and I suppose I just had it in a separate bucket in my head having talked about how hard it was to cross silos. It's just quite hard to join things up and I didn't do it.
Ben Yeoh (09:41): And you think obviously from those comments, that is probably going to be one of the major themes for the next decade or two going forward.
Diane Coyle (09:50): It'll have to be when you see what's already happening in terms of weather events and the financial world as you know better than I do is starting to pick up on this with things like bank of England and other central banks getting in on taking account of climate risk or hopefully biodiversity risks as well, which also matters a lot. My colleague Matthew Agarwala has done some work on climate adjusted Sovereign [bond/debt] ratings. So the finance world is getting there, I think but I worry that people aren't really getting their heads around how big the changes need to be or will be. If we see these kinds of extreme weather events every year, we are going to have climate refugees, we're going to have conflict and all of the spillovers that implies for us and it's very easy for policymakers to do some small fixes, but not to realize that there's going to be a big change in the world and they need to do big fixes. So that's one of the things that preoccupy me at the moment.
Ben Yeoh (10:50): Yeah. It's not an intersectional challenge. I mean, sticking with sustainability wider and the climate challenge. My observations are there's a multitude of economists who backed some form of carbon price in either a tax or a cap and trade continue to remain less popular with the public and thus with politicians but given those intersectional challenges that we see everything, I talked to a lot of people and they kind of think is this the best that current economic thinking can do with some of these challenges. Obviously there is research and happening and more than that. Would you point to anything else that you think economists are offering in terms of the climate challenge, or do you think without some sort of carbon price in that market mechanism, a part as a sort of underlying foundation, some of these other ideas are not going to get through.
Diane Coyle (11:44): I think we have to throw everything at it and one tool won't be enough. So, of course, I think a carbon price could be a powerful tool, but we'll have to see government step in and mandate things or ban things and we'll have to see businesses changing their practices and figuring out quickly how not to use plastics in packaging and how to move away from using any internal combustion engines in their transportation. All of those things have to happen. So it's a question of how do you align all of that on a big enough scale that you tip things toward a different model of production and consumption in the economy? One of the most powerful things I think is, and this is very nerdy, it's about economic statistics because that's the way you understand what's happening in the world and my colleague here in Cambridge. [ Dasgupta] did a review for the treasury on biodiversity where he just made a really powerful case that the big failing of economists has been leaving nature outside of the economy. We've not put it inside what we call the production boundary, so we haven't counted it and there's not enough data on all of these things that are going on. We're just getting to the point where statisticians are measuring natural capital on an aggregate national scale and being able to track what happens with that.
UN is accepting it which is great, but we've got to step up gear and measure in detail, what are the climate damages, what are the carbon impacts of consumption as well as production, what's happening to biodiversity in different ecosystems with all the implications that might or might not have for human health and the food system and joining up those dots again as you're saying, Ben, because seven million people die each year from pollution, WHO says, which is more than who has died during the pandemic to date. And we haven't been paying attention to the costs of pollution, the human capital costs, the economic costs of that and so we've got to bring that into our thinking about how we run the economy and the statisticians can do it, I think.
Ben Yeoh (13:58): Yeah, I agree. I mean, we've only just really started tracking particulate matter, these small PMI, 2.5 type things. And I think WHO you know, the limit, they actually don't give a sort of limit of what they think is healthy because they kind of think all of this particular matter is probably damaging. I wonder, there's a little bit of pushback I hear on natural capital in the sense that people worry about whether the economic trick techniques are sort of sophisticated enough in the round to sort of measure and deal with this. So you feel they are and is that intersection, I guess with say systems biology or ecology there that actually the picture we paint is probably good enough, you don't want to get into this case we're going to seven decimal places where you've got the kind of order of magnitude of things right? Or is there still research which needs to be done in terms of getting these techniques robust enough that we feel that we can have some sort of natural capital accounting, because then I think if that feels robust, there is no theoretical reason that might not start to flow into corporate accounts of some sort, which obviously financial accounting, but if there was some natural capital accounting and accounts, then that's something where investors and other stakeholders can then start to hold businesses somewhat accountable to, or could even vote certain ways with a business model. But it's so absent at the moment that it's very hard to know where to start.
Diane Coyle (15:26): That's really interesting because I often get a different kind of pushback, which is that you shouldn't be trying to quantify and put a monetary value on things that are intrinsically valuable to which my answer is that if you don't do some kinds of accounting, you're putting a value of zero, which we know is the wrong answer. And I suppose I'd give the same answer to your question, which is we probably don't have the right answer, but it's a broad brush one better than none. I think it is. There's obviously a need for more data and more granular data and there are definitional challenges about that, particularly with ecosystems and biodiversity but the big problem it seems to me it's not so much technique as integrating different disciplines and the climate and the economic and political changes, for instance. I talked about Matthew's paper with his co-authors and they run a climate model and look at GDP impacts but what ideally you want to do is say, well, this means that the countries in the middle east are going to become uninhabitable. So what does that imply? What do the people there do? And what are the social and political spillovers from that? There's a really nice Paul Krugman article from years and years ago, where he talks about why he became an economist and it was about the idea of psycho history in the Asimov foundation trilogy and that takes you towards that grand ambition of integrated knowledge, which is probably complete nonsense
Ben Yeoh (17:01): We can aspire to the science fiction world or the solar science fiction world. Another debate I kind of hear around this comes from, I guess so-called de-growth thinkers such as maybe Kate Roth or Jason Hickle and it seems to me that many other thinks that de-growth is very challenging because of the idea of lifting the poor in a country, or even between countries, between richer countries or poor countries, or the poor within richer countries. Where do you see the role for growth and is therefore a de-growth economy, anything we can learn from that, or is it going to go down the wrong path because of the challenges about raising people up from poverty?
Diane Coyle (17:48): A couple of weeks ago, I took part in a round table with African economists who were very critical of the growth for exactly the reason that you just explained. They don't see it as a model for their thinking at all, so they were pushing back a lot against those models and so on. So there's definitely that. And I think some of the de-growth advocates don't really articulate clearly what the implications of their approach are, but I have a different objection to it, which is a kind of misunderstanding of what economists mean by growth. And as we were talking about the weightless world, there has been a separation between growth of material used in the economy and creation of value in the economy but if you say to me, we want to keep GDP as it is or reduce GDP, it's not saying to me you can't buy 5 handbags, you can only have one. It's saying to me, actually, we can't invent a vaccine because that's valuable and it would add to GDP. A lot of GDP is ideas, it's services. So I think it really requires a much more sophisticated understanding of what growth is and how that translates into economic measures like GDP. So I'm not a fan of de-growth while at the same time completely respecting the imperative to do something about sustainability.
Ben Yeoh (19:14): Yes. I think Mark Carney said something similar - he was challenged [on growth] as in, do you think you can have sort of infinite growth and that type of thing, and his reply is that, well, you could have carbon light growth, you can have physical capital, not intensive type of growth and talking about sort of the digital world you can have things on Fortnight. You're buying digital clothes to show off where it's not necessarily physical clothes.
Diane Coyle (19:44): And of course that uses energy, so there's no physical cost, but that's the kind of calculation you need to make. In the end thermodynamics will kick in. So infinite growth and that's because it's not possible.
Ben Yeoh (19:56): Sure. Yeah. But perhaps a long way out or not. That kind of brings me to thinking about this aphorism, which we got two halves of already, which is what gets measured gets managed. But then there's another one, which is this idea that not everything that can be counted really counts and then the opposite about some things which are really important, but are really hard to count. And your book on GDP seems to me to argue that GDP did measure something fairly useful in the last 100 years, 200 years, and maybe going back, but as the world has moved much more intangible and we've had to address ideas like natural capital, social capital, human, intellectual, and the like, that current thinking about what GDP encompasses is somewhat inadequate. So where do you think that what we're measuring at the moment is getting it right and where do you think we're really falling short?
Diane Coyle (20:58): Yeah, I do, as you say, see the gap between GDP and what we might care about in terms of economic wellbeing or welfare is growing and making the GDP less and less useful. There was a paper by an economist called Vegra Licas who taught me at Harvard many years ago and he calculated what proportion of the US economy he thought was unmeasurable, or hard to measure. And it was, I think it was something like 43% in 1994 and I redid the calculation and I think it's something like 23% now is easy to measure and therefore 77% is hard to measure. And it's because ideas are creating so much more of the value and that might be because it's in services and the quality of the service really matters. And so the price there is a signal of quality and you can't use it to calculate real GDP in the same way all those quality changes and all the electronics goods that we buy all the time. There are new goods, like new vaccines, and it's really hard to figure out how to incorporate those. So just generally the way the economy has changed makes it hard to do this deficient that we always do between here's the pounds or dollars amount spent in the economy and here's what we think about it in real terms or volume terms, because although it's called real, it's an abstraction. GDP isn't a natural thing anyway and that abstraction that we use and we get the growth figures, 9.2% or whatever it is each quarter, it's very hard to interpret what it means now, I think.
Ben Yeoh (22:36): And so there's a lot of talk in the media and, I guess, economists about so-called UK productivity challenge or the global productivity challenge but I guess there's been some pushback about how much of that challenge is really a measurement challenge, partly measurement, and how much it's been based on some causal factors which no one quite understands. From your point of view do you think much of it is a measurement challenge and what do you think are the root causes of it in your opinion?
Diane Coyle (23:09): So there are definitely measurement issues to think about. That doesn't mean that there are no headwinds against productivity. [There is a] hangover from the financial crisis, demographic change the time it takes companies to adopt new technologies and there are lots of historical examples of how slow that can be, and it's now being called a productivity [challenge]. So all of that's real if I can use that word. It doesn't mean that GDP is getting worse at measuring what GDP measures, but that's different from what you might be interested in measuring. And so we might become much more interested in measuring a different meaning of productivity. If I can think of an example, I'm trying to think about time and productivity now because in services and actually a lot of manufacturing, productivity gains have been about saving time, doing routine things faster, or squeezing out unproductive time from processes and logistics system but there are also services where time spent will increase the quality and therefore arguably the productivity, the service. So if I'm getting a blood test done, I want it to be quick, no time wasted. If I'm in intensive care, I want to have a dedicated ICU nurse who can spend all their time looking after me. So I'm playing around with this idea about is there just a completely different way of thinking about productivity than taking GDP and doing some things to it to calculate what the productivity level would be. But that's a very long-winded way of saying, I think there is a puzzle, I think there are some good reasons to believe in it. It's not all about measurement, but that doesn't mean the measurement questions aren't really interesting because they're about concepts really.
Ben Yeoh (25:04): And I think that you've been relatively critical of some happiness indexes as a sort of alternative and there's some other things out there like a peace index you've got human development index and things like that. I'd be interested in what currently you're thinking might replace or supplement some thinking around GDP and whether you continue to remain slightly critical of what sort of perhaps happiness economics or some of the claims that happiness economics makes versus GDP.
Diane Coyle (25:39): I am still critical about them. One reason being that they're kind of black box theories, that you can do econometrics, regressions that show you that well-being measures, stated life satisfaction measures are positively correlated with various things. But there's no kind of theory that has been tested about it. So you can certainly advocate cognitive behavioral therapy for mental health reasons. That might be a really good thing to do, but if the person suffering the mental health problems is living in a dump flat with no money, then it's not really good to solve the problems for them. It's also the same challenge as with GDPs, you're trying to reduce a complex assessment of how things are going into one number and the thing about GDP is there's a whole load of economic theory about how you combine things to get that one number. And a lot of the alternatives are just quite arbitrary and the human development index, for example, has some really unpleasant implications about how you value life in different countries, just because of the way it meshes together incomes and life expectancy. And then the other issue I have about some of the happiness advocates is that they're kind old fashioned utilitarian. It's doing it top down to people. We will do happiness to you. There's that flavor about it that I just, as a [Inaudible:00:27:05], I don't particularly like.
Ben Yeoh (27:10): Great. Yeah, that's food for thought. Yeah, I think that's right. So I studied some neuroscience and experiments in psychology, and there was always this more suspicion about if you couldn't tie it into a kind of testable model or a theory about what was coming about, it's all fine to have your empirical data and something else, but it's so much stronger when it is actually backed in something biological or real world in basis.
Diane Coyle (27:38): Well, we might get there, but I think it's not there yet. There's a lot of strong policy claims being made.
Ben Yeoh (27:44): So circling back to Jason Furman we've had at the start. So you've been interested in competition policy and part of the review and I guess one strand of thinking is that we have some of these mega corporations or particularly technology corporations and they're stifling competition much harder to these tech startups and things like that and therefore that's bad for consumers. And then I guess they argue that they don't have as much, I guess, what is it vertical sort of competition so these startups can't happen in a sort of horizontal place, and yes, they might buy them up, but they're still appearing and going and aren't we giving so much value to consumers by providing our products and some of these for free or for what the things like that. And I think the review tended to sort of say, no, actually there probably is an issue with sort of competition and fluidity and dynamism and that would actually be better for the economy and consumers. Have I kind of read that right from your point of view, kind of now a couple of years down the line, post pandemic where a lot of companies kind of have been very helpful, but it has been quite concentrated as well? Has that changed your view?
Diane Coyle (29:05): These are clearly services that people really value. I started a piece of work with co-author David Nguyen looking at what people say they would need to be paid to give up different free services. We included parks, but we will set it to online shopping, search, Facebook [ ] and we managed to run it in February 2020, May 2020 and February, 2021. So the timing was very lucky and people state high median values for a lot of these services, particularly search and personal email, they stand out compared to all the others but parks as well. And they changed in the ways that you'd expect with a lockdown. So online shopping became much more valued by particularly older groups of people. So, they are highly valued and as a policymaker, you should interfere with that cautiously. So I'm not a fan of the idea that you break up these companies, because a lot of the value that they deliver to people is that they have the network effects and they link up all kinds of different things. But the issue is can people with better technologies get into the market in the way Google took over from Yahoo or Facebook took over from My Space. And I still think, no, they can't now. So personally, I think data access is one of the barriers to competition and finding some way to make the services more interoperable seems quite important. If you think about it, we can all text each other, use SMS and mobile calls because the barriers were not engineered in and they have been engineered in social media, for instance.
So thinking about that and thinking about rights of data access seems important to me, but also scrutinizing mergers much more and thinking about the whole raft of things; kills zone acquisitions, the things that might make startups hesitate to go into a certain area if they think Amazon is going to get into it ahead of them and all of those things need looking at. So all the competition authorities, EU, US, China also, and the UK are looking at ways to tackle this and I don't see it as a settled view about the right thing to do. So, things will get tried and we'll see how it goes. I don't know what the chances of success are. Do I think Google will not be a big and powerful company in 10 years time? I suspect it will be.
Ben Yeoh (31:46): Maybe touching on thoughts on inequality maybe just through the lens of share of capital, labor and potentially pay. I know there's been commentary and you made some comments as well that senior management pay at a lot of companies has really escalated, particularly when you look at it as multiples of average worker pay. On the other hand, you also see this across all sectors of children's book authors at the very top also making more money sports people, footballers. So it seems to be a cross sector wide phenomenon. And I'm actually often asked to think about sort of these pegs, we have these concepts of fairness as well. On the other hand, some of these companies are now just sort of an astonishing number of a trillion dollars of market cap, and they would claim if you're increasing that 10%, you're making a hundred billion dollars of value. So to get 1% of that value might seem reasonable, even though it might not seem that reasonable to a worker. So I was wondering what you're thinking about inequality and what me might want to do about that and whether, I guess this is a side effect of that capitalistic incentive route and is there other ways of sort of modifying that, which doesn't destroy the incentive system as well, or do you think it needs a more thorough examination overall?
Diane Coyle (33:15): I think it's become socially toxic that there are people who do earn so much money and I'm very skeptical that an individual makes so much difference to corporate outcomes that they deserve 1% of the gain and there's been an upward ratchet. And in my consultancy days when I tried helping companies write their annual reports, you would see the remuneration committee say, well, we want to attract the best people so we'll pay in the top quartile of our peer group. And then the next year, everybody does the same thing and the next year everybody does the same thing and so it just doesn't reflect. So it's supposed to be about incentives, but it's not really, it's just about the structure of the way that they fit the incentives and the other pernicious effect of it all is that stock options plans give companies an incentive to buy back and that means they're not investing in better products and new activities, but all in all, I think the system really is problematic. As you say in your question, the superstar phenomenon pushes the other way and it's a genuine phenomenon. The way I think about it is there's a Milton Friedman essay from the 60s where he talks about why inequality is perfectly acceptable and he goes through all of these thought experiments. So somebody who spends a long time training, do they not deserve higher pay? Well, most people say yes, of course they do. Somebody's got a particular natural talent, they're brilliant actors. Do you resent them becoming a movie star even if the economics of technology of movies mean that they're getting so much more money than Betty Davis used to back in the day? And people don't really mind that. And you get through this list and it's all very reasonable and then at the end, he says, but if it becomes so unequal that it's socially divisive then you tear up all of those things and you fix it.
So I think if Milton Friedman said inequality can become too divisive, then we should probably take that seriously and there are people who lead lives that are so totally separate. They've got no idea how the rest of the community, how their fellow citizens are living. I think it's really unhealthy and many rich people seem to think that they don't owe society. Why should they pay their taxes? So they've become a kind of group part and it seems to me really unhealthy. What would you think?
Ben Yeoh (35:58): Well the counter arguments or some of the counter arguments, I guess, are that-- Okay, I'll say one thing that it seems to be when you ask people, people mind less about entrepreneurs than they do about corporate managers, although even there is a thing. So we mind less about the Richard Bransons and the Jeff Bezos of the world because like you pointed out, like a sports person, they kind of did it all themselves as opposed to someone who's come up, not the founder or put their own life in risk capital, but came up as a manager. So there's a kind of interesting question about does society view those people differently. CEOs and very market-based people would also sometimes argue that, oh, we are worth more than 1% because when we leave, we see our stock price goes down 5%. That would be one argument and then the argument people make with the stock buyback is that actually you're meant to do stock buybacks and dividends after you've done all of your productive investment in long-term R&D and things like that. There's obviously counter arguments about maybe there was not long-term or short term enough, but at least that's the argument there. I think, to the points that you alluded to, because the problems are across so many sectors and also non sort of corporate as well as corporate maybe I think you alluded to we simply kind of need higher taxes that people actually pay and actually there is an increasing amount of people, I think even in senior managers to do on a lot who would be prepared to do that. And interestingly, circling back to something that Jason Furman said recently.
He was saying that higher taxes is one of those areas where he doesn't think it'll particularly help growth or productivity or anything, but the fairness aspect was the fact that it should be, he thinks broadly neutral to where he's seeing growth and productivity would be a positive and that would allude to your point that you were making via Friedman that that sense of fairness means you don't get those divisions because the systematic second or the point around-- aside from the people and the structure, which again, that's what you allude to is the social contract or the social capital. And there are signs trust has gone down, maybe social capital is eroded and to the extent that this sense of fairness is eroding that then on a systems level a little bit like a lot of these things we're talking about sustainable and climate, on the systems level that can be and continues to be actually quite troubling and maybe destructive. And so you do have to lean against that, even though you can look at the individual case and that seems fair, but I don't know whether you can just do it through the corporate arm when you have the issue across non-corporate and you see it within inequality. So actually maybe we should just do these higher taxes and then we actually know from my reading of it, again, I'm not actually a trained economist, I do this from a [investing] lens, but things like investing in education, investing in our children, investing in our natural capital, all of those are kind of win-wins on a long-term basis that get really high returns, whether they're social returns or financial returns.
So it seems as capital allocation, it's not that we lack good ideas for where we could put that tax money, we have them. So that would seem to me to make sense, but the actual pressure on individual company votes, which is the lens that we see it, is currently quite fraught because of that. And therefore, I do think this is something where the system, and by that it will probably have to be government needs to notch it a little bit harder than just trying to let the-- Well, no markets are completely free, right? There's social contracts and regulations. It is not something that this form of market can actually solve by itself.
Diane Coyle (39:52): Yeah, I agree and I suppose if that doesn't happen and you're pessimistic, we're in the world of [Thomas Piketty{?} ] or [Walter Schiedel] where the thing that does bring about a reversal and an equalization is some kind of catastrophe, more of [a disaster of some kind] and if we want to avoid that, maybe we should try doing something else.
Ben Yeoh (40:13): Yeah, exactly. Fall of the Roman empire (ref: to Scheidel book and cf. Four Horseman]and all of that. Maybe, just touching on a couple of other of your experiences, I'm kind of thinking boards and maybe BBC and also investor Chronicle. I was thinking about your work on the BBC at that very high level. Maybe you can give us a glimpse into what boards actually do and the kind of challenges they have managing big complex organizations where you have some see-through, but you obviously won't have everything. I mean, the BBC seems really interesting to me, public good. When I have a glimpse on social media, it seems to be attacked from both the right and the left. It seems to me that maybe they're doing a kind of balancing job because they can attack from both sides and you've got the strategic board, which has got a lot of different challenges to handle. Can you give a glimpse of what that is actually like and how hard it is?
Diane Coyle (41:13): I can try, it's a big question. I think the BBC is a really important institution in the UK for social and cultural and educational reasons, the public service broadcasting that it does, but also as an industrial policy and I think this is underappreciated. It's got a great engineering department. It started out as a deliberate industrial policy to make sure this country had a foothold in the emerging radio industry and it has through investing in R&D, through training a lot of people who work in the industry and laterally through providing a market for all kinds of broadcast content, but also bringing new music to the audience and commissioning classical music. So we're one of the few net exporters of music in the world and I think that industrial policy that nobody talks about through the BBC is part of that. Having said that I found being on the BBC trust the predecessor to the current board and dealing with the management just unbelievably frustrating and I think it's for all the reasons that you're hinting at about non-executive roles and it's partly an information problem because you can set up all kinds of processes and board packs to try and make sure you know what's going on. You're never going to know what's going on in the same way that the executives are and that's an inherent challenge to which you can only make sure that you talk to lots of other people outside as well. Part of the process for me was a kind of formal approval process that involved working with Ofcom and talking to industry stakeholders.
So I heard all the complaints that they always made about BBC being too dominant in the market and the Ofcom perspective, which is very different. But that's one of the challenges. The other though it just goes back to the previous bit of our conversation is that these are really clever, really highly paid confident executives and we were part time [Inaudible:00:43:23] public sector much, much, much less well paid non-executives. I think my pay for it was something like 20, 30000 pounds a year. I can't quite remember, but that ballpark order of magnitude difference. So that correlation is quite challenging as well and you've got a confident board who've got something that they want to do and they're going to advocate for it and they're going to present the information to you in a particular way. You've really got to have a lot of courage to say no, so you can ask questions, but stopping something happening is really difficult. I think our big success was having huge fights with the BBC management about their executive pay. And it's a difficult thing because they are in a very competitive market where people are really highly paid, so they can't cut it too far, but they were overpaying themselves. It was an attitude with the political climate. We had a standup rouse, but we won that one. And I think that was one of the merits of that governance system, which was much criticized, it was kind of [Inaudible:00:44:38] and in the end they got scrapped and replaced to the unitary board. I doubt they have stand up fights between their non-execs and their executives and I doubt Ofcom gets into that kind of detail. So I don't think that could happen again.
Ben Yeoh (44:54): That's fascinating. So the first part was probably one of the best articulations of a defense of the BBC that I've heard. I think it's very interesting that I don't hear that many people defend the BBC as articulately as that and plus you can see it [in iplayer] and all of these other things and from my work in theater world, I know people going to BBC learn a lot of skills and then move into private sector or film or wherever and much, much more valuable from it. In that sense, they are definitely providing training and R&D. But to your point, there are these and I think BBC kind of epitomizes it in a sort of public way, but this problem with non-execs and boards and compensation and all of that-- It did bring to mind that there is a comparison actually within Sweden where you have Swedish domestic, more local CEOs or senior management. Their pay is decided at a lower level by their boards and sometimes it's more boards as well. But where you have Swedish companies, in fact, generally applies Nordics, which are much more global in nature. So they make the claim that we could go to an American company and do this job and get paid 10 times more. They have much more trouble, but where you feel like either because it's purpose driven or because no, we're only selling something relatively more domestic, they actually have less of this issue and then some of it is cultural. They're much more prepared to say, okay, well, if this is the medium worker, I will cut myself at X because I don't really need another 10 million Swedish krona on that. Great. Well, I thought we'd do a small section of overrated, underrated, and then finish with maybe a couple of pieces of advice if that's good for you. So you can pass, you can say things are correctly rated or not. But overrated or underrated then UBI universal basic income.
Diane Coyle (46:53): Overrated. Seems to me it's a neoliberal answer to a neoliberal problem. The problem is people are being employed on precarious contracts, low wages, minimum wage is not enforced, all of that stuff. Pay them properly, make labor market regulation work. But you can't buy a good school with your individual basic income. You can't buy a bus service that will get you into work. So I'm not a strong advocate of universal basic infrastructure, give people good schools, good hospitals, and good transport.
Ben Yeoh (47:28): So do you find it strange that so many people who I think would consider themselves progressive or therefore left leaning or maybe even anti market do something, which I think it's-- I don't know if it's Peter Thiels' actual idea, but he's definitely a proponent of that quite libertarian Silicon valley bent on UBI.
Diane Coyle (47:48): I find it absolutely incomprehensible, I must say. Yeah. You know why it's so popular?
Ben Yeoh (47:57): I think so there is the libertarian bent in Silicon valley. Actually in the US, this is my own personal pet theory, as they see something akin in the way that their disability benefits work. So their disability benefits are almost like very low substandard, higher barrier UBI cause if you can claim them, you often never go off them. So there's a certain way of doing that and I feel that through that lens, they felt well, this is a way that the welfare could work. Plus they have this culture of this sort of the individual, you give something and you can make it go for you and therefore they've come to that and also because Silicon valley that kind of Californian thinking is this sort of little bubble in itself. I don't know if you've been to San Francisco recently, but you could see these pictures. You've got some of the richest people in the world and they walk past a sort of homeless and homeless drugs and housing and all of that infrastructure problems. So there's a particular-- and we all suffer it in our hometown, so I know. I live in London and I will walk past similar, I am sure. But as an outsider, you can see even in a degree and I think that is something which does discolor our thinking.
Diane Coyle (49:21): If it demands to make the benefits system work better and be simpler, then it's hard to argue with it but you know, that's not really universal basic income.
Ben Yeoh (49:31): No, I agree. But I think that's where their thinking is. That's my pet theory on it. Anyway, it's probably much more complex than that. So maybe moving one step on UBI this policy idea of a job guarantee.
Diane Coyle (49:48): Underrated because there are lots of things that need doing in public service and if you're paying people unemployment benefits, then the marginal return on paying them a little bit more to do a job. It seems like a no-brainer to me.
Ben Yeoh (50:05): Yeah. And there's a lot of, in my view, what we would call it soft skills to actually turning up and being at work, which is very valuable to future employers and it's also very valuable to yourself, actually, both mental resilience and these other soft skills that you need to sort of go, oh, I have to turn up on time and do whatever this is. Maybe it's planting new flowers in our community gardens. So something where you have the incremental, although I do think a kind of upskilling general idea program might work similarly, but I guess they're cousin ideas. Okay. Overrated, underrated the idea of running the economy hot, which is topical at the moment.
Diane Coyle (50:51): I'm not sure I really know what people mean when they say that or how they would--
Ben Yeoh (0:56): I guess they're meaning, particularly in the US it's this fiscal stimulus where you might be giving people fiscal money, as well as monetary stimulus by these lower interest rates so that you are trying to maximize where you are with employment and everything else and maybe even cause inflation or these nominal inflation in order to kickstart or continue growth. I think that's kind of the cluster of ideas, but like you say, people say slightly different things about it.
Diane Coyle (51:28): Yeah. Well, I'm not a macro person. I find it a little bit mysterious sometimes, but to know that you're running the economy hot, you would have to know what the speed limit or what its capacity is and I don't think that's known, and I don't think it's a fixed number. It depends on all kinds of things, including what demand is.
Ben Yeoh (51:50): Sure. Okay. Industrial policy or a government actually having an industrial policy might be it, but industrial policy overrated or underrated?
Diane Coyle (52:01): Well, underrated. Since Thatcher and Reagan, we have dismissed the idea of industrial policy. It gets called picking winners and people stop thinking about it but there are all kinds of what we call in a jargon horizontal policies, including competition policy, including skills and apprenticeships, infrastructure, investment that can be industrial policy. The key is you've got a government that thinks strategically about where they want the economy to go, what the economy's strengths are and where those strengths are and we don't have that. We have a [UK] government that thinks about the next tweet, if we're lucky.
Ben Yeoh (52:40): Yes. Arrow's impossibility theorem?
Diane Coyle (52:48): Underrated or overrated, underrated, I think. But I don't think people think about it very clearly. And so, you obviously know that it says you have these few kinds of vanilla assumptions about people's choices, and it turns out that mathematically that says that you can't aggregate for society across all the individual choices. And a lot of economists go, that's really smart and clever, what a fantastic theory. Okay, let's now ignore it and let's decide that we can calculate the improvement in social welfare that will come about for policy A, B and C. And so I think that means that it's underrated because they don't think about the implications which for me are more about what some would call the restricted domain, what's the scope in which you are thinking about whether a policy is an improvement or not, and who is that affecting? And so it goes back to what we were talking about earlier, Ben, about it's so hard to have one number that tells you what the answer is and I think Arrow's impossibility theorem is in effect saying there's not just one number.
Ben Yeoh (54:07): And that would hint to, I guess, some of the themes we talked about thinking about things in a more pluralist way, and also thinking about these interdisciplinary things, because one number, whether that's happiness or GDP is not going to give it to you. And therefore trying to maximize that one number is certainly not going to give it to you. And the last one on this is the New Zealand prime minister Jacinda.
Diane Coyle (54:35): She's probably accurately rated, don't you think?
Ben Yeoh (54:38): Well, I think she might still be underrated. I think she's slightly underrated in her own country and I wonder whether she will be-- So strong female leader with a lot of interesting ideas and why I might think she's still underrated is because she's pushed through this idea of what do they call it, the New Zealand living budget and therefore to me, one of the first sort of substantial-- Okay, it's a smaller economy and it's got its own special quirks, but it's one of the first attempts to put in some of the capitals we talked about, calling them capitals or whatever, natural capital or health, social, and other things in a way of forming policy, but by putting it kind of for treasury to think about, or whoever's in charge of that part because of what we've talked about is I don't know whether treasury has been thinking about this enough because of everything that we said, because of their training and because of where their data comes and therefore if they can, or she can prove that something about that is going to increase the welfare of her people that will end up being a pretty, I think, significant jump in thinking about how governments can think. And therefore I go underrated. I'd be interested in what you think about the New Zealand living budget and that whole area.
Diane Coyle (56:03): I think it's a really analytically rigorous good framework and to be quite interesting to see how it develops over time and also whether, if any, political implications it has. But I was going to ask you, if you think as a small country, a scale thing here in that it's easier to take these approaches in smaller places, like Scotland and Wales or some English local authorities, Iceland? They are all quite small and I just wonder if there's something about the kind of cohesion you can get in a smaller place that makes it more feasible to try these kinds of policies?
Ben Yeoh (56:42): I think so as you could probably even add, [ ] Taiwan, South Korea, Singapore but to me it riffs on something to do with that trust and social contract where if that remains strong, I think you can do it potentially in some larger countries. Obviously Scandinavia is a little bit larger, but I mean, if we think about the UK, I wonder whether if we're prepared to do things by less central planning, so devolve a little bit more localism and that localism-- I mean, they're still quite big areas, big economies, but they might be more New Zealand style and you have that to be able to set that. I kind of think at least in theory that they could therefore work. So I guess that is a little bit more federal now and maybe there's a little bit more like Switzerland. I mean, maybe that's going to be really hard in places like India, Indonesia, China, Russia, US, but I kind of feel like the UK, which sits slightly in between that, has a chance of enacting some of those things. And it still, to me, I know we talk about a more polarized society in all of this, but I still feel I've traveled around the country and even into Wales and Scotland quite a lot over the last 10 or 20 years. There are still things about Britishness that bind us together. Our love of the NHS, the underdog sort of quirkiness, other aspects of British culture, which although were quite hard to sort of define, I think people do put their finger on it.
So to me that means there's enough social trust and cohesion even whether you want to be multicultural or not, which is foundational to let some of this happen. But perhaps we need to push forward a little bit more in terms of innovation. Well, I guess it's innovation within the government, right? And that's what New Zealand have done and I guess the problem is that some of it won't work out. By its nature some of it will have to fail and if you can fail and then pivot, that will be good. But at the moment, we're stuck in this thing where we dare not try anything new and therefore in this kind of slow and steady-- Well, I guess if you look at it, some of these metrics, GDP or HDI [Human Development Index] , the UK has got this slow and steady decline, although from a very high base. So I kind of would like to remain cautiously optimistic with some of those inklings coming through. So maybe with a final couple of questions. So, maybe because he's on the record on some of this we can say coming back to Jason Furman again, he suggested a few things which he feels can help growth, productivity and inequality. So there's kind of a win-win things. And I was wondering what you would have thought about them. So he names, I think education and investing in children. He would also name enabling work which I think solutions to getting people in the workplace, but particularly females, minorities and that more competition and more fluidity or dynamism. So people moving cities, I guess that's a particular US thing but see there's some in the UK. Would you disagree with any of those points and would you add anything into your own policy recipe?
Diane Coyle (1:00:06): I think I might disagree with getting people to move around more. I think people just quite like to stay where they are and although we've had that sort of pattern of mobility that you leave your small town and you go to university in a city and then you go and work in London, that one kind of mobility. Most people want to stay where they are. So we've got to make things work for where they are and that's why I think geographic policies are really important. So that's the one thing I might disagree with and even the US is not that mobile anymore. Are there other win-wins? I mean, I think there's a lot of investments that would be win-win. So I think that you could call it investing in natural capital, but reducing air pollution and the health benefits of that. So all of that stuff, that's definitely a win-win and particularly the kinds of green technologies where government coordination can de-risk markets and make them grow faster than they otherwise would and therefore that stimulates the private investment and that's all good dynamic win-wins as well. So I think there are plenty of them, they just need doing..
Ben Yeoh (1:01:19): And then, he's got a smaller category of what you call “win neutral” or “win, tiny bit lose” but you're losing so much tiny that the win makes more up for that. And he puts higher taxes and minimum wage in that bucket. Although I guess they have enacted at least one of those. Would you agree with those and would you add anything else in that bucket? I guess this is the kind of fairer society we're looking at, some of the extra capital things more.
Diane Coyle (1:01:53): Minimum wage, I don't think you can say in generic terms it's going to either have positive or negative effects. It depends on the context of the labor market in which it's being applied and there is obviously a level of minimum wage that will reduce employment. But equally there are increases in the minimum wage that will increase demand and through the multiplier effects have positive outcomes. US minimum wage got to be so low that they're in that territory I think, going to $15 minimum wages seems to be wholly beneficial once you abstract from the effects of the pandemic on employment levels. So I don't think I agree with that. I've forgotten the other one already. I'm sorry.
Ben Yeoh (1:02:38): It was higher taxes.
Diane Coyle (1:02:40): Higher taxes, so they're efficiency costs of increasing taxes but that says you design a tax system as well as you can and there are going to be trade offs and you're going to have some inefficiencies and that's just too bad. If you want to have any public goods, you're going to have taxes and given that, I think in general, private and public sector in the UK in particular have under-invested for a long time, then we're going to have to raise taxes
Ben Yeoh (1:03:11): And on the natural capital, whether that's biodiversity or sustainability, what do you think should be highest on the policy agenda?
Diane Coyle (1:03:22): Well, COP26 and some global action finding a way through the politics of that. It's obviously really important and then actually paying more attention to biodiversity questions and that cluster of issues about land use, zoonotic diseases, soil quality, agricultural productivity, all of those but for understandable reasons have been kind of second order to climate change but actually we need to think about those as well.
Ben Yeoh (1:03:52): Sure. A lot of it seems to me that actually economists or economic thinking does have some of the answers, but the sort of what we would call it, the political economy or the political leadership is not really following any of that and therefore there's this growing gap. So it kind of almost seems to me that some of this is now a political economy question, or maybe it always has been obviously that it's intersectional.
Diane Coyle (1:04:16): I think it always has been but the politicians were, I suppose, more like economists previously in that they thought they were right answers to problems. But as an economic analyst you're saying we've got this great policy, if only the politicians would implement it, then your policy is not a great policy. You've got to incorporate that.
Ben Yeoh (1:04:40): Yeah and I think this is the point and we lead it to that. This is why I think I see the climate assembly and that kind of work is very important because you have to bring your people along with you. There's a lot of things which only exist because humans caused them to exist in their mind, call them into subjective thoughts and if you don't put that into your calculus, you don't have a policy because that is only a kind of idea.
Diane Coyle (1:05:06): That's right. And we have a lot of language for it; multiple equilibrium focal points in games, narrative, economics. We've got the tools to think about that but it somehow doesn't get translated into what should this government do in this place at this time.
Ben Yeoh (1:05:22): Right. And so final two questions. One is what does a productive day or week look like for you with the work that you do? And the second question is, do you have any advice for maybe say young people thinking about being an economist or particularly if you're not from a kind of middle-class background who would think of being economist as potentially the job to do, what would might spark in a young people's mind about why this would be a great thing to do, or your observations about the career that you've had?
Diane Coyle (1:06:03): Oh, well, a productive day I try to make them all productive I suppose. It's very busy and I've just in the past, a few months really for the first time in my career, apart from a six month period as acting chair at the BBC trust, have somebody to look after my diary for me and that's made me so much more productive. So that's been fantastic, but it's always a mix and some of the most productive moments are walking to work or walking in the Botanic garden or walking the dog and the thoughts are jostling around in your head and something falls into place. So that's good and every day needs some of that, just not thinking or doing anything in particular, but letting the thoughts run around in your head. That's productive day. Economics is a great subject, it's intellectually powerful, it's interesting. You don't have to be an economist to study economics and enjoy it and get a lot out of it. The downside is that lots of places still teach economics in a mathematical way that's too mathematical. I think the math is important, the empirics is important, but they overdo it and that's the downside.
But I think my advice would be if you're interested in big challenges, how to make society fairer, how to make sure that there are enough jobs, how to bring about climate sustainability, then it's one of the most powerful disciplines that you can study to think about those kinds of questions. And although economists have a bad reputation for being selfish or all about the money, actually, most economists are really highly motivated by what can we do to make things better and that's the driving force in lots of what we do. I've done pretty much everything you can do as an economist. I've worked in the private sector. I've worked in the treasury. I've been a journalist. I've been a consultant. I've done public service roles and I've done academic stuff. And so that's the other benefit that you can do all kinds of other things, all kinds of variety of things with this pulpit that you get from studying economics.
Ben Yeoh (1:08:16): Great. So with that final question I'll say thank you very much.
Diane Coyle (1:08:22): It's been really interesting chatting to you. Thank you so much for inviting me on.
Ben Yeoh (1:08:27): Great.
Mark Carney argues that low carbon growth is possible
Mark Carney, Governor Bank Of England, argued that low carbon economic growth is possible. In further testimony he stresses the importance of transition, policy, transparency and risk management while commenting that intangible growth is still important growth.
De-Growth advocates argue decoupling carbon from economic growth is impossible (or extremely hard). Thus degrowth policies may be needed.
(I tend to not be in the de-growth camp, but do think some consumption eg food waste - is wasteful)
The arguments continue to be intense. There is some agreement that brown—>green transition is important regardless of growth stance. Central scenarios point to 3c warming in 2100. Stronger policy + innovation amplified by markets, corporate and consumer behaviour could bring those scenarios down. Complex tipping points, policy failures could swing other way.
Check out my £10K grants programme for people looking to make positive impact.
Quality of Government matters more than size of government for human development, education and life expectancy
“...It’s not the size of the wave but the motion of the ocean…”
Quality of government (QGOV) seems more important than size of government (SGOV) for a variety of domains
QGOV is more important for peace, for human development, for health and for education
This exploratory work extends the work of Ed Dolan (Niskanen Centre) and comes with many caveats due to interactions.
Outliers such as Singapore and Ireland may be worth closer examination for what is working well in smaller governments
QGOV may have increasing importance at higher levels of development
This may provide exploratory evidence that “state capacity” in certain domains eg innovation, health and education - might be important. This adds to the debate on “state capacity libertarianism” and in terms of current UK policy may inform on whether investing in an “ARPA organisation” or other areas of state capacity is a positive return on investment.
Background
Economist Tyler Cowen posited a notion of State Capacity Libertarianism. Cowen subsequently linked to a blog referencing the work of Ed Dolan.
The work (2017) developed two scores - QGOV for quality of government and SGOV for size of government. Dolan analysed two measures of freedom and prosperity the Legatum Prosperity Index and the Cato Human Freedom Index and concluded - with several caveats due to interactions and unknown causality- that QGOV was more important than SGOV. See his work for definitions of SGOV and QGOV.
Idea
I was intrigued if this work extended to other areas that I am interested in both personally and professionally. (I help allocate $13bn in pension fund and other investments in global equities with an interest in healthcare).
I chose to look at:
-Peace
-Human Development
-Life Expectancy (as broad measure for health)
-Education
As measured by other organisations.
Methods
I hand inputted data on:
SGOV, QGOV,
Human Development Index (UN HDI)
Education Index (EDI, as component of HDI)
Life expectancy Index (as component of HDI)
Peace index (as calculated by non-profit Vision of Humanity)
(Sources at end, errors possible)
I ran scatter plots and Pearson correlations. I tagged for World Bank classifications of income, and by geographic region.
Results
QGOV vs Peace
Correlation = (-) 0.71 | R2 = 0.5
Higher quality of government had a 0.7 correlation with the Peace Index (where lower score = more peace)
An interactive version of this data, where you can also view by income level (use drop down box) and geography (click circle legend labels) is below. The trend holds for all levels of income.
SGOV vs Peace
Correlation = 0.32 | R2 = 0.1
Size of government had a weaker 0.3 correlation with the Peace Index (where lower score = more peace)
The overall correlation is weaker and also suggestive that large governments correlate slightly with the peace index.
An interactive version of this data, where you can also view by income level (use drop down box) and geography (click circle legend labels) is below. Different income levels change the trend line, upper middle level countries inverting - suggesting smaller govts here are better for peace but only weakly.
Geography also changes the trend, with Latin America countries suggesting smaller very weakly trending. It’s weak enough maybe to be considered almost no trend though.
My overall takeaway is that the trend is weak vs QGOV but it is intriguing that income levels change the pattern as do geography.
Peace comment
As often there are intersections on what components might go into peace. Experts may disagree as to the validity of this index for peace however the methodology is clear and it has some support.
I find it interesting as it is another lens to judge human “progress” on and therefore what types of government might best foster progress.
QGOV vs HDI, Human Development Index
Correlation = 0.75 | R2 = 0.57
Quality of government has a 0.75 correlation with the Human Develpment Index where larger HDI = more developed.
It looks to me that the slope is stronger in more developed nations. Gently sloping until about 0.75 on HDI, and then steeper.
An interactive version of this data, where you can also view by income level (use drop down box) and geography (click circle legend labels) is below. You can observe this as the slope is stronger for the richer nations (and a measure of GNP is included within the HDI) but it is the same direcction for all incomes, slightly weak for middle.
SGOV and HDI
Correlation = -0.53 | R2 = 0.28
Size of government has a -0.5 correlation with the Human Develpment Index (where larger HDI = more developed) suggesting larger governments are moderately better than small governments with some notable outliers such as Singapore, South Korea and to some extent Ireland, and Switerland.
An interactive version of this data, where you can also view by income level (use drop down box) and geography (click circle legend labels) is below.
The trends are weaker split by income level, with there almost no trend in high income and upper-middle income.
I now present the components for life expectancy and education (that go into the HDI seperately).
QGOV vs EDI
Comments on EDI, Life expectancy; observations and arguments for state capacity.
Given the weighting in the HDI that life expectancy has, it is unsurprising that QGOV also correlates better than SGOV for life expectancy.
While there are social and cultural determinants of health of which government would only be a component, I argue that it is still noteworthy that it is not size but quality of government here that seems to count.
Again given the weighting in the HDI for Education, it is again unsurprising that QGOV correlates better than SGOV.
Of note, Chile and Kazakhstan appear on education and to some extent life expectancy as higher perfomer small government countries to join Singapore and Ireland, Switerland.
I chose to examine education and health because in many countries there is on going debate as to the structure and capacity that governments should play in health and education markets.
This line of argument would suggest where countries do wish their governments to be involved then quality of that government or perhaps “state capacity” could be an important factor.
This is noteworthy in the UK where there is wide support for a National Health service across the political divide and also for state funded education providing the majority of the populations education.
Two other tentative observations. It is worth dwelling on where small governments seem to be doing well. I would note Singapore and South Korea and perhaps to an extent Ireland and Switerland. Those countries would be good examples of small, high quality goverments.
My own theory here is also the importance of social and cultural determinants of health and education.
For instance, it is unknown what the compliance rate for medications are in various countries. A higher drug medication compliance of cost effective genetic medications in Singapore (arguable driven by a social factor of listening to your doctor properly?!) or of the positive/negative health outcomes of effective elderly social care across countries are mostly unknown.
A second observation is the seemingly stronger slope in the high HDI nations. There may be many explanations for this and all the caveats expressed by Dolan also apply but it might be an intriguing provocation that quality of government becomes even more important in extending the progress of already highly developed countries.
Caveat
As Dolan notes there is considerable interation between SGOV and QGOV as larger governments have a tendency to be of better quality, but Dolan runs multiple regressions here:
“…simple correlations like this need to be interpreted with caution, as there are complex intercorrelations among multiple variables. In this case, we have a correlation of -0.42 between SGOV and QGov, that is, a tendency for larger governments to have a higher index of quality. We also have a correlation of 0.74 between QGOV and the log of GDP per capita (richer countries have higher-quality governments) and -0.48 between SGOV and the log of GDP per capita (richer countries have relatively larger governments).
Dolan can run multiple regressions which I do not have the capcity for, but Dolan concludes:
We can use multiple regression to untangle these interactions, using HFI* as the independent variable and using QGOV, SGOV, and the log of GDP per capita as the dependent variables. When we do so, we get a strongly statistically significant positive coefficient on QGOV and no statistically significant relationship at the 0.01 confidence level for the other two variables. The overall correlation is 0.79, essentially the same as for the two-variable relationship shown in the left-hand scatter plot above…”
I suspect multiple regressions would confirm similar and hope a profesional academic might look into this
Conclusion
I tentatively extend the work of Dolan on the size of government and quality of government to look at four further broad indices of 1) peace, 2) human development, 3) education and 4) life expectancy.
In all four cases, quality of government seems to be a more important factor than the size of government. This would be tentative evidence for theories that emphasise the importance of quality - perhaps state capacity - over the size of the state, where societies favour a state role in any given area.
Notes and Caveats
Data sheet link available on request. It’s not very tidy but all in good faith. Image below. I may have made errors in the data, as it’s my late night pet -project.
Do read the Ed Dolan Caveats in his blog but repeated here.
“...As in any statistical study, we should be cautious about drawing conclusions about causation. There is nothing in these results to suggest that making a country’s government bigger will automatically make it better. At the same time, it is hard to deny that there is a strong tendency in the cross-country data for larger governments to be better governments, when by “better,” we mean better able to protect property rights, better able to offer impartial civil and criminal justice, and less open to corrupt influences.
Readers are also encouraged to think about the country-by-country data reported in the chart and table above. There is a lot of variety in the world. Too strong a focus either on statistical regularities or on selected outliers can draw us too strongly toward conclusions that, in reality, admit of many exceptions.
For example, the small-government city states of Singapore [is] rightly admired for [its] prosperity and economic freedoms. However, it gives one pause to note how many small-government countries enjoy neither. Chad, Bangladesh, and the Democratic Republic of Congo are just the outliers among a whole cluster of countries in that category.
Similarly, a look at individual countries shows that our statistical indicators of “big” and “small,” or of “good” and “bad,” do not always line up with what we mean by these terms in other contexts. For example, many people in the West would readily name Russia and China as countries with governments that are conspicuously both big and bad. Yet, although Russia and China do fall into the southwest quadrant of our chart, they do so only barely. Statistically speaking, neither country is an outlier on either variable…]
Ed Dolan’s two part blog on SGOV and QGOV.
Peace Index can be found here: http://visionofhumanity.org/indexes/global-peace-index/
Human Development Index and components (both the education and life expectancy - I use 2018 data - ) can be seen here: http://hdr.undp.org/en/data
World Bank Classificatinos are from 2016 (as the 2018 xls wasnt’ working when I compiled the data). The Visuals are H/T Flourish Studios and Google Sheets.
Tyler Cowen on State Capacity Libertarianism
The Table of data I used is below.