Knowing and Making

I have just remembered to link to Turbulence Ahead , the blog of Gerard O'Neill, who spoke on a panel with me last year at the Geary Institute. His latest post has a nice quote from Sean Corrigan: "...prosperity cannot be forced, but must be built one exchange at a time as individuals further their own self-interest by catering to the interests of others..." Corrigan intends this as an argument for his Austrian, laissez-faire philosophy. And it does support that case. But when we think about it a little more deeply, it also illuminates a different view. The quote hints at, but perhaps underplays, the role of the entrepreneur. Presumably each consumer knows about a certain range of available goods, and they are already choosing whichever subset is best for them (I'd usually insert a critique about economic rationality here, but this time I'll leave that alone and make a different point). Given this starting point, in order to get economic growth we need one o...

An intriguing situation with an advertising campaign in which the government promotes breastfeeding of babies. The "Breast is Best" campaign, aside from biasing sales in Kentucky Fried Chicken, is intended to encourage new mothers to breastfeed their babies instead of using bottles. Breastfeeding generally is thought to improve the health of the baby and, possibly, also of the mother. However, the campaign appears to have the surprising side-effect of reducing  the number of breastfeeding mothers. Apparently, highlighting the fact that people need to be encouraged to breastfeed creates an unintended norm...leading many people to (not consciously, I believe) think that bottle feeding is the default option. Therefore, a pro-breastfeeding organisation has asked the government to stop the campaign. I'm sure the new coalition, with its new budget constraints on the COI (Central Office of Information - the civil service advertising department) will be happy to oblige. ...

I have posted a couple of detailed comments in response to Scott Sumner's recent items, and as most of my readers probably don't read his blog, I'm cross-posting them here. For background, read this comparison of the performance of the UK and Sweden , and the comment thread; then the following response by Scott . First, I tackle UK monetary policy: As illustrated by the currency discussion, the figures in this debate is strongly influenced by the choice of starting point. For example, nominal GDP in the UK has been growing at an annual rate of 6% for the last nine months. http://www.telegraph.co.uk/finance/economics/7764916/Boost-for-UK-as-GDP-growth-revised-up.html All of the problems in Scott's figures come from a single quarter, Q1 2009. In Q1 of 2009 we were still in recession, with a 3% fall in NGDP in that quarter alone. I believe the CPI was also negative in that quarter (though I can't find quarterly index figures for that, only annual changes). It was ...

Three posts in 24 hours, Mr Peston? Back from your holiday and full of energy it seems. One of the enduring phenomena in macroeconomics is stickiness. This most commonly shows up in the idea of 'sticky prices', which in some models are responsible for business cycles. In short, prices of goods and wages increase beyond the level of stable demand (perhaps driven by higher short-term demand or by inaccurate expectations of rising demand). The demand curve turns out to be a bit lower than was thought, but prices do not immediately adjust downwards in response. Therefore the amount of goods supplied is less than the optimal (equilibrium) amount and we get a recession. There are many other examples of stickiness, or as I referred to it in an earlier post, friction . But one that I have not seen discussed is policy stickiness . Robert Peston highlights this in an item today about Northern Rock . The British government is changing its original policy of running down Northern Rock'...

An update on my proposal (and Roger Farmer's) from the beginning of this month: The Japanese government  has proposed  buying equity stakes in small to medium sized companies. Not via the central bank, but the (state-owned) Development Bank of Japan. The plan will be considered by the cabinet next month.

So Jaguar might be "rescued" by the UK government. Robert Peston gives a summary of some of the arguments. Even more quickly, here they are: The company is not able to refinance its loans, but is still fundamentally a good business 15,000 people are employed by Jaguar and up to 60,000 second-order jobs are dependent on it It is one of the remaining UK-based manufacturers with substantial ongoing R&D But: It is owned by Tata, the (profitable) Indian multinational There's a risk of moral hazard - if Tata can get finance for its UK operations like this, why wouldn't other companies do it and use their scarce private funds elsewhere? There is no doubt that Peter Mandelson is aware of these arguments - he makes it pretty clear in the interview with Robert Peston. What other criteria or safeguards might he use to make sure that public money is genuinely providing a public good which would not be financed by the private sector; and that it gets a positive return? Sugge...

Lots to write about today, but not much time. Here are the topics. See if you can spot the connection: The myth of hollowing-out. Frank Furedi (see Tuesday's post) gave an interesting talk but I still see this as the main flaw in his argument. I have started to work on some more concrete theory to help quantify the contribution the knowledge economy makes to consumer benefit. Government intervention/rescue of businesses. Jaguar in particular - definitely a firm on the "productive" side of Furedi's distinction - is a candidate for some kind of financial assistance. Can government choose the right businesses to rescue or set specific criteria for doing so? What should it get in return? Zero interest rates. At some point it isn't the price of money that stops people borrowing or lending; it's the challenge of paying it back. What else can the state do other than print money? Related topic: what should people do with their fiscal stimulus? More to the point, what ...

I have carried out a brief survey of some of the main UK broadsheets and their predictions about the pre-budget report. A consensus is emerging today (Monday) but Sunday's papers are a bit more diverse: Newspaper Prediction Recommendation   BBC (Nick Robinson) Friday 21st 1% of GDP (£15bn) fiscal boost: deferring tax rises on cars, small business and income tax; tax cuts for the lower paid; bring forward government spending BBC (Robert Peston) Friday 21st Deferred VAT rise to 22.5% in a couple of years Observer Sunday 23rd VAT reduced to 15% Big tax cuts on low paid, rises on high earners; extra tax on bonuses Sunday Times Sunday 23rd 2.5% VAT cut; extend £120 income tax rebate; defer road tax and corporation tax rises; three months grace on repossessions; increase public capital spending; expand SFLGS Increase support for manufacturing Sunday Telegraph Sunday 23rd 2.5% VAT cut; reduce empty buildings tax FT Monday 2...

I have been working recently on an exploration of bounded rationality. This post from Robert Peston gives an interesting example of the insidious overlaps between this and other problems in economic theory - in this case the agency problem. Barclays management preferred to accept a private £2.8bn investment from the Qatar and Abu Dhabi states, rather than take UK taxpayers' money, to the apparent detriment of existing shareholders. Peston suggests (in an earlier post which he links to in this one) that the reason may be that top Barclays management want to preserve their freedom to pay big salaries and bonuses to themselves (and each other). Without addressing the accuracy of this suggestion, as I have no data either way, economic theory does shed some light on how this could happen. Assume for now that the facts are as Robert Peston says. Classical theory says that firms act in their own interest (equivalently, the interests of their shareholders). In this case, that would mean t...

There's a proposal today for a £12bn "small business fund" to help companies across Europe through the current crisis. As owner of a small business, I would naturally be grateful for access to such a fund - but is it economically sensible? Let's look at how it could be structured to make the most impact with the minimum of interference with market mechanisms. Access to credit . Probably the most obvious area where small companies may be suffering in the current environment. This has always been a constraint for small businesses, and the UK government already has a good system to address it - the Small Firms Loan Guarantee Scheme which guarantees loans by banks to small firms. It was expanded in the 2008 Budget and the criteria for accessing it were relaxed. The economic justification? First, that the external returns to the economy for supporting the foundation of new businesses exceed the risk-adjusted returns available to capital. So if the Government can help me ge...