Friday, January 29, 2010

VC and employment

New research from Dr Horst Feldmann at the University of Bath on relations between the availability of venture capital in various industrial countries, and employment statistics:
The study estimates that if venture capital availability in Italy, where it was most difficult to obtain during the sample period, had matched the United States, where it was in best supply, Italy’s unemployment rate might have been 1.8 percentage points lower; its long-term unemployment share 9.0 percentage points lower; and its employment rate 2.7 percentage points higher.
On average over the sample period, venture capital availability was rated 3.1 in Italy and 5.8 in the United States on a scale of 1 to 7. The United Kingdom was rated at 5.3.

The exact methodology may be questionable - data on the availability of VC is taken from surveys of business executives (the World Economic Forum’s annual ExecutiveOpinion Surveys), so seems likely to have some subjective element. Feldmann does say, in the full paper (published in Kyklos) that the survey data can 'permit better coverage of the various facets of venture capital financing than hard data'. But, when tested against data on 'venture capital investment as per mil of average GDP', the correlation coefficient is just 0.29.

That aside, it's an interesting paper that will doubtless be welcomed by BVCA, EVCA, et al, as they argue against extra regulation.

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Wednesday, January 06, 2010

Prosperity without growth

In this iciest of new years, you might as well curl up with a good book and hope for sunnier times. A good candidate, if you're at all interested in some of the economics ideas occasionally aired here, would be Tim Jackson's Prosperity without Growth: Economics for a Finite Planet (thanks to publishers Earthscan for the review copy).
Based closely on Jackson's report for the Sustainable Development Commission (published in March last year, and freely available from the SDC site), the book is a painless introduction to the case against that impossible totem of conventional theory, endless economic growth.
Jackson begins with a sketch of ecological limits - it is a small world, after all - and overview of the most unsustainable aspects of our current global economy, addressing the usual objections about the necessity of eternally growing GDPs. Bracingly, Jackson debunks the familiar calls for a 'decoupling' of economic growth and ecological cost - the basic numbers just can't add up.
A broader reconsideration of some of the fundamentals of society is needed, Jackson reckons, particularly what he calls, pace Weber, 'the iron cage of consumerism'. The book argues the case for the now-familiar if ever elusive Keynesian 'green new deal', as well as a new form of ecological macro-economics which relaxes that old presumption of perpetual consumption growth as a prerequisite for stability.
It's all presented as plainly as is possible for such an inevitably complex topic - a little handwavey at times, but there's abundant references for anyone who wants to dig deeper. The arguments are sound but, in the depths of this post-Copenhagen winter, it's too easy to doubt whether they'll ever be usefully heard.

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Thursday, October 29, 2009

No nonsense?

I recently read The No-Nonsense Guide to Global Finance, courtesy of the publishers at New Internationalist. As you'd expect from the title, it's a very digestible overview of the international finance system, starting from what 'money' actually is, through the increasingly weird and wonderful activities of banks, to the root causes and effects of the recent mess. As such, it's a great introduction, very clearly written, and spiced with some fascinating historical nuggets - it's a rare treat to have such lucid accounts of both the origins of money itself, and the origins of the credit crunch.

And as you'd expect from the publishers of New Internationalist (a venerable magazine on international development issues, originally sponsored by Oxfam and Christian Aid), it takes a deeply sceptical line on the pre-crash orthodoxy. Simultaneously explaining and critiquing something as complex as the global financial system is a tricky task, but author Peter Stalker generally pulls it off.

Some parts do grate a little - the chapter on the role of the World Bank and IMF is titled 'The ugly sisters', a judgmental epithet that does rather beg the question -and there is a vague sense of preaching to the converted. Anyone committed to the old economic models will find some of the conclusions easy to dismiss - but then, anyone still wedded to the old certainties has enough problems of their own.

It's certainly not an entirely objective book, but so ingrained are the ideologies in global finance, and so emotive the effects, that it's questionable whether objectivity would be possible or desirable. It is a lucid and engaging book, and there's few readers - especially among its target audience - who won't come away with something new.

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Thursday, August 27, 2009

Tobin redux, and what the L?

Interesting to see Adair Turner apparently considering a Tobin tax to curb destablising speculative currency trades, in an interview with Prospect Magazine. As reported in the Guardian:
He told Prospect: "If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit. Higher capital requirements against trading activities will be our most powerful tool to eliminate excessive activity and profits.
"And if increased capital requirements are insufficient I am happy to consider taxes on financial transactions – Tobin taxes."

The paper's Larry Elliot embraces the comment:
Lord Turner's championing today of a levy on financial dealings to curb the power of the City marks a breakthrough in the long struggle to have the neglected brainchild of American economist James Tobin become a practical policy proposition.

But it does seem like fairly weak support, really. It's not a great advance on his views in his Just Capital (Macmillan 2001), in which he notes that there are 'at least theoretical attractions' in the tax - 'The key arguments against it are therefore not theoretical but simply the impracticality of enforcing it and deciding on division of revenues in a world of multiple nations and government.'
Those arguments remain.

And here's a puzzling little recession-related thing. The Guardian again relays the wise words of an advertising chap on the likely shape of recovery:
Martin Sorrell, WPP chief executive, gave the City little to cheer about as he used his trademark skill with metaphors to suggest the recession would be "L-shaped" – an italic capital L, to be exact. He said that while chief executives and marketing managers may have recently begun to feel slightly more positive about the global economy, that was not yet translating into actual spending.
Now, here's an italic capital L:
How the hell does that fit onto a graph of any economic indicator against time?


Wednesday, August 19, 2009

So has Taleb gone nuts?

Last evening, I caught a rather bemused-seeming Nassim Nicholas Taleb appearing at the end of Newsnight, apparently following some kind of meeting with David Cameron. When he could get a few words in between Kirsty Wark and some chap from the Times talking about Cameron's intellectual credentials (such as they are), Taleb was making his usual points about risk in the economy and other areas. Here's something he said:
"We have to be more conservative with some classes of risk, like the climate - we have to be more worried about the climate than people traditionally have."

So it's slightly puzzling to read this morning's papers and see Taleb presented as a climate change denier (see the Scotsman, for instance - although it is strangely satisfying to see even the Sun portraying denialism as the hallmark of a crank).

The implication is that Taleb (and by extension, Cameron, who shared a platform with him at the RSA event) has joined that weird lobby of evidence-denying dishonest do-nothings. From what I've read of his work, that seems rather unlikely.

For example, there's this from an essay on the Edge:
Correspondents keep asking me if the climate worriers are basing their claims on shoddy science and whether, owing to nonlinearities, their forecasts are marred with such a possible error that we should ignore them. Now, even if I agreed that it was shoddy science; even if I agreed with the statement that the climate folks were most probably wrong, I would still opt for the most ecologically conservative stance. Leave Planet Earth the way we found it. Consider the consequences of the very remote possibility that they may be right—or, worse, the even more remote possibility that they may be extremely right.

Here's what he reportedly said at the RSA, as per the London Evening Standard:
"I'm a hyper-conservative ecologically. I don't want to mess with Mother Nature. I don't believe that carbon thing is necessarily anthropogenic"

[EDIT, 20/8: Having now listened to the recording of the meeting, available from the RSA page linked above, it's clear that what Taleb actually says is "Even if I don't believe that carbon thing is necessarily anthropogenic, I just don't want to mess with Mother Nature." Which is obviously quite different. Shame on the Standard.]

It's grossly unfair to paint Taleb as part of the denial lobby, when his message is that even if you don't accept the evidence, we should be doing all we can to reduce greenhouse emissions because the potential cost of not doing so will be devastating. That's a long way from the do-nowt bleating of the fossil fuel industry shills and the genuine fruitloop fringe.

I strongly suspect Labour party briefings are behind this morning's stories. That not only seems deeply unfair on Taleb (but then, if you lie down with dogs, etc), but also rather unnecessary, as you really don't need this kind of spin to suggest that Cameron's a bit of a twat.

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Thursday, July 09, 2009

Rushkoff on economic disconnection

From Reality Sandwich, an entertaining interview with author Douglas Rushkoff about his new book Life Inc, a historical critique/polemic on the developing role of corporations in Western culture, touching on many topics of interest:

An over-arching theme I found in the book is how the common-sense stuff of our reality, the economy and money and shopping and working, is really science fiction; we don't live inside a "natural" economic structure -- we made it up.

It gets very much like Baudrillard in a way. We lived in a real world where we created value, and understood the value that we created as individuals and groups for one another. Then we systematically disconnected from the real world: from ourselves, from one another, and from the value we create, and reconnected to an artificial landscape of derivative value of working for corporations and false gods and all that. It is in some sense Baudrillard's three steps of life in the simulacra.

So by now, as Borges would say, we've mistaken the map for the territory. We've mistaken our jobs for work. We've mistaken our bank accounts for savings. We've mistaken our 401k investments for our future. We've mistaken our property for assets, and our assets for the world. We have these places where we live, then they become property that we own, then they become mortgages that we owe, then they become mortgage-backed loans that our pensions finance, then they become packages of debt, and so on and so on. We've been living in a world where the further up the chain of abstraction you operate, the wealthier you are.

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Friday, June 12, 2009


Here's the most entertaining economics blog I've seen for a while - Ecocomics, applying economic theory to problems raised in superhero comics. How do super-villains pay for their dastardly schemes (all those minions!), what kind of insurance structure could pay for all that downtown devastation, the challenges of establishing an intergalactic union and monetary fund. That kind of thing. The latest entries focus on game theory as applied to super-villain team-ups - amazingly, the Joker isn't always being rational when he collaborates with the other inmates of Arkham Asylum.


Wednesday, May 27, 2009

A cognitive theory of the firm

I've been reading A cognitive theory of the firm: learning, governance and dynamic capabilities by Bart Nooteboom*, professor of innovation policy at Tilburg University (with thanks to publishers Edward Elgar for the review copy)

Nooteboom's core question is: what are the sources of innovation in firms? That's an important issue for a lot of people - managers and entrepreneurs, regulators and policy-makers, as well as economists. To address it, Nooteboom looks to concepts of cognition - a broad category of mental and social processes from rational inference and knowledge, through to value judgments and perception. It's an intriguing subject, though this isn't an easy introduction to it.

The main concepts are taken from social cognitive theory, a model of learning in which individuals learn through interactions with and from observation of others. Nooteboom takes a constructivist 'embodied cognition' view, as in the cognitive work of economist Friedrich Hayek, rather than the computational view currently popular in AI-focused cognitive science.

From the economic perspective, the theory draws on Joseph Schumpeter's proposal that innovation comes from novel combinations of resources. As per Hayek, the elements for these innovative combinations emerge from markets: the firm acting as an entrepreneurial vehicle for turning this innovation into marketable products or services, as per Edith Penrose.

The dilemma for innovative companies is thus between exploration and exploitation - whether to concentrate on developing new innovations, or on selling what you've already got. Exploration must derive from exploitation, Nooteboom argues, and be based on observations of how existing techologies are received by the market.

Nooteboom's key idea, also derived from Schumpeter, is that the firm develops a particular cognitive focus which distinguishes it from other firms or agents, and gives it a particular niche in the market. That can apply to one-man firms, but Nooteboom also considers the role of larger organisations in narrowing the cognitive distance between individual managers and employees (the managerial-speak version of this, I guess, would be 'singing from the same hymnsheet').

That's the nub of the theory, which the book sets out in much more detail. Disappointingly, for me at least, the detail is long on the theory but very short on actual practical applications. Over 100 pages pass before there's even a brief real-world example to illustrate what's being talked about. There's a sprinkling of other illustrative examples in later chapters on relationships between firms (including network and cluster effects), and the evolution of firms and industries, which do help illuminate the often abstract-seeming theory. More would have been very welcome.

The book is very much a resource for theorists working in the same area (and, to be fair, primarily intended as such). Getting the most from it will probably require more rather more specialised background knowledge than I've got - although some of the ideas here might prove valuable resources for further research, I suspect the book won't offer much directly to those people working at the sharp end of innovation.

* - intriguingly, Nooteboom is also working on a philosophical tome Transhumanism: How to affirm life and be a good person without help from God; a reply to Nietzsche.

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Thursday, April 16, 2009

On the futility of carbon trading

The New Scientist has a provocative comment piece on the shortcomings of carbon trading from Andrew Simms of the New Economics Foundation:

Unless the parameters for carbon markets are set tightly in line with what science tells us is necessary to preventing runaway warming, they cannot work. That palpably did not happen with the ETS, which initially issued more permits to pollute than there were emissions and now, in the recession, is trading emissions that don't exist - so-called hot air.
Carbon markets cannot save us unless they operate within a global carbon cap sufficient to prevent a rise of more than 2 °C above pre-industrial temperatures.
Governments are there to compensate for market failure but seem to have a blind spot about carbon markets. They could counteract the impact of low carbon prices by spending on renewable energy as part of their economic stimulus packages, yet they have not done so. The UK, for example, has spent nearly 20 per cent of its GDP to prop up the financial sector, but just 0.0083 per cent in new money on green economic stimulus.
Price mechanisms alone are unable to do the vital job of reducing carbon emissions. They are too vague, imperfect, and frequently socially unjust.

It's more than just a criticism of current trading schemes, it's pretty much a broadside against a large portion of environmental economics. I await the response, not least from these guys.

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Wednesday, April 15, 2009

Without the hot air

Inspired by the glowing review in the Economist, I've just been reading David MacKay's Sustainable Energy - without the hot air (available as a book through the usual sources, or as a free download under a Creative Commons licence). Like the Economist, I'd strongly recommend the book for anyone interested in sustainable energy.

MacKay might seem like an unlikely person to write such a book - a physics professor from Cambridge, he's primarily a specialist in information theory, with a sideline in international development. It's maybe that off-centre viewpoint that allows him to use some simple tools from physics and maths to address the most basic question - can renewable (or, at least, sustainable) sources replace fossil fuels for the UK?

Along the way, he demolishes some of the wilder, waftier claims of industry boosters and environmental campaigners, as well as many of the tedious objections of the climate change deniers and do-nothings.

It's mostly to do with totting up the energy consumption and potential renewable resources for the UK, based on pretty basic material considerations. There's very little about what would usually be considered as the economics of the problem - the marginal costs, externalities, public preferences, game theories, discounted cost-benefit analyses, etc - but the book is, at heart, pure economics: how we can make best use of limited resources to achieve a social goal.

I've written a longer review over at Clean Ventures.

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Tuesday, March 24, 2009

Child psychology

A different take on the roots of the financial crisis from Peter Totterdell, of Sheffield Uni's Institute of Work Psychology, who's profiled in today's Education Guardian:

Look at the causes of the credit crunch and you can see clear evidence of what happens when emotion regulation goes wrong, says Totterdell.
"In the financial sector, you've got a situation where people were on an upward spiral," he says. "They are being successful in their speculations. This fuels them into feeling good. They want to maintain that feeling, so they do more of it. They start to ignore the risks, or package up the risks, or push the risks on to somebody else, and there is nothing to stop them. In fact, they are encouraged to do it by the others around them."
He is struck by the similarities between what has happened recently to the banking system and two areas of the research programme. One is mood disorders, such as bipolar disorder, "when people go on these upward spirals and sometimes they think they're invincible, that nothing they can do is wrong, everyone around them is wrong, and their mood spirals upwards, they start taking much greater risks". The other is children, and the way that when they get overexcited, parents have to step in to calm them down, or remind them that if they persist it will end in tears.

Although he's coming at it from a different angle, it's not far from some areas of behavioural economics.


Wednesday, March 18, 2009

Economics 2.0

I've just been reading (courtesy of a review copy from Palgrave Macmillan) Economics 2.0: what the best minds in economics can teach you about business and life. Written by Norbert Häring and Olaf Storbeck, both economics journalists on the German Handelsblatt newspaper, and elegantly translated by Jutta Scherer, it's a very accessible scamper over some popular areas of economic study - education and employment, stock market success, the roots of the credit crunch, CEO and sports star pay, things like that.

It's undoubtedly part of that post-Freakonomics wave of pop economics books, but it's one of the better ones. It's very clearly written and translated, albeit with the occasional literal. The European origin offers up a few less familiar subjects and perspectives, and the authors also seem refreshingly free of the ideological bent apparent in some such similar books. Indeed, the authors spend the final chapter offering warnings about the effects of political prejudice (and other hazards) among professional economists.

It does take a rather scattergun approach, but the main theme is research which helps close that often overwhelming gap between economic theory and reality. Much of the work is drawn from experimental and behavioural studies, and much of it is very recent though there are some interesting historical cases. References are given after each chapter, though these are not comprehensive - to take a glaring example, Ferguson and Voth's fascinating Betting on Hitler (Quarterly Journal of Economics 2008 - pre-press pdf here) is discussed over several pages in chapter 13, but doesn't appear in the references.

The book gives a very good overview of a lot of interesting work, and should be of interest to economic novices and experts alike. The breadth of the topics means that even the most experienced professionals are likely to find something they didn't know as well as plenty of ammunition for arguments. The less experienced should get a good sense of what economics is really about and why, despite the conspicuous failures of models and ideologies in recent times, the subject is still relevant.

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Wednesday, December 17, 2008

Real-world treats

As ever, there's plenty to chew on in the latest Real-world Economics Review (formerly the Post-Autistic Economics Review). Unsurprisingly, it's a financial crisis special, with three papers each on responding to the crisis itself, and on what it means for the study and teaching of economics. No less inevitably, there's a certain element of 'We told you so...'

The punchiest paper is from JP Bouchaud of Capital Fund Management, who's done some seminal work on the failures of standard market models (eg, "An Introduction to Statistical Finance", Physica A, 313, 1, 238-251). Here, in an expanded version of a short paper first published in Nature in October, Bouchaud outlines the fundamental case for a more scientific approach to financial economics -
Of course, modelling the madness of people is more difficult than the motion of planets, as Newton once said. But the goal here is to describe the behaviour of large populations, for which statistical regularities should emerge, just as the law of ideal gases emerge from the incredibly chaotic motion of individual molecules. To me, the crucial difference between physical sciences and economics or financial mathematics is rather the relative role of concepts, equations and empirical data. Classical economics is built on very strong assumptions that quickly become axioms: the rationality of economic agents, the invisible hand and market efficiency, etc. An economist once told me, to my bewilderment: These concepts are so strong that they supersede any empirical observation. As Robert Nelson argued in his book, Economics as Religion, the marketplace has been deified.
[JP Bouchaud, “Economics needs a scientific revolution”, real-world economics review, issue no. 48, 6 December 2008, pp. 290 - 291,]

Elsewhere, there's an intriguing paper by David George of LaSalle University, in which he studies the changing meaning of the words 'competition', 'monopoly' and their variants from 1900 to date -
Paradoxically enough, the firm that manages to become the only seller (an economist’s “monopolist”) or the firm that manages to be one of just a few sellers (an economist’s “oligopolist”) now qualifies for the title of “very competitive firm” since it’s the only one (or one of a few) that managed to survive the competitive struggle. Amazingly, the firm that is least able to be described as “competitive” by the old definition (a single firm in a sea of many firms) now is most able to be described as “competitive” by the new definition (a “victorious” or “most able” firm). This is a coup d’état writ large.
[David George, “On being ‘competitive’: the evolution of a word, ” real-world economics review, issue no. 48, 6 December 2008, pp. 319-334,]

To download the entire issue (530KB PDF), click here.


Thursday, December 11, 2008

The Road to Huddersfield

Sometimes, a good poke around a secondhand bookshop will turn up something that just leaps off the shelf at you. So it was with 'The Road to Huddersfield: A Journey to Five Continents'. A book commissioned by the World Bank from Guardian journalist James (later Jan) Morris in the early 1960s, with a delightfully Yorkshire-centric title - what's not to like?

Huddersfield here is posited as the exemplar of industrialised society, the epitome of 20th century civilisation, the very birthplace of the modern world, whose 'horny, stocky, taciturn people were the first to live by chemical energies, by steam, cogs, iron and engine grease, and the first in modern times to demonstrate the dynamism of the human condition'. Aye, that's right enough.

The assigned task of the World Bank was then (and, more or less, is now) to help those less advanced nations advance along the titular road to Huddersfield - to fund those infrastructure projects which, according to theory, will speed those economies towards the wealth and freedom from want of industrial society, that very state of Huddersfieldness.

After a visit to the World Bank HQ, under the idiosyncratic rule of Eugene Black, Morris travels through some of the recipients of the Bank's aid - Ethiopia, Siam, southern Italy, Colombia, and the Indian-Pakistani borders - in an elegant and picturesque odyssey. Given that the book was commissioned by the Bank, Morris stays remarkably ambiguous about the effects and efficacy of its work - a lot kinder than many of its latter-day (or even contemporary) critics, but no apologist for its occasional incompetence or amorality.

Some 45 years on, some of the descriptions of the countries visited strike a little odd. 'Nobody is starving' in Ethopia, though that country 'is still a long, long way from Huddersfield'. Further East, 'it is no coincidence that Burma, that gilded stronghold of Buddhism, is perhaps the only country on earth that shows no eagerness at all to take the Huddersfield Road." On the other hand, the chapter detailing political and ethnic tensions in the Indus basin seems ever relevant - though some might see a certain irony as Morris notes of Pakistan, 'never did a country seem to need her Huddersfield more.'

It all makes for an intriguing slice of political and economic history. Although it seems slightly unfair that the book's thin section of photographic plates does not show the titular Yorkshire town, but rather its neighbour Halifax - a view from Beacon Hill of a near-unrecognisable forest of belching chimneys. Were it not for the dark satanic smog, now long gone, you might just see my house from there.

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Friday, November 28, 2008

Flawed analysis

Some new research from Newcastle Business School leads to an obvious objection.

Accountancy reader Richard Slack surveyed mainstream financial analysts, and found that they pay no attention to the social and environmental disclosures in the annual reports of UK banks. This, he says, 'will trigger fears over capital market analysts’ understanding of the broader challenges facing business and their attitudes to issues such as climate change'.

Mr Slack said the study, conducted jointly with Newcastle University, left question marks over analysts’ attitudes to the environmental challenges facing business. “Social and environmental reporting was universally considered irrelevant and incapable of influencing a financial forecast,” he revealed. “There was total dismissal of the importance of environmental issues in taking decisions such as giving loans to potential polluters, for example, and I would suggest that analysts are not taking potential climate change and environmental impact seriously enough.”
Mr Slack continued: “Our findings show that analysts are dismissive of anything other than financial metrics, and they deem large sections of voluntary narrative reporting as useless or worse. Analysts have been shown up to be narrow in their approach, often formulaic and rules-driven, and highly unlikely to be a source of change in respect of social and environmental issues. Their approach should be a major concern to wider market participants given analysts’ crucial role in the information supply chain.”

While, there's little doubt that analysts can be too focused on narrow metrics of questionable relevance to anything resembling real market conditions, it might be unfair to blame them for ignoring environmental and CSR reporting. Repeated studies by academics and pressure groups have shown that such reporting efforts are often meaningless, and little more than greenwash. Obviously there's exceptions to that, but ignoring the stuff that runs closer to self-promotion than to disclosure is hardly damnable behaviour. Still, it's never a bad idea to look beyond the analysts for information...

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Friday, September 19, 2008

Bish bash HBOS

A worrying time for my home town of Halifax, with a significant number of local jobs sure to disappear in the wake of Lloyds' white knight takeover of HBOS. Exact numbers have yet to be announced, but I'd guess at least a thousand in the town - maybe more.

Lloyds has said that preserving jobs in Scotland will be a priority - job losses there were also small when the Halifax acquired the Bank of Scotland back in 2001, with most of the limited cutting then done at lower levels, and Edinburgh also had the honour of hosting the head office at the BoS's historic HQ on the Mound. So saving jobs there seems fair enough - the Guardian reports that the group has 6,459 employees in Edinburgh, a fairly significant chunk of well-paid employment in a city of 450,000.

But what's worrying is that nothing's been said about jobs in the Halifax' eponymous home. HBOS also employs around 6,500 in and around Halifax - and this is a town of just 90,000, with far fewer other major industries than the Scottish capital.

There are obvious political motives for favouring Scotland, which will put Labour into even more disfavour locally. Fair enough, most will say.

But the potential economic impact on the town and the surrounding area is likely to be terrible. The presence of the bank here - its head office until the BoS takeover and, after, the base of the expanded retail operations - has been the main factor in protecting the town from the worst of the industrial decline and saved it from being quite as bad as, say, Burnley. Any major reduction of HBOS employment would, alongside the general downturn, easily make it as bad as, say, Barnsley when the mines were closed. Not a happy prospect.

It might not be that bad, of course. There's inevitably going to be swingeing cuts at the common operations of the two merged groups, but it's a question of deciding how that's going to be split between Lloyds and HBOS. I'm less familiar with Lloyds' operations, but I'd guess the bulk of their operations are in London. It might then be an attractive option for them to cut jobs in that more expensive employment market, and keep them in the more cost-effective West Riding.

But even if that happens, I'd guess that in Halifax they'll be cutting from the top; and in London, from the bottom. Fewer well-paid, professional jobs here in finance, IT, management and so forth, but we'll likely still get the minimum-wage call centre and data input end. Not a great deal.

More generally, it's been fun to see the scrabbling for scapegoats to blame for the deeply shite state of the banking markets, and the faux outrage over the antics of the short-sellers and speculators who we are shocked (shocked!) to find are inclined towards amoral profit-seeking based on some rather unrealistic financial models. At least, I hope it's faux - surely no one who's been keeping the vaguest of eyes on the financial markets and the economic orthodoxy can honestly be remotely surprised?

As per the title of this blog (borrowed from Galbraith, of course), it looks like reality has caught up with its would-be escapees.

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Wednesday, April 30, 2008

Phantastic phinance

It's hardly a secret that the rational agent hypothesis of neoclassical economics is, at best, an idealisation; and, at worst, a dangerous myth. It's much the same for the rational investor of finance theory, as backed up by a host of behavioural studies.

You don't need to have experienced many investment bubbles, crazes and panics to appreciate that. Some diehards have claimed that bubbles can be understood as rational phenomena, but that always seems like stretching the definition a little too far.

It's interesting then to get the psychoanalytic point of view on a question that has been dominated by economists. David Tuckett of UCL and Richard Taffler of Edinburgh Uni have a paper in the new International Journal of Psychoanalysis with the delectable title Phantastic objects and the financial market’s sense of reality: A psychoanalytic contribution to the understanding of stock market instability.

Tuckett lays it out in the UCL press briefing:
“Feelings and unconscious ‘phantasies’ are important; it is not simply a question of being rational when trading. The market is dominated by rational and intelligent professionals, but the most attractive investments involve guesses about an uncertain future and uncertainty creates feelings. When there are exciting new investments whose outcome is unsure, the most professional investors can get caught up in the ‘everybody else is doing it, so should I’ wave which leads first to underestimating, and then after panic and the burst of a bubble, to overestimating the risks of an investment.

“Market investors’ relationships to their assets and shares are akin to love-hate relationships with our partners. Just as in a relationship where the future is unexpected, as the market fluctuates you have to be prepared to suffer uncertainty and anxiety and go through good times and bad times with your shares. You can adopt one of two frames of mind. In one, the depressive, individuals can be aware of their love and hate and gradually learn to trust and bear anxiety. In the other, the paranoid schizoid, the anxiety is not tolerated and has to be detached, so the object of love is idealised while its potential for disappointment is ‘split’ off and made unconscious.

“What happens in a bubble is that investors detach themselves from anxiety and lose touch with being cautious. More or less rationalised wishful thinking then allows them to take on much more risk than they actually realise, something about which they feel ashamed and persecuted, but rarely genuinely guilty, when a bubble bursts. Again, like falling in idealised love, at first you notice only the best qualities of your beloved, but when everything becomes real you become deflated and it is the flaws and problems that persecute you and which you blame.

“Lack of understanding of the vital role of emotion in decision-making, and the typical practices of financial institutions, make it difficult to contain emotional inflation and excessive risk-taking, particularly if it is innovative. Those who join a new and growing venture are rewarded and those who stay out are punished. Institutions and individuals don’t want to miss out and regulators are wary of stifling innovation. If other investors are doing it, clients might say ‘why aren’t you doing it too, because they’re making more money than we are’.”

That last point seems to bring us into the realm of situational psychology. I've recently been reading Phil Zimbardo's The Lucifer Effect on that area - an interesting and disturbing read. Most of the behavioural finance studies I've read (or, at least, read about) concentrate on the personal biases and heuristics that affect individual decisions - the effects of peer pressure and groupthink on economic decision-making seems a fruitful area for further study.

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Tuesday, April 15, 2008

Of balls and busts

It's not often that neuroscience/economics research hits the headlines, but a paper in this week's PNAS, concerning hormonal influences on the behaviour of individual stock traders, has sired prominent stories in many of today's organs - see, for instance, the Guardian or BBC.

The research is be John Coates and Joe Herbert of Cambridge uni. Their abstract sums it up nicely:
Little is known about the role of the endocrine system in financial risk taking. Here, we report the findings of a study in which we sampled, under real working conditions, endogenous steroids from a group of male traders in the City of London. We found that a trader's morning testosterone level predicts his day's profitability. We also found that a trader's cortisol rises with both the variance of his trading results and the volatility of the market. Our results suggest that higher testosterone may contribute to economic return, whereas cortisol is increased by risk. Our results point to a further possibility: testosterone and cortisol are known to have cognitive and behavioral effects, so if the acutely elevated steroids we observed were to persist or increase as volatility rises, they may shift risk preferences and even affect a trader's ability to engage in rational choice.

It's not a new concept, of course - I wrote about a related behavioural economics study two years ago (a post that, because of the title, is actually one of my most frequently accessed items by people coming to this blog via search engines - I suspect most of them will be disappointed).

And it doesn't take a genius to spot why this is now a lot more newsworthy - boom and bust economics seems to be on people's minds...

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Wednesday, February 27, 2008

PE prognosis

Many private equity players are (quite rightly) criticised for doing all they can to avoid publicity. That's not a complaint you could make about Alchemy Partners' John Moulton - I fondly remember his Ali G impersonation, back in the Venturedome days ('Ali G' was a popular TV comedy character of the time), while interviewing himself about his much-reviled bid for MG Rover.

Anyway, he's back in the news, raising hackles with a gloomy speech at the more usually bullish 'Super Return' conference in Munich. As the FT reports:
"The industry needs to prepare for bad news," warned John Moulton, founder of Alchemy Partners, in his opening address as a handful of trade unionists waved "locust" placards and distributed anti-buy-out leaflets outside Munich's MOC centre.
"Parts of our industry were behaving just like the US subprime mortgage lenders," said Mr Moulton, a renowned industry doomsday forecaster.
"The quality of what we were doing went down, there was no checking and we used false numbers," he said [...]
"We really ought to expect returns of the industry to tumble," said Mr Moulton.

Gloomy, but hardly unrealistic. It'd be hard to argue that the top end of the private equity market hasn't been building itself a bubble in recent years, fuelled by cheap debt and the weight of new money pouring into the class. The cheap debt's gone now, slamming the brakes on new deals and leaving many over-leveraged existing investments in deep lumber.

The weight of money coming in is still there, though, and it's still looking for a home. I've recently been writing a couple of articles on the European mid-market for Private Equity International, and the folk in that market are a lot more optimistic. There's some problems from the credit crunch, but not nearly as bad as at the big LBO end. And everyone's claiming they were aware of the risks of the recent debt bubble, of course - the head of buyouts at 3i described the generous conditions as "beyond the levels of common sense... a dangerous place for a banking market to be". Many partners are seeing potentially rich pickings in the more troubled economic times ahead, and those out raising new funds over the crunch period say there was no loss of appetite from their own investors.

At the venture end, things are looking shakier. 3i's announcement that it's pulling out of earlyish deals (reported here at Real Business) is hardly unexpected, but might be symptomatic of a wider shift. The rate of new deals in the very-recently-hot areas of clean technology, which I've been tracking over on my Clean Ventures blog, certainly seem to be slowing.

Interesting times ahead...

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Thursday, January 31, 2008

Ape traders

There's an entertaining piece of research just published in PLoS which claims to be the first study to examine the circumstances under which chimpanzees will trade commodities - specifically, apples for grapes.

Such trades are assumed to have played a key stage in our own evolution towards Homo economicus. Previous studies involved training chimps to trade tokens for food - a less realistic model, given that apes tend not to carry round purses of tokens in the wild.

The researchers found that chimps do not spontaneously trade their food, but can be trained to do so. With training, they're willing to swap a less-liked food such as carrots for tastier fruit, but remained reluctant to engage in near-comparable trades such as apples for grapes. Lead author Mark Grady of UCLA’s Center for Law and Economics reckons this reflects the lack of ownership rights among our primate cousins.

Still, this must raise the possibility that apes could be trained to take over some roles in the mainstream markets. There might be initial problems with all the screeching, scratching and fighting for alpha-male dominance, but I'm sure the chimps could get used to it.

And, bearing in mind the old theorem about monkeys writing Shakespeare, how many chimps on how many trading desks would it take to fuck up as spectacularly as some human traders?


Sunday, January 20, 2008

Graduation day

Here's me just officially graduated with the MA in Economics and Finance, with Distinction, at the University of Sheffield. (Photo by the wife, on a rather dingy day.)

I was quite proud to share the stage with Nicholas Stern, who was receiving an honorary doctorate for his work in development and environmental economics. The 2006 Stern Review on the Economics of Climate Change played a large part in my own dissertation.

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Friday, January 04, 2008

$100 shenanigans

A good start to the year for the rational agent hypothesis, with the oil price hitting the $100 benchmark as a result of what appears to be a less than entirely rational act of self-aggrandisement.

As the Guardian reports:
Richie Arens, an independent trader who runs a brokerage called ABS, bought 1,000 barrels for $100 on Wednesday at a time when the prevailing price was $99.53. The price instantly settled back, although it jumped over $100 again yesterday, hitting $100.09 during the day before settling to end at $99.18.
Wednesday's trade appears to have made an instant loss of at least $500 - but market watchers believe Arens was motivated simply by being the first person to buy at more than $100. His actions have attracted criticism from experts who say that it risked artificially triggering automatic "stop orders" placed by others in the event that the price hit $100.
Stephen Schork, editor of the Schork Report market intelligence service, said: "This could have triggered a massive artificial rally. It creates a doubt that these kind of shenanigans could be commonplace - you begin to question the validity of prices and to ask 'are these markets really working?'"

OK. so one could argue that it can be rational to incur a financial cost in return for an enhanced reputation, but I'd love to see the utility function that could codify this. More generally, it really doesn't seem entirely rational that such attention should be paid to a price or index hitting any particular number - psychology aside, $100 isn't any more significant that $98.75 or any other price. Reminds me of other apparently paradigm-changing round-figure events, such as the Nasdaq hitting 5000 back in the day.

The Economist meanwhile looks at the broader implications of the $100 barrel. It ain't pretty. Happy new year, all.


Tuesday, December 11, 2007

Of fat-tailed catastrophes

Estimating the long-term costs of climate change has become something of a stumbling block in determining what we should be doing now to mitigate the worse effects. There's continuing debate about whether the short-term costs of mitigation outweigh the uncertain long-term costs of doing nowt - something complicated by questions about what the appropriate discount rate should be, as noted below. In the US, industry lobby groups have deployed cost-benefit analysis (CBA) to argue that it's just not cost-effective to do anything to reduce emissions now - given the long time horizons, it'll be better to deal with any problems if and when they happen, even if the cost is many times that of acting now. Basically, prevention isn't better than treatment.

Martin Weitzman, of Harvard's economics department, has now countered that device with a paper considering the possibility (however low) of a genuinely catastrophic event resulting from a failure to act now. Such events are usually ignored in standard CBA, mainly because they're a bit difficult to work with. Weitzman's model does include the possibility of extreme events (which he terms 'fat-tailed catastrophes'), and the results significantly shift the balance of costs. When applied to the current knowledge relating to climate change and emissions, Weitzman's analysis shows that mitigation investment makes a hell of a lot of sense in minimising expected future costs.

As Weitzman concludes:
Even just acknowledging more openly the incredible magnitude of the uncertainties that are involved in climate-change analysis - and explaining better to policy makers that the artificial crispness conveyed by conventional IAM-based CBAs here is especially and unusually misleading compared with more-ordinary non-climate-change CBA situations - would in my opinion go a long way towards elevating the level of a reality-based public discourse concerning what to do about global warming.

The fairly technical paper is available in draft as a PDF here. For the less technically inclined, New Scientist gives a good summary.

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Thursday, November 15, 2007

Good news is no news

More interesting research from Erasmus University Rotterdam, with econometrics professor Dick van Dijk presenting new work on the impact of news events on stock prices (broadly the area I covered in my dissertation).

van Dijk studied short-term price movements on the New York stock exchange in response to unexpected interest rate announcements. He found an interesting asymmetry: good news (ie, a rate cut) leads to a response which depends on the weight of the news (the amount by which interest rates are cut; bad news (a rate increase) creates a response that does not reflect the magnitude of the change. As theory predicts, expected rate change announcements create no significant response.

By tracking price movements on a minute-by-minute basis, van Dijk also identifies the speed with which prices can move in response to unexpected news: an unexpected interest rate adjustment of 0.25% leads to a return of more than 1% within five minutes.


Tuesday, November 13, 2007

Mark of distinction

Just received word from Sheffield Uni - my dissertation on a possible clean energy bubble, as outlined below, got a First Class grade. Which means I get the MA in Economics and Finance with Distinction. Which is nice.

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Monday, November 05, 2007

Pluralist economics review

Here's a useful new site/newsletter thing - the Pluralist Economics Review, promising 'the best of free-access economics'. It's a collection of links to unorthodox economics papers, articles, news stories and blogs. The site's run by Edward Fullbrook, editor of the Post-Autistic Economics Review, which has been referenced here many times before.


Tuesday, October 30, 2007

A Stern response to the bubble question

One year ago, the UK Treasury published the Stern Review on the Economics of Climate Change to intense media interest. Unlike previous surveys or popular accounts of climate change, Stern put a financial cost on both action and inaction in cutting emissions of greenhouse gases and moving to a low-carbon economy.

The work was of obvious relevance to the clean energy industry, which can't always convince potential customers that its products and services make economic sense, and generally hailed as good news. Specialist financial information provider New Energy Finance welcomed the Review as "good news for investors in the renewable energy and low carbon technologies sectors", highlighting Stern's calls for a stronger price signal for carbon emissions, greater international cooperation, and increased funding for low carbon R&D, "all of which will boost clean technology companies". Stock tippers on personal investment websites also saw the Review as positive news, posting 'Buy' recommendations on selected clean energy stocks.

At the time, there were concerns about a speculative investment bubble in the sector, manifest in both venture capital activity and in the valuations of publicly listed companies. Such concerns continue to date. While some bubble-like behaviour is hardly unexpected in an emerging and potentially revolutionary sector, a bubble and burst would be likely to cause medium-term financial problems that could seriously damage the prospects of clean energy companies.

From an economics point of view, it's virtually impossible to say whether a market is actually in a bubble situation until some time after it's burst - not a very useful situation for current investors. Previous bubbles have however demonstrated the role played by the media in feeding 'irrational exuberance' and inflating bubbles, with stock prices moving in an irrational fashion in response to high-strength but low-weight news events.

The release of Stern Review can be considered as such an event. The Review did not contain any new information about the nature of the climate change problem or related policy or technological issues. Despite the NEF's comments, it also contained nothing that could meaningfully affect the prospects of individual companies or the clean energy sector as a whole.

So could the stock price response of listed clean energy companies to the Stern Review and its accompanying media hype shed any light on the much-debated clean energy bubble?

That's the question I addressed in some recent research (completed as my dissertation for a Master's degree in Economics & Finance), using event study methodology to test the reaction of a portfolio of AIM-listed clean energy companies.

The findings were largely negative, which is fairly encouraging. A small minority of clean energy firms (notably those dealing in carbon trading) did show abnormal returns around the release of the Stern Review, but there was no significant portfolio-wide response that would indicate irrational exuberance among investors. There is no indication of a runaway bubble of the kind seen in the dotcom era, a period to which the current cleantech boom is sometimes compared.

Although the research methodology can't claim to be conclusive (and is relatively untested in its application to a non-company-specific event such as this), its conclusions are encouraging for the sector. Investor interest in clean energy, and the broader cleantech sector, appears to be rational and reasonable. That can only be good for its longer-term prospects.

The dissertation, 'Evidence for a speculative bubble in the clean energy sector: an event study', is available as a 1.2Mb PDF here.

For the latest news on clean energy and cleantech VC, see my Clean Ventures blog.

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Monday, October 08, 2007

Bubble, bubble

Further speculation and comment on possible bubbles in a couple of tech areas -
The Guardian worries about another dotcom bubble with VCs searching for the next Facebook or Myspace. There's particularly tutting over the apparent focus on very young entrepreneurs:
With millions of pounds once again being poured into companies run by young entrepreneurs, some experts are warning that too much emphasis on youth could help reinflate the dotcom bubble.
"People like Mark Zuckerberg [of Facebook] show that there is great talent out there ... but there's a world of difference between a teenager and a young entrepreneur," said Sayula Kirby of Index Ventures, which has backed a large number of European internet startups. "I wouldn't say we are in a bubble yet, but we are getting closer to the point where the froth begins."

Meanwhile, in the specialist media, Rob Day of the Cleantech Investing blog meanwhile revisits the continuing concern about a cleantech bubble, this time focusing on solar:
As for the verdict, solar VC bubble or not, it’s too tough to say. That’s a different answer than I would have given just a few months ago, when a “no” would have been the simple answer, but the crowded marketplace and rising valuations and deal sizes is worrisome. Also worrisome is seeing VCs get out of their tech-focused comfort zones to invest in unfamiliar business models. And when you hear stories about unworried investors and entrepreneurs who haven’t done their homework, that’s got to raise some eyebrows.
Are there a lot of reasons to be very optimistic about solar markets and the prospects for solar investments long-term these days? Absolutely. But could we be due for a bit of a break in the hyper-activity? Quite possibly, but maybe not quite yet.

As noted below, last week I handed in the final draft of my dissertation on evidence for a bubble in the AIM-listed clean energy sector. The event study methodology I used didn't provide any significant evidence of speculative bubble-like behaviour, but some of the data is certainly suggestive. I should be submitting the finalised paper later this week, subject to my supervisor's comments, and will put up a PDF of it here.

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Wednesday, September 19, 2007

A herd of VCs

Interesting research from Ward van den Berg at Erasmus University Rotterdam, on herding behaviour among private equity and venture capital investors. Cyclical behaviour and investment waves are well known among such investors, a phenomenon that van den Berg ascribes to incomplete information between rival firms.

According to the university's press release:
Van den Berg uses three models to describe how acquisitions seem to prompt each other. The announcement of a takeover and the initial bid awake the interest of a second party, and this already can drive the price up to a point that stops this second party from taking part in a bidding war. An investment in a buyout can also unveil information that other financiers use in their own investment decisions. This attentiveness to the behaviour of others can lead to a wave of private equity investments. Finally in the consolidation of a branch of business the value of every successive takeover candidate increases, to the extent that more companies have been bought up. This too leads to a new wave of investments.

In short, VCs see other investors chasing a new technology or market opportunity, look harder for companies in the same area, and valuations spiral. That certainly seems to fit some observed behaviour - arguably, we've been seeing something similar in the clean energy sector in the past couple of years.

There's more information on van den Berg's work at his university site.

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Tuesday, September 11, 2007

Prisoners of Bali

Interesting new paper from New Energy Finance on the lessons of game theory for international emissions-reduction agreements. It's an easy introduction to the problem of international cooperation considered as the familiar form of the Prisoner's Dilemma - basically, individual countries can not bother to cut their own emissions in the faith that other countries will do enough to avert the worst effects of climate change. The problem, obviously, is that if everyone does that, nowt gets done.

The NEF paper quite sensibly points out that the real world situation isn't a one-off game, as in the classic case, but a repeated game - a player who acts selfishly in one round can find himself punished in subsequent rounds. Back in the '80s, US political scientist Robert Axelrod showed this tit-for-tat strategy could reach a sustainable equilibrium, and boiled it down to four rules, with clear equivalents in the emissions-cutting game:
Be nice (start by cooperating - cut your emissions unilaterally);
Be retaliatory (if another player isn't nice, punish the bastard - sanctions, tariffs or other economic hurt);
Be forgiving (if he mends his ways, restore cooperation - help them with tech transfer if appropriate); and
Be clear (make sure your oppo knows what you're doing, so he knows what he has to do - the UN may have a role in education and communication here).

As the big global players get ready to head to Bali to knock out the successor to the not-entirely-successful Kyoto Protocol, their lessons according to this analysis are clear: the US needs to be nice; Europe needs to be retaliatory; the developing world needs to forgive the developed's past sins; and everyone needs a good deal more clarity.

The NEF paper is available as a PDF here.

The application of simple game theory models like the Prisoner's Dilemma to such problems of international cooperation isn't new, of course. The problems of coordination and free-riding become more acute as the number of participants increases, a particular problem for sumnative technologies such as carbon emissions. Still, there's some optimistic findings in the economic literature - this 2006 paper from Manfred Milinski et al finds that individuals can behave altruistically to help protect the global climate, with the basic level of altruistic behaviour increasing if the decision-makers are given expert information on climate research, and if they gain social standing by so doing. Let's see how that plays out in Bali.

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Wednesday, August 22, 2007

A Stern response

I've just caught up (via the Environmental Economics blog) with an interesting paper from the good chaps at Resources for the Future responding to some of the more considered criticisms to the Stern Review on the economics of climate change.

Thomas Sterner and U. Martin Persson focus on the criticism raised by William Nordhaus (who I've mentioned before) on Stern's assumption of a near-zero discount rate when considering the future costs of long-term climate change (this is a common economist's device based on the principle that a pound today is preferred to a pound tomorrow). I've not been convinced by Nordhaus' argument - while a significant discount rate is certainly applicable in cold financial decisions, it's less so when considering wider social criteria. If someone argues that we shouldn't invest now to try and reduce potentially catastrophic climate change because the current costs of doing so outweigh the discounted future costs of not doing so, then there's an obvious question to ask them: what generation of your own descendents are you willing to sacrifice for your own current comfort? By revealed preference, that should give some idea of their real social discount rate.

Anyway, Sterner and Persson use a few well established bits of economic theory to argue that, even if one takes a higher discount rate than Stern, the same conclusions are still justified.
We argue that nonmarket damages from climate change are probably underestimated and that future scarcities that will be induced by the changing composition of the economy and climate change should lead to rising relative prices for certain goods and services, raising the estimated damage of climate change and counteracting the effect of discounting.

The moderately technical paper can be downloaded as a PDF here.

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Thursday, August 09, 2007

Fabulist economist

Breaking news from this week's Nature on a very naughty economist:
A 63-year-old German economist has for decades falsely claimed an affiliation with the University of Maastricht, in the Netherlands, according to an article in tomorrow’s issue of Nature. The economist, Hans-Werner Gottinger, also appears to be a serial plagiarist, according to Nature’s report.
Mr. Gottinger’s deceptions began to unravel two months ago, after an attentive reader noticed that a paper he published in the journal Research Policy in 1993 had pilfered a string of complex equations from a 1980 issue of another journal. The editors of Research Policy started to sniff around — and their plagiarism investigation eventually turned into something much larger. When they contacted Mr. Gottinger’s ostensible employers in Maastricht, they learned that he had never worked there.

Inevitably, Gottinger has published on social ethics.


Sunday, June 03, 2007

Environmental economics blog

Here's a good blog, simply called Environmental Economics, by a couple of economics profs who get their teeth into many of the issues I've been nibbling at recently - not least the relative merits of carbon trading versus carbon taxes. A good overview of recent developments is here:
I really don't get the debate by economists between a carbon tax and marketable carbon permits. At the first level, as economists, we've won! We've convinced nearly everyone that regulation using economic incentive-based policies is a preferred approach. The squabbling amongst us over the best economic incentive-based policy can't help get one of these policies implemented.
I understand the squabbling by others ... since there is a lot of money at stake.

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Saturday, June 02, 2007

Sustainable chaos

Interesting short paper by Jacques Nihoul of the University of Liège on the role of chaos theory in models of sustainable development, which ties in with a number of subjects recently mentioned here. From the journal press release:

Current approaches to sustainable development do not fully involve complete methods and techniques for using, recycling, and replacing natural resources. Moreover, they do not take into consideration the effects of ongoing economic policies and fluctuating human populations. This is where the butterfly effect of chaos theory fame must be resurrected, says Nihoul [...]
Chaos theory is a major component of the computer models used by climatologists and weather forecasters as well as economists seeking patterns in the rise and fall of stock market values. However, Nihoul explains that while these models can provide useful information to feed into a global sustainable development policy, they must also take into account those butterflies on the periphery too. "Models of sustainable development on the ten-year and century-long timescales, must take into account both the diversity and the ‘turbulence’, the fluctuations on much shorter and more local scales," explains Nihoul.
Nihoul has developed a new modelling approach to climate, resources, economics, and policy, that sees the world system as interconnected local happenings rather than taking the smoothed global view favoured in much simpler studies. The earth cannot be modelled as a whole, he says, but rather as a mosaic of different systems, each with its own network of smaller systems and so on. Such an approach recognises the importance of global effects but also of the tiny deviations, the exquisite flapping wing of a butterfly as having a potentially enormous effect, chaotically speaking.

Jacques C.J. Nihoul, "Chaos, diversity, turbulence and sustainable
development", Int. J. Computing Science and Mathematics, 2007, Vol. 1, No. 1, pp 107-114
available here.

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Monday, May 28, 2007

The burning world

"The difference between science and economics is that science attempts to understand the behaviour of nature, while economics attempts to understand the behaviour of models. And many of these models have no relation to any state of nature that has ever existed on this planet."

That, in a nutshell, is the message of Thomas Legendre's remarkable novel The Burning, recently published in paperback in the UK. It's a campus novel which embeds an unorthodox economic polemic inside the usual academic and sexual shenanigans. Apart from some intrusive stylistic tics, it's a much more engaging and well-written story than one initially expects from the introduction of the protagonist:
His name was Logan Smith and he had just earned a Ph.D. in Economics at the University of Pennsylvania and he wasn't going to sleep in his hotel room tonight.

But it's this embedded critique of the neo-classical orthodoxy that distinguishes the book (although, perhaps unsurprisingly, its cover and blurb obscure this major aspect of the work). Legendre draws on the work of Nicholas Georgescu-Roegen to argue that energy and entropy considerations impose fundamental limits on models of economic growth. Coming from a physics background, that does indeed seem obvious (I've often thought the same myself, at least), but it's not something you'll see acknowledged in mainstream economics in any significant way.

Legendre, via his fictional economics and astrophysics PhDs, focuses on energy constraints, but there's also increasing awareness - among materials scientists and geologists, if not among economists - about constraints imposed by specific limited resources. Research published in this week's New Scientist details the rapid consumption of limited resources of metals - from rare elements like gallium and indium, to commonplace materials like copper and silver. Ironically, this places severe limitations on the spread of clean technologies such as solar panels and fuel cells, as well as many other growth technologies:
as [Tom Graedel of Yale University] points out in a paper published last year (Proceedings of the National Academy of Sciences, vol 103, p 1209), "Virgin stocks of several metals appear inadequate to sustain the modern 'developed world' quality of life for all of Earth's people under contemporary technology." And when resources run short, conflict is often not far behind.

Of course, economics has its supply-and-demand models for this sort of thing, but the nice clean orthodox theories generally don't consider the implications for macro growth, or the possibility of technological limitations, or the general human mess of it all. In a real ashes-to-ashes detail, researchers are looking at reclaiming platinum, emitted in trace quantities from vehicle catalytic converters, from the dust accumulating in road-sweepers.

Less scrupulous operators are already responding to scarcity-driven price rises for some common metals through some creative reclamation. In another detail that would fit nicely into a moderately apocalyptic novel, the Guardian today reports that copper thieves, stealing cables and pipes for scrap value, are causing havoc for railway operators and other infrastructure providers, and are even being blamed for a gas explosion that destroyed a house in Bradford. The metal's likely destination is China, as that colossal country invests in its own infrastructure in a bid to reach US levels of production and consumption. At this rate, we're going to need a bigger planet.

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Monday, May 21, 2007

Ride a black swan

I've just been reading Nassim Nicholas Taleb's long-awaited new book, The Black Swan: The Impact of the Highly Improbable (I say long-awaited - New Scientist was plugging it as imminent nearly a year ago, and Taleb manages to get an apology for lateness into the text itself).

As the follow-up to Taleb's landmark Fooled By Randomness (a book whose ideas are sadly more widely referenced than acted on), it's been getting plenty of press - for example, this by Oliver Burkeman in the Guardian - so I don't need to repeat its arguments here (basically it's all to do with non-normal distributions for many events and phenomena, not least asset price movements). It covers more ground than the earlier book and is perhaps a bit less coherent, but it's still a pretty great read with a much-needed message. Remarkably for a 300-page polemic about statistics and orthodoxies, it's never dull. Actually, I'm wondering whether I should be worried that I found the closing technical section - which Taleb recommends that most readers can happily skip - the most interesting and provocative.

Taleb firmly places his chips with Benoit Mandelbrot, to whom the book is dedicated, and his work on scaleable distributions. For more on this and Mandelbrot's other work in economics, see my interview with the man himself from 2003.

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Carbon politics, and alternative introductions

As always, some interesting papers in the new issue of the Post-Autistic Economics Review.

Donald MacKenzie of the University of Edinburgh discusses (in a paper originally published in the London Review of Books) the political economy of emissions trading, a subject I discussed immediately below. It's an interesting look at the political machinations behind the introduction and implementation of such schemes, notably the US sulphur-dioxide programme and the more recent European Emissions Trading Scheme. He doesn't spend much time on the pros and cons of trading versus the alternative approach of taxation, apart from noting the greater political difficulties of the latter:
What pushed Europe towards trading rather than the initially preferred carbon tax is in good part an idiosyncratic feature of the political procedures of the European Union. Tax measures require unanimity: a single dissenting country can block them. Emissions trading, in contrast, counts as an environmental, not a tax matter. That takes it into the terrain of ‘qualified majority voting’ [...] A plan for a Europe-wide carbon tax had foundered in the early 1990s in the face of vehement opposition from industry and from particular member states (notably the UK), and its advocates knew that if they tried to revive it the unanimity rule meant they were unlikely to succeed.

MacKenzie also addresses some of the instinctive objections to emissions trading:
many people, especially on the political left, have an instinctive dislike of the idea of emissions trading. Amongst its roots is a variant of what the economic sociologist Viviana Zelizer calls the ‘hostile worlds’ doctrine. She’s concerned with the worlds of economic relations and of intimacy. There, the ‘hostile worlds’ doctrine is that the intrusion of economic considerations corrupts intimacy, and conversely that kinship and other intimate relations need to be stopped from corrupting what should be impersonal economic transactions [...] In my view, Zelizer’s open-mindedness should also be applied to emissions trading. Just as economic relations and intimacy aren’t necessarily at odds, we shouldn’t assume a priori that market pricing is detrimental to environmental stewardship.

Meanwhile, the PAER leads with an update from Arjo Klamer, Deirdre McCloskey and Stephen Ziliak on their alternative introductory textbook for economics, The Economic Conversation:
We want to produce a book that reflects the actual conversation of economics, Samuelsonian to Post-Autistic. Our web site intends to nurture an already worldwide community of teachers and students who believe there's more than one way to skin an intellectual cat - and that a fair and public hearing of the alternatives is crucial to the health of the economic conversation.
We don't expect to be the next Samuelson. Market share would be nice - we openly admit to a profit motive! - but it’s not our main goal. After all, that's one of the leading points in the Post-Autistic movement, that human goals are multiple and cannot be reduced in most cases to Prudence Only or to Mr. Max U or to any of the other formulas for sociopathy recommended by the Samuelsonians.

Sounds like exactly the kind of introductory text I wanted not too long ago.

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Tuesday, May 15, 2007

Carbon trading - not all that great

The Guardian reports on Blair-backed proposals for a new generation of international carbon trading schemes to help reduce greenhouse gas emissions. Even Dubya's close to getting on side on this one, apparently:
The plan would involve setting up a network of carbon trading schemes and is one of five main proposals drawn up by the Germans and British ahead of the G8 summit next month[...]
Under the new trading plans, China and India would not face binding targets; instead they would be allowed to continue their extraordinary economic growth in exchange for a commitment to establish national cap and trade schemes to cover some of their most heavily polluting industrial sectors, such as metals processing and cement manufacturing.
Companies in these sectors would be granted permits to emit carbon dioxide and other gases, in the hope they would rather reduce pollution than pay for permits. The idea is based on a scheme covering power generators and heavy industry that operates in Europe under Kyoto.
Further cap and trade schemes - this time with binding targets and penalties for non-compliance - would be set up to cover carbon pollution in developed countries, including the US and Australia, which have refused to sign up to Kyoto. These could be along national, regional or sectorial lines, officials said, with carbon credits eventually traded between different schemes using exchange rates similar to currency conversions, with the goal of placing a global price tag on pollution.

Last week's Economist also had a favourable story on carbon trading schemes, based on a recent World Bank report:
The benefit of this approach over regulation is that the businesses which can reduce their emissions at the lowest cost do the bulk of the adjustment. Perverse incentives that can often hamper environmental regulations may also be avoided.
These schemes are large, and growing. Last year, carbon-trading markets grew to $30 billion, three times bigger than the previous year. Trading was dominated by permits issued under Europe’s emissions trading scheme but a voluntary private market worth $100m has also evolved.

Funnily enough, many economists (primarily in the US) are arguing that such a Coasian rights-based approach isn't actually all that suitable for tackling global greenhouse gas emissions, largely because of the size and complexity of the market. More attention is again being paid to straight taxation on carbon dioxide and the other GHGs, in something closer to the classic Pigovian approach.

William Nordhaus of Yale University, for instance, argues in this discussion paper that the structure of costs and benefits of the climate change problem innately favour a price-based approach - a combination of non-linearities in emission reductions, costs and benefits, and remaining (and probably unavoidable) uncertainties means that trading schemes are likely to create much more undesirable volatility in carbon pricing, reducing the effectiveness of any international scheme. Nordhaus rather advocates a harmonised carbon tax, "a dynamically efficient Pigovian tax that balances the discounted social marginal costs and marginal benefits of additional emissions". Such a tax would increase real carbon prices by between two and four per cent per annum, he estimates.

Inevitably, politics rears its head here. A globally harmonised carbon tax is likely to be resisted by governments protective of their national powers - given a choice between a carbon tax and a less efficient market scheme, policy-makers may opt for the latter as there is less obvious cost to the electorate. And in general, national policy-makers are likely to be deterred by the potential costs of implementing any pricing scheme if the benefits are unlikely to be felt before the next electoral cycle – or indeed in the next generation.

Meanwhile, carbon trading has been embraced by corporates who've figured that with a little lobbying resulting in less than perfect market design, as with the early European emissions trading scheme, it can be a nice little earner without actually requiring much work to clean up their act. And now it seems the White House is putting its weight behind such schemes. If I can be excused a touch of cynicism, it doesn't exactly inspire confidence in achieving the necessary reductions, does it?

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Wednesday, May 02, 2007

Gamesmanship theory

Intriguing paper by Stuart Macdonald of the University of Sheffield and Jacqueline Kam of Bristol on the politics of journal publication in their own field of Management Studies. Shockingly, they find the whole area rife with gamesmanship, with who publishes what where apparently more important than the actual content.

From their abstract:
Pressure to publish in [quality] journals and the triumph of managerialism over professionalism in the modern university have undermined peer review. In consequence, the same old hands are publishing the same old ideas in the same old journals. Quality journals must be taken much less seriously if there is ever to be any real enthusiasm for new ideas from new blood in Management Studies[...] Cunning and calculation now support scholarship in Management Studies. Gamesmanship will remain common until the rewards for publishing attach to the content of papers, to what is published rather than where it is published. We propose a Tinkerbell Solution: without belief in the value of a paper in a quality journal, the game is no longer worth playing.
[Stuart Macdonald and Jacqueline Kam, 'Ring a Ring o' Roses: Quality Journals and Gamesmanship in Management Studies', Journal of Management Studies, 44, 4, 2007, pp.640-655]

Still, such gamesmanship doesn't seem entirely alien to the practice of Management. And of course, such practices couldn't possibly be so dominant in other fields - could they?

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Thursday, April 26, 2007

Bulls in the China shop

Report from the Economist on the makings of a likely stock market bubble in China:
WOULD-BE share punters, keen for a piece of China's booming stockmarket, are queuing to open accounts at a Beijing branch of China Merchants Securities. A busy manager, handing out application forms, says he is taking on 100 new clients a day, perhaps five times as many as a year ago. Bunches of small investors, ranging from students to pensioners, crowd around computer terminals to carry out their trades, keeping an eye on the prices as they flicker across big electronic screens. China's biggest-ever stockmarket boom may be turning into a bubble—and the country's leaders are getting worried.
Some economists fret that share prices are moving far ahead of companies' earnings, to a degree scarily reminiscent of Japan in the late 1980s just before its crash. With the help of new share listings, the combined market value of the Shanghai and Shenzhen exchanges has risen to some 15 trillion yuan ($1.8 trillion), 87% more than at the end of last year and surpassing that of Hong Kong.
The growing involvement of low-income groups such as students and pensioners, who were more cautious during the last bull run, could make a crash more painful.
Twice this year—on February 27th and April 19th—the markets have wobbled alarmingly amid rumours of tougher measures to control the flow of cash. The latest upset was caused by figures showing the economy growing even faster than expected: in the first quarter of this year, output was up 11.1% on the same period of last year. But the bulls have quickly returned. Outside the China Merchants Securities branch, a group of investors debates the market's prospects. “It's like a casino set up by the Communist Party,” says one. Another says only fools are still investing. But none has any plans to cash out.

Certainly looks to be exhibiting many of the classic bubble characteristics, fuelled (as was the late-90s bubble in the West) by the widening adoption of online trading:
A big difference between this bull market and the last is the penetration of the internet and mobile telephony... The widespread installation of broadband in homes over the past four years has made it easier for pensioners and housewives to join in.


Monday, April 02, 2007

Tax attraction

A counter-intuitive (or maybe just counter-doctrinal) finding on the effects of corporate taxation on inward investment, from a team at the Universities of Nottingham and Dundee. The countries which attract the most investment turn out to be the ones with higher taxes and levels of public spending - the opposite to what most neo-liberal economists would claim.

Holger Görg of Nottingham's Globalisation and Economic Policy Centre comments:
“Most economists have always argued that globalisation leads to a 'race-to-the-bottom' as countries compete to cut tax rates in the hope of attracting multinational investment and the jobs that come with it. The traditional theory is that this then leads to a shrinking of tax revenues and undermines the welfare state.

“But our evidence shows that overall effective corporate tax burdens do not appear to have fallen in response to capital and trade liberalisation, that countries aren't competing to cut taxes and actually, when investing abroad, firms find countries with higher taxes attractive because they associate them with a happy, stable workforce.”

One possible explanation is that multinationals are able to shift book profits between locations, so that the bulk of their taxes aren't necessarily paid in the locations where they have their main profit-generating operations. That may, in turn, further weaken the case for national or regional government bodies to pimp themselves out to potential inward investors by proffering subsidies or favourable treatment for investment which, in some cases, last only as long as the bungs. And it certainly makes a nonsense of much of the rhetoric of 'regional competitiveness'.

Full press release from Nottingham here.

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Tuesday, March 13, 2007

The invisible hand disappears

Today sees the release of the new Bank of England £20 notes, featuring Adam Smith. Smith is of course inextricably linked with the 'invisible hand', that magical concept, often invoked to justify free market ideology, which (to borrow the Wikipedia definition) illustrates how those who seek wealth by following their individual self-interest, inadvertently stimulate the economy and assist society as a whole.

That's something of a distortion. The phrase occurs exactly once in Smith's most invoked work, The Weath of Nations. It appears in Book IV, Chapter II:
Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home, in the specific context of merchants choosing domestic products over imports:
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
This is hardly a major part of the text. Many editions, including the Pelican Classics edition on my own shelf, omit it entirely. And it's highly questionable whether such buy-British behaviour is now a significant phenomenon, if ever it was.

The phrase also occurs once in Smith's other key work, The Theory of Moral Sentiments, in a passage proposing that wealth naturally spreads from a few rich to the mass of poor:
The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.
More recent economic and demographic work on income distributions tends not to support this charming proposition.

The vast majority of Smith's writings runs counter to the instincts of many of his loudest invokers, as set out at length in Iain McLean's recent Adam Smith, Radical and Egalitarian. Personally, I've found that anyone invoking Adam Smith and his Invisible Hand almost certainly doesn't really know what the hell they're talking about.


Option on an option on an option

John Kay weighs into the current private equity debate (or to be precise, the large leveraged buyout debate) in his Financial Times column. Rather than following the union criticisms on asset stripping and job losses, he goes for the financial engineering aspect:

Sitting on my desk is a prospectus for a fund of private equity funds. It offers me some of the best names – Blackstone, Permira etc. I have just received a large cheque for my holding in Equity Office Properties and, if a similar bidding war for Sainsbury’s takes place, I will have a lot of cash to reinvest.
But wait a moment. Was it not Blackstone that just bought Equity Office and are not the names in the frame at J Sainsbury almost exactly those in my fund of funds? The prospectus invites me to buy Equity Office Properties and Sainsbury from myself, at prices around twice what I recently paid.
If management and business operations remain much the same, as does the underlying ownership structure once you drill down through the layers of fee-collecting intermediaries, it is hard to see where value is being added. If financial engineering of the business is not the explanation, can the answer lie in financial engineering among investors?
The private equity promoters propose layer upon layer of debt, leveraged by non-recourse finance. What I get is an option on an option on an option. But the same finance theory also tells us that you do not increase the value of an investment portfolio by increasing gearing: once again the greater risk exactly matches the greater prospect of return.
Perhaps the sophistication of modern financial structures means that the distribution of risks and the design of governance structures can be finely tuned to the needs of individual investors and the businesses they fund. Or perhaps there is a miasma of complexity and confusion in which everyone persuades themselves that the uncertainties of business have been landed on someone else. Make up your own mind: but I have decided to keep my cheque book in my pocket.

Given the recent research suggesting that LBO fund performance is no better, allowing for gearing and cheap borrowing, than the public markets, it's a valid question.

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