Tag Archive: economics

Aug 05 2016

Book review: The Company by John Micklethwait and Adrian Wooldridge

the_companyThe Company: A Short History of a Revolutionary Idea by John Micklethwait and Adrian Wooldridge is indirectly related to my reading of the history of science and technology. The commercial world impinges on stories such as that of the development of the railways, the story of Mauve and Lord Kelvin’s work on telegraphy. Scientific expeditions were motivated, in part, and supported logistically by merchant interests. The “search for the longitude” was driven by needs of merchants and navies. 

The Company is particularly concerned with the limited liability joint-stock company, created in approximately its current form by the 1862 Companies Act in the UK but repeated across the world. In this system, the owners only risk the money they put into a venture (rather than all their worldly possessions), and shares in that company can be traded on the stockmarket.

The book starts with some prehistory, there is some evidence in Mesopotamia as back as far as 3000 BC for arrangements which went beyond simple barter. And by Roman times there were various forms of company used for collecting tax, for example. The Romans also had a developed legal system. These arrangements tended to be relatively short lived and in the form of partnerships, where the owners were the managers and if things went wrong they could lose the toga off their backs.

The Middle Ages saw the rise of “corporate persons” in Western Europe which included guilds, monasteries and corporations. The Aberdeen Harbour Board, founded in 1136 can lay claim to be the oldest still existing. In China there was a tendency towards large, long-lived state corporations. Italy had compagnie literally “breaking bread together” with shared total liability, and thus requiring high levels of trust. Banchi were the campagnies banking equivalents, often built around family ties. The relationship between banks and companies is a theme throughout the book.

England and France were scarred, separately, by the collapse of the South Sea Company and the Mississippi Company in the early 18th century. Created in the spirit of the East India Companies, monopoly corporations with a Royal Charter, they came to grief through rampant speculation and dubious government decisions on debt.

The railways provided the impetuous for the reform of company law. They required substantial investment, once formed they needed substantial workforces and management structures. In the early days each railway company had to make its case in parliament to gain its charter, this was a costly, slow undertaking. And so there were reforms culminating in the 1862 act.

A quote attributed to Edward Turlow in 1844: “Corporations have neither bodies to be punished, nor souls to be condemned, they therefore do as they like”, encapsulates an ongoing concern about companies. This from a lawmaker but a similar concern was echoed by economists of the time, they thought that a partner or manager/owner was going to do better job of running a company than a servant of shareholders.

The Company compares developments in the US, UK, Germany and Japan in the latter half of the 19th century. The US forte was in professionalising management, enabling them to build ever bigger companies. The UK had a more developed stockmarket but positively spurned professional management (a blight that has afflicted it since then). Germany had strong oversight boards from the beginning, complementing the management board. These included workforce representation, and companies were seen as a social enterprise.

This is the second tension in the company: whether it is solely interested in its shareholders or whether it is responsible to a wider group of stakeholders which might include its employees, the local community, environment and so forth.

The book continues with developments in the latter half of the 20th century, closing in 2002. These include the wave of privatisations across Europe (the French keeping substantial government control), and the decline of many big companies. In the case of Enron and WorldCom these were precipitous declines in disgrace but there were also leveraged buyouts and subsequent dismantlings. Another theme here is the balance between transaction costs and hierarchy costs. Companies succeed when the cost of running a hierarchy is lower than the savings made by carrying out transactions in aggregate. These costs and savings change over time, transaction costs have recently been much reduced by technology.

I was surprised by the recency of the commercial world we see today. The modern company and the stockmarket only really came into being in the final quarter of the 19th century with the great corporations rising to dominance in the first quarter of the 20th century. Harvard’s business school was only founded at the beginning of the 20th century. This is little more than a lifetime ago.

The same is true of trade tariffs, they were initially introduced by the US and Germany in the 1880s with Britain and the Netherlands holding out as “free-traders” until 1932. One wonders whether this is the origin of Anglo-Dutch conglomerates such as Unilever and Shell. The book is not explicit on the differences between tariffs and customs duties and taxes – a clarification which I would have found useful.    

The authors are clearly enthusiasts for capitalism in the form of the company. The book is short and readable, and I felt enlightened for having read it. The bibliography has some good pointers for further reading.

Sep 30 2015

Book review: The Son also Rises by Gregory Clark

downloadThe Son also Rises by Gregory Clark is a book about social mobility, as traced through surnames. Clark prefaces his work by saying that what he is to say might be considered radical and controversial. Other studies of social mobility have find modest “inheritability” between generations. This study finds high levels of inheritability spanning hundreds of years.

The theme for the early chapters is to find some source of high status individuals – be it graduation from prestigious universities such as Oxford, Cambridge or the American Ivy League, membership of professional bodies such as those for doctors or attorneys or from financial records such as occasional tax releases or records of wills (probate). Next a cohort of names is tracked through these systems and their level of incidence is compared against the background level of incidence for that surname. For example, “Smythe” is a relatively rare surname in the general UK population but it is found at a much higher level in records of registered doctors.

The selected cohort of surnames may be from a distinctive ethnic population – i.e. Japanese in America, Native Americans or French settlers. Or it may be selected from a set of high status individuals at a point in time i.e. the Normans who came the England with William the Conqueror, or Swedish nobles.

Clark’s discovery is that for all of these many cohorts across multiple measures of status the persistence over time is strong. The Smythes of 200 years ago had relatively high status then and they still do now. After nearly a 1000 years those with surnames associated with the Norman conquest are still a little over-represented in the intake of Oxford and Cambridge University. Similar behaviour is found for low status groups, Baldrick’s character through the several series of Blackadder is not far from the truth. In both cases these groups are “regressing towards the mean” but it is a long, slow process.

Following these initial demonstrations of social mobility, Clark states his general law which is that the correlation of status over generations is high compared to previously measured parent-child measures and remarkably constant across multiple countries, periods in history and cohorts. The magic number for the correlation is 0.75. He argues that the reason that his estimate is higher than others is that he models social mobility with an underlying constant and a random fluctuation, the methods of calculation for early figures mean that this random fluctuation is much more apparent and brings down the measured social mobility. I don’t feel he demonstrates the origin of this discrepancy very clearly.

Subsequent chapters go on to look at some cases where one really expects deviations from this general rule, in the Indian caste system where low mobility is expected and also in China, where post-revolution is expected to be a time of high social mobility. It turns out that in India, despite laws aimed at reducing caste based discrimination, social mobility is has not improved dramatically. In China social mobility seems to have been little bothered by the revolution. The odd groups that do break the rule of constant social mobility seem to do so by preferential recruitment i.e. in the past in Muslim countries non-Muslims were tolerated but charged a poll tax which meant that lower status/income people were more likely to convert to Islam leaving a more persistently high status non-Muslim population. A second route is by strong preference for “in group” marriage which is seen in the Indian Brahmin caste. It turns out that the surnames identified with British parliamentarians are particularly immobile.

As for the origin of this constant social mobility, Clark ascribes it to what he calls “social competence”. There is a confused discussion of the balance of nature and nurture, not helped by a table where nature and nurture headings are accidently swapped (I think). I believe that technically it is all nurture, and Clark is trying to work out whether it is all about money. It strikes me that your wider family is where you learn about what the possibilities are for you and, while every family has it’s black sheep, the fact that your father, two out of three uncles went to Cambridge University means that your expectation is that you should aspire to that. Your family sets what is “normal”.

I suspect that this is particularly the case for British parliamentarians where there seems to be a lot of siblings (Milibands, Johnsons, Eagles), husband wife (Cooper/Balls) and parent-child (Kinnock, Benn) combinations. Being a politician is an odd sort of job, there is not really a class at school for it, seeing your family working in the “family business” must be a big influence.

“The Son also Rises” is an interesting read but turning it into a 300 page book seems to belabour the point somewhat. I liked the incidental details of the origins of surnames, and the various sources of information on social status.

I got this as a Kindle edition, I wish I’d bought it as a paperback, there are numerous figures, tables and equations which didn’t render at a reasonable size in the first instance.

May 15 2014

Book review: The Undercover Economist Strikes Back by Tim Harford

undercover_economistWhat have been reading?
Tim Harford’s latest book "The Undercover Economist Strikes Back". It’s about macroeconomics, a sort of blaggers guide.

Who’s Tim Harford?

Tim Harford is a writer and broadcaster. I’ve also read his books The Undercover Economist, about microeconomics and Adapt, about trial and error in business, government and aid. When I get the time I listen to his radio programme More or Less, about statistics and numbers, and also read his newspaper column.

Hey, what’s going on here? You keep writing down the questions I’m asking!
Yes, this is how Strikes Back is written. At the beginning I found it a bit irritating but as you can see I’ve taken to it. It recalls the method Socratic dialogue and Galileo’s book, Dialogue Concerning the Two Chief World Systems. The advantage is that it structures the text very nicely and is likely rather SEO friendly.

OK, I’ll play along – tell me more about the book

The book starts by introducing Bill Philips and his MONIAC machine, which simulated the economy, in macroeconomic terms, using water, pipes, tanks and valves.

That’s a bizarre idea, why didn’t he use a computer?

Philips was working in the period immediately after the Second World War and computers weren’t that common. Also, it turns out that solving certain types of equations is more easily done using an analogue computer – such as MONIAC.

Back up a bit, what’s macroeconomics?

Macroeconomics is the study of the large scale features of the economy such as the growth in Gross Domestic Product (GDP), unemployment, inflation and so forth. Contrast this to microeconomics which is about how much you pay for your cup of tea (and other things).

What’s the point of this, didn’t someone describe economics as the “dismal science”?

Yes, they did but this is treating economics a little unfairly. One of Harford’s pleas in the book is to accept the humanity of economists. They aren’t just interested in numbers, they are interested in making numbers work for people. In particular, unemployment is recognised as a great ill which should be minimised and the argument is over how this should be achieved rather than whether it should be achieved.

Tell me something about macroeconomics

There is a great divide in economics between the Keynesians and the classical economists. The crux of their divide is how they treat a recession. The former believe that the economy needs stimulus in times of recession, in terms of of increased “printing of money”. The latter believe that the economy is a well-oiled machine that is de-railed by external shocks, in happy times there are other external shocks that pass off relatively benignly. The classicist are less keen on stimulus believing that the economy will sort itself out naturally as it responds to the external shocks. These approaches can be captured in toy economies.

Tim Harford cites two examples: a babysitting collective in Washington DC and the economy of a prisoner of war camp. The former is a case of a malfunctioning economy fixed by Keynesian means: the collective worked by parents agreeing to babysit in exchange for vouchers which represented a period of babysitting. But the amount of vouchers available was limited so parents were reluctant to spend their babysitting vouchers for a night out because they were scarce. In the first instance this was resolved by printing more baby sitting vouchers: a Keynesian stimulus.

The prisoner of war camp suffered a different problem, towards the end of the war the price of goods went up as the supply of Red Cross parcels dried up. Here there was nothing to be done, the de facto unit of currency was the cigarette and there was a limited supply of them and nothing could be done to increase that supply.

It’s all about money, isn’t it?

Yes, Harford highlights that money fulfils three different functions. It’s a medium of exchange, to save us from bartering. It’s a store of value, we can keep money under the bed for the future – something we couldn’t do with our valuable goods if they were valuable. And it is a “unit of account”, a way of summing up your net worth over a range of assets.

Is The Undercover Economist Strikes Back worth reading?

I’d say a definite “yes”. We’ve all been watching macroeconomics playing out in lively form over the last few years as the recession hit and is now receding. Harford gives a clear, intelligent guide to the issues at hand and some of the background that is left unstated by politicians and in the news. Harford points out that our political habits don’t really match our economic needs. Ideally we would have abstemious, right-wing governments in the boom years and somewhat more spendthrift left-wing ones during recessions. He ends with a call for more experimentation in macroeconomics, harking back to his book Adapt. And also highlights some shortcomings of macroeconomics as studied today: it does not consider behavioural economics, complexity theory or even banks.

There’s much more in the book than I’ve summarised here.

Apr 27 2012

Revisions to UK GDP data

The BBC published an article entitled “Viewpoint: Is UK GDP data fit for purpose?” which featured a graph showing the original estimates for quarterly UK GDP growth and current estimates for those same figures. The point being that the original figures are subject to revision which can change figures quite significantly, for example currently we are technically in recession with a GDP growth figure for Q1 2012 of –0.2% (source). But how does this compare with the size of the revisions made to the data?

Here is the graph from the original article:

464

This is quite nice but there are other ways to display this data, which unfortunately isn’t linked directly to the graph. However, this should not stop an enterprising number-cruncher, there exists software which will allow you to extract the numbers from graphs! I used Engauge Digitizer, which worked fine for me – I had the data I wanted 20 minutes or so after I’d downloaded the software. It does some semi-automatic extraction which makes separating the two different sets of data in the graph on the basis of the colour of the lines quite easy.

This type of approach is not ideal, the sampling interval for the extracted data is not uniform, and not the same for the two datasets, furthermore the labelling of the x-axis is unclear so it’s difficult to tell exactly which quarter is referred to.

I next loaded up the data into Excel for a bit of quick and easy plotting. To address the sampling problem I used the vlookup function to give me data for each series on a quarterly basis. I can then plot interesting things like the difference between the current and original estimates for each quarter, as shown below:

DifferenceGraph

A few spot checks referring back to the original chart can convince us that we have scraped the original data moderately well. The data also fit with the ONS comment on the article:

…looking back over the last 20 quarters, between the first and most recent estimates, the absolute revision (that is, ignoring the +/- sign) is still only 0.4 percentage points.

I calculated this revision average and got roughly the same result.We can also plot the size of revisions made as a function of the current estimate of the GDP growth figure:

DifferenceGraph2

This suggests that as the current estimate of growth goes up so does the size of the revision: rises are under-estimated, falls in growth are under-estimated in the first instance although this is not a statistically strong relationship. These quarterly figures on GDP growth seem awfully noisy, which perhaps explains some of the wacky explanations for them (snow, weddings, hot weather etc etc) – they’re wild stabs at trying to explain dodgy data which doesn’t actually have an explanation.

The thing is that the “only 0.4 percentage points” that the ONS cites makes all the difference between being in recession and not being in recession!

Footnotes

I uploaded my spreadsheet here, the figures did not import well.

Apr 06 2012

Book Review: Adapt by Tim Harford

adaptThis is a review of “Adapt: Why Success Always Starts With Failure” by Tim Harford which puts forward the thesis that “trial and error” is the only way forward for complex endeavours to succeed.

Opening up to trial and error is divided into three tasks:

  • Providing scope for variation in what you do;
  • Establishing whether or not a variant has been successful;
  • Making sure that you have systems in place to cope with failure.

Each of these tasks is illustrated with a wide range of real-life examples: using the Iraq War to highlight the difficulties of running “trial and error” inside control structures that are designed to take in information, channel it to the top of the organisation and provide a channel back from the top to the bottom. Donald Rumsfeld, apparently, would not refer to the “insurgents” as “insurgents” so hobbling the US’s ability to fight an “insurgency”.

Alongside these major case studies are smaller ones, such as on Jamie Oliver’s school dinners which showed that feeding children healthy food at primary level led to measurably better outcomes in education and attendance than comparable groups not within the scheme, you can see the study here.

There is also a section on using a carbon tax to address anthropogenic climate change, this fits in as a way of making selection possible by providing a simple measure of “success”. Harford is scathing of the ”Merton Rule” which demands that new build of above a certain size generate 10% of their electricity onsite by renewable means. As put by Harford this means installing capacity rather than demonstrating capacity which has lead to the use of dual fuel systems (nominally able to take renewable fuel) that are ultimately only used with non-renewables so providing no benefit at all.

The Piper Alpha and Three Mile Island accidents are provided as examples of the importance of being able to fail safely, they didn’t or rather Piper Alpha didn’t – arguably Three Mile Island just about failed safely. This was linked to failings in the financial system where large organisations, such as Lehman Brothers failed in a matter of hours with administrators scrabbling around frantically to come up with a controlled-landing plan. This is failure at large scale, but there is also coping with failure at the personal scale. For example, using “Deal or No Deal” as a model system in which contestants can “lose” which changes their estimations of risk for subsequent play for the worse.

One issue with “trial and error” is that the proponents of any method are often so convinced of the value of their method that they feel it immoral to subject anyone to an “inferior” alternative in order to conduct a trial. This is highlighted with a story about Archie Cochrane, pioneer of the randomised control trial in medical studies. He had been running a study on coronary care, comparing home-based care to hospital care. This had met with some opposition, with medics insisting that the home-based arm of the trial was unethical because it was bound to be inferior. When results started to come in it turned out that one branch of the trial was inferior to the other – Cochrane misled his colleagues into believing it was the home-based arm that was inferior – they demanded that it should be closed down but were rather silent when he revealed that it was in fact the hospital-based arm of the trial that was inferior!

Harford also discusses funding for research, in particular that blue-skies research could not be valued because the outcomes were so uncertain, highlighting the success of the Howard Hughes Medical Institute which funds speculative biomedical research in the US. What he goes on to say is that the use of prizes is a way out of this impasse. Using as an example the Longitude Prizes, his presentation plays up the friction between Harrison and the Board of Longitude. The Academie Des Sciences also ran prizes but until recently the method had been out of favour for approaching 200 years. The recent revival has included things like the DARPA challenges for self-driving cars, Ansari X Prize, the Bill and Melinda Gates Foundation prize for vaccines and Netflix’s film selection challenge. These have been successful, however it’s difficult to see them finding more general favour in the academic community since the funding is uncertain and appears only after researchers have expended resources rather than receiving the resource before doing the work.

From a practical point of view “trial and error” happens in the private sector, if not within companies then between. In the voluntary sector it has taken some hold, for me some of the more compelling examples were by the “randomistas” studying the effectiveness of aid programmes. In the public sector “trial and error” is more difficult: there is less scope for feedback on the success of a trial – you can’t meaningfully count customers through the door, or profits made, so there is a need for proxy measures. Furthermore, the appearance of failure carries a high price in the political sphere. This is not to say it shouldn’t happen, simply that “trial and error” face particular challenges in this area.

I like the central thesis of the book, it fits with my training as a scientist; my field allows for more direct experimentation than a randomised trial but the principle is the same. It also has pleasing parallels with biological evolution, which Harford explicitly draws. The book is well referenced, in fact I hit the end unexpectedly as I was reading on a Kindle – I couldn’t “see” the length of the end notes!

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