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Katie Caldwell, Marketing Executive Volterra

Some Surprises - But Not Many

The Budget this year was perhaps the most leaked ever: a far cry from the occasion when a Chancellor was sacked for blabbing Budget secrets.  Only the changes to allowances now being dubbed the 'granny tax' really provided much surprise which is perhaps why the journalists have fallen on them with such glee, though the detail may be less impressive than the headlines.

Overall, this was a neutral, steady as she goes, affair with much tinkering and re-announcements, and promises of more substantive stuff to come.  Those who compared this budget with the confusions and sleights of hand in Gordon Brown's Budgets have some justification, although the Red Book is still a lot clearer than in his day.

And there was one announcement which pleased me very much.  As a Commissioner for the Public Services Trust 2020, I strongly argued for the benefits of tax transparency and that people should have a clearer explanation of how their taxes were used, particularly in relation to the services that they consume.  And the Chancellor has picked up this idea and is going to implement it.   This may seem a small step but bringing the scary and incomprehensible billions down to the scale of the tax payer themselves will give a much more informed and realistic debate about value for money.

I was also pleased, but without the frisson of surprise, at the reduction in the top tax rate.  Although 45p is still higher than in most other leading countries and is even higher when national insurance is taken into account, this is a step in the right direction for enterprise and even the tax take itself.  Having helped in garnering support and letter writing on the matter, it was nice that HMRC confirmed that not much tax is actually being raised by hiking top rates.

Of course, the cut is being balanced by rises in the tax on high value property which could bring to an end the surge in prices across central London, but the constraints on supply may be more effectively bolstering prices than the tax in denting them.

There is nothing wrong in a boring budget with no surprises in a time of uncertainty and wobbling growth.  The OBR has opined that government finances remain on track.  the balancing act between cuts and taxes may just be about right.

Bridget Rosewell

21st Century Policy Development





21st Century Policy Day - the Breakfast Panel!

   I spoke last week at a fascinating day on how policy development needs to be rethought, organised by Synthesis of which I am an Associate. The day made clear that both the techniques now available to us (computer modelling, simulation techniques) and our understanding of the elements of our problems (dynamics, feedbacks, behaviours, networks) suggest that we are making as big a policy shift as when big government first became fashionable in the twentieth century.

Then people believed, from the Webbs to Gordon Brown, that government could solve all our problems and make us be happy. Now we are more sceptical of these claims, even though we are starting to measure happiness, and of our government’s ability to devise and execute appropriate policies. Hats off to Matt Hancock and Jesse Norman, MPs who supported last week’s conference and opened and closed it with their own perspectives.

My own contribution to the debate was from my engagement over the couple of decades with infrastructure projects. I found it hard to stop grinning when the Chancellor, in his Autumn Statement, stated that infrastructure supports economic growth, since this is a case I have been making for more than a little while. However, the analytical underpinnings of this argument and how it relates to both the financing and the funding of projects is still not well articulated or understood and I talked about some of these issues in relation to investments that I have been involved in, such as Crossrail, High Speed rail, Thames Gateway Bridge (and more).

Successful policy development requires several different perspectives and this was illustrated in the context of security policy as well as infrastructure. Generating the right analysis is one essential element, but asking the right question is an important starting point, and getting support across the spectrum for a new approach is also key. The right analysis has to address the right question. ‘Is this railway worth paying for?’ is a good question and leads to asking who will pay for it and why. Is it passengers? Or property developers? Or does the taxpayer have to cough up for something unspecified, such as a welfare benefit?

Clear questions also require clearly articulated answers and the challenge to analysts and modellers is to provide models that policy makers can understand and challenge. Models cannot capture everything – by definition they are simplifications. Are the simplifications the right ones? Outcomes are inherently uncertain. Can the model show the likely range of outcomes with any degree of robustness? Our policy makers need to ask these questions of analysts rather than rely on a black box and their academics and civil servants.

There is a risk that one set of black boxes will be replaced by another set – cleverer ones no doubt. I hope not. I myself try to present arguments that have a common sense element but can be backed up by data and models. I need policy makers and politicians to challenge me and everyone else to make sure I succeed in creating these so that we can have a healthy policy debate rather than a technocratic one.

Bridget Rosewell, Partner at Volterra

Photo credit: © Zarina Holmes / Synthesis ISP

High Speed 2 – What Can We Know?

Henry Overman, in the most recent issue of Centre Piece, the journal of the Centre for Economic Performance, concludes that he is sceptical of the benefits of the proposed High Speed line, because the opportunity cost is high. He wonders whether this is the best way to spend government money and if there are more effective projects.


This is a conclusion that is very seductive and needs careful examination. A series of smaller projects, invested over shorter periods, offer more certainty about both their costs and their benefits. They will not be game changers and can therefore be analysed in the context of ‘business as usual’. The Eddington review also came to the conclusion that sets of smaller projects had better ratios of benefits to costs.

The proponents of large projects therefore need to be clear both about their own assumptions and those on which the conclusion above is reached.

In the UK, we undertake extensive cost benefit analysis to reach conclusions about the value of investment. These are based, as Overman points out, on values of time about which it is possible to argue both about values and the ability to work on a train. He comes to no conclusion on these issues – although they are key to the comparison of cost benefit ratios of projects by which one might conclude that small projects are better.

The opponents of High Speed 2 have, after all, made great play of the proposition that it is not ‘worth’ £17bn of taxpayer funding to save 20 minutes in getting to Birmingham. I would agree that if this were the only argument, then it does seem a rather expensive toy.

Overman goes on, however, to point out rightly that the bigger argument about HS2 is about getting to Manchester, Leeds, Sheffield and Newcastle – and indeed points further North – quicker. The argument is really about growth. This is dismissed by Overman as likely to promote growth in the South as readily as in the North. If increased growth is desirable, this might not matter of course, but in fact we know that cities with the fastest employment growth have also seen the fastest growth in rail trips and we know that better and quicker trips attract more travellers. Overman’s dismissal seems to me to be premature, especially when this is such an important part of the case.

I am disappointed that someone who has sat on the HS2 analytical challenge panel has not made some more fundamental challenges. In a stable economy we might choose to invest in transport to save people time, or to give them more pleasant journeys. When the economy needs to change and grow, we are investing for quite different purposes – to make it possible for cities to reinvent themselves and reach new markets. So we cannot compare ‘small’ projects designed for the former purpose, with large projects designed to foster growth.

The Jubilee Line Extension did not pass the cost benefit test. But Mrs Thatcher decided to build it anyway, and now it is full and has been essential to getting Docklands regeneration off the ground. Growth, anyone?

Sorry Henry – get more challenging.

Bridget Rosewell, Managing Partner Volterra

The 50p Tax Rate and Writing Letters

The Daily Telegraph inferred on Monday Feb 27th that the 50p tax rate was bringing in less than expected since income tax receipts are not rising alongside other taxes. This is potential confirmation of the proposition I and others made last summer in a letter to the Financial Times. In the letter, we argued that such a tax would do more harm than good, damaging innovation and entrepreneurship and deterring mobile workers.

I was involved in canvassing economists to sign the letter and indeed appeared on various radio and television shows to support the argument. Now it appears that the evidence on our forward looking argument may well have been right.

Nonetheless the tax exists so what was the point of such a letter? Certainly not simply so that we could say ‘I told you so’ later. Rather we hoped to influence the terms of the public debate on these matters and make it possible to defend lower tax rates. Who knows, it might even be possible to defend bonuses!

Not everyone agrees that economists should write letters to the papers. Alan Manning, professor of economics at the London School of Economics, thinks that such letters are all about how many signatories a letter has rather than its content. So he thinks there should be few signatories, and that a letter must provide ‘serious evidence’. This seems to mean waiting until the damage has been done, rather than warning of potential for damage.

It is true of course that economists can hold themselves above the fray, never coming to a conclusion until the evidence is overwhelming – although I have never encountered an economic proposition with which reasonable economists all agreed. On the other hand, if an economics background and training is useful, it should be useful in the policy debate. And if a group of economists draw attention to a concern that they share, this seems to me to be a useful thing to do.

Professor Manning thinks that such letters undermine the reputation of economists. I’m not sure with what constituency since most people think our reputation is pretty low anyway. Perhaps engaging sensibly with sensible debates on which opinions can vary and evidence be ambiguous might be a way to raise it.

Bridget Rosewell, Managing Partner Volterra

Post-Crisis Economics

A conference last week brought together a variety of economists from academia and policy to discuss what changes the discipline should produce post the financial crisis and what changes should be made to degree studies.


There was probably a consensus that micro economics had made more progress than macro in recent years and that students should be taught more economic history (and possibly the history of economic thought), but beyond this there was perhaps insufficient willingness to engage in setting out the principles of the subject. John Sutton suggested that we would only be able to say we had a proper subject discipline when we could say that 95% of a textbook was true – when I asked the audience later to say whether they thought even 50% was true, no hand at all went up. I hesitated to try and find out whether there was any percentage a majority would have signed up to! I did wonder whether we should run an auction to decide the agreed proportion – an area where there is probably a consensus that progress has been made – but didn’t have any rules to hand.

If teachers and practitioners are unclear what truth there is in basic teaching, what can the subject be about? One teacher suggested it was about ‘thinking like an economist’ which I defined as considering incentives, balancing costs and benefits, asking about market failures. This is certainly how the distinction feels in public policy. Of course, this has nothing to say about whether equilibrium is a useful concept, or whether maximisation is possible.

John Kay stressed that different problems would need different approaches and modelling techniques and that economics was too often a technique in search of a problem. Andy Haldane drew attention to the importance of networks in many markets and how standard economics made no allowance for the impact of one market participant on another. But the group did not really focus on these approaches, and I think largely prefers to consider how adjustments can be made to the existing approaches to maintain as much as possible of the canon – even though it is not true!

Hardly anyone referred to learning from other disciplines, whether anthropology, biology, psychology, philosophy or history, although many of these are making contributions to how economies work. A particular contribution comes from physics as Paul Ormerod pointed out.

Of course there are circumstances in which the standard model of independent market participants, able on average to build a good model of the market, in a rational way, will be a sensible approach. But there are many circumstances when these conditions will not hold. It was noteworthy that innovation, growth, and disruption got little coverage at the conference. What is the model for considering large scale investment which will change connectivity between markets for example? What about technical innovation which disrupts markets? These are the sorts of changes which have been a distinguishing feature of capitalism and which have made possible the standard of living, health and longevity we now enjoy. We didn’t discuss these and we must.

I think that the conference showed that economics continues to have good problems, and it has some good skills. But it still lacks a set of good theories and quite often lacks good data as well.

Bridget Rosewell, Managing Partner, Volterra

Co-operation and Competition

Ed Mayo, ex-head of the New Economics Foundation and now of Co-ops UK, has an interesting blog (read here) on the importance of co-operation in our economic system rather than competition. This is a really challenging and difficult topic.


Co-operation is extremely important to the successful functioning of the market-oriented economies of the West. But this is not because of co-operation as an organisational structure. The dominant form of corporate structure for over 100 years has been the shareholder-based joint stock company, and not organisations based on co-operative lines. But nevertheless, co-operation between firms is essential.

The most important reason for this is very simple. Complex economic systems contain many linkages between the different component parts. In an evolutionary context, we can think of a competitive relationship between two firms being expressed by a negative connection between them. If one does well, the other is likely to lose out, and its fitness is reduced. In contrast, a co=-operative relationship is positive. If one does well, the fitness of the other is increased, and vice versa.

Economic theory focuses exclusively on the competitive links. But these are dominated by the co-oerative ones. The structure of production is the reason why. Most economic activity does not involve the final consumer, the individual. It is business to business. So if a firm learns to produce something more efficiently, or if it innovates successfully, the companies to which it supplies benefit.

More generally, co-operation is needed to agree institutional structures in which economic activity can take place. And it is the basis of most contractual agreements. It is impossible to specify in complete detail most business-to-business contractual relationships – look at the massive difficulties caused by Brownite thinking on this in terms of the relationships between regulators and the regulated in the relevant sectors of the UK economy. A strong element of trust is required.

But all this co-operation, which pervades successful capitalist economies, has nothing to do with the organisational form of companies. It can, and indeed has, shown itself in a system dominated not by co-operative but by joint stock firms.

I have been interested in this for some time, and here is a very technical paper which examines what happens in an evolutionary system when most of the linkages are competitive and not co-operative.

Paul Ormerod, Managing Partner Volterra

The Folly of Wellbeing in Public Policy

The idea that Government policy should focus more on promoting wellbeing has been gaining support. Proponents of this view argue that happiness indicators have stagnated over decades because, they argue, governments have paid too much attention to maximizing a materially-based measure of economic welfare, Gross Domestic Product, rather than a more holistic indicator based on happiness.  This premise is clearly false.   Economics has undoubtedly been important in post-war political life, but it has not always been a decisive factor in determining the outcome of elections. Clinton’s Party lost the election in 2000 despite years of prosperity, Margaret Thatcher led the tories to re-election in 1983 despite the 1980-82 recession, and Tony Blair overwhelmingly defeated the Conservatives in 1997 after several years of strong economic growth. The fact is politicians do exhibit concerns over a wide range of issues where GDP is not the immediate focus.  For instance immigration and crime are two very live issues that no serious politician can afford to ignore. Yes, economics and economic policy matters to voters, but so do other issues, and it is wholly misleading to suggest that policy is focused solely on the maximization of GDP.    GDP as a concept has been criticized as it does not capture wider social and environmental costs and benefits within a society.  But the simple fact is that GDP was never intended to include them in the first place.  The purpose was to measure the value of the output of an economy, as far as possible using market based prices to do so. The question of measuring non-market output is conceptually different to that of happiness and well-being, but it is often confused with them in practice.  Namely:  Should we, and if so how, extend the concept of GDP to include more ‘non-market’ factors?   A wide range of adjustments to the basic measure of GDP have been suggested, such as weighting income by the degree of inequality, deducting the value of ‘bads’ such as time spent commuting, valuing work in the house, and so on.    However, the wellbeing movement goes far beyond tinkering with what is and what is not included in GDP. It suggests replacing it altogether with a measure which purports to describe not the material prosperity of a population, but its happiness.   Surveys on the levels of happiness reported by individuals have been carried out over a few decades in most Western countries. In general there is no apparent trend to be found, either up or down. Over the same period, average material standards of living (GDP per head) have shown a clear upward trend. This seems to support the old maxim ‘money does not buy you happiness’! The fact that measured happiness has not increased over decades is viewed by some commentators as indicating a flaw in our society which must be corrected through government intervention.  Indeed the lack of correlation between happiness and GDP is indicative of a similar non-trend across many other variables: expenditure, life expectancy, racial and gender inequality.  This suggests that attempting to improve the human lot through any policy – not just through pursuing economic growth - is entirely futile. Alternatively, we could conclude that happiness data over time shows little movement because it does not have much meaning.   When happiness is measured, people are asked to register their level of happiness on a scale of n categories (e.g. 1 = ‘not happy’, 2 = ‘fairly happy’ or 3 = ‘very happy’). Discrete categories mean that people have to undergo large discrete change in their happiness in order for this to be registered by the indicator so noticeable changes in average happiness can only come about through substantial numbers of people moving category. Furthermore the happiness data can exhibit no indefinite trend; in answering a survey in which levels of happiness are measured on an n-point scale, the data is therefore bounded between one and n. In contrast, at least as it is presently defined, real GNP can exhibit no upper bound.    More subtle recent work is in fact suggesting that there is a clear and positive connection between life satisfaction and income, and that there appears to be no cut-off point to this.  In a paper published in 2010 in the Proceedings of the National Academy of Science Daniel Kahneman and Angus Deaton distinguished two aspects of well-being.  First, life satisfaction, defined as the thoughts which people have about their life when they think about it.  Second, emotional well-being, which refers to the emotional quality of an individual’s everyday experience, the frequency and intensity of emotions such as joy, anger, sadness. The results of Khaneman and Deaton are striking.  Life satisfaction is unequivocally related in a positive way to income, but emotional well-being is not. In these recent studies, GDP does therefore appear to continue to have wider value as an indicator of a successful society, over and above its direct purpose of measuring material prosperity.   Despite such recent developments happiness advocates continue to insist that a single measure of happiness should be the only way of evaluating policy and progress. The problem is not merely that this lobby wants to replace GDP with a happiness index, it is the belief that by measuring happiness, it then becomes subject to prediction and control by policy makers. Of course, the fact that economics has made little or no progress in its ability to predict and control the macro economy might be seen to suggest that same fate awaits the happiness index and its devotees.  It is simply not possible to obtain systematically reliable predictions of aggregate happiness indices, any more than it is for GDP. We cannot predict with accuracy the next shake of a true dice, and neither can we do so for happiness.    Indeed, government attempts to increase measured happiness, rather than making life better for us, may well actually do the opposite: create arbitrary objectives which divert civil service. energies from core responsibilities; give many people the message that happiness emanates from national policy rather than our own efforts; and create pressure for Government to appear to increase an indicator which has never before shifted systematically in response to any policy or socio-economic change.   These are exactly the mistakes of the target-driven mentality which has come to pervade the British public sector.  We should learn from these rather than replicate them.   By Paul Ormerod. Read Paul’s full chapter on the subject in the recent IEA publication …and the Pursuit of Happiness available here.

Recessions as Collective Action Problems

In a blog on Keynes and Hayek I mentioned that I viewed recessions as collective action problems. In this blog I want to expand on what I mean by this because it makes all the difference for economic policy. It also contextualises our conventional demand management approaches, namely fiscal and monetary policy.

To build up the hypothesis, it is necessary to dip our toes in to a number of fields of study. But let us start with some empirical evidence and build the conceptual framework from there.
In his study of decision-making in the financial system, set out in his book Minding the Markets, Prof. David Tuckett from UCL interviewed 50 investment managers and analysed how they made decisions under conditions of uncertainty. Here I will take Prof. Tuckett’s conclusions and apply them to the phenomenon of recessions.

Prof. Tuckett explained how investment managers used narratives to help them make sense of the past, present and future. The amount and complexity of the information and the high degree of uncertainty they have to deal with can be staggering. So they develop narratives – mostly sub-consciously – to form what seems to be a cohesive pattern of understanding. This is also true of people in everyday life.
This is very different to conventional economics where “rational expectations” dominate. In this conventional approach, people are typically fully informed, have a particular (unchanging) model of how the economy works, and use these to determine their expectation of some variable in some fully predictable future.
By contrast, in reality people use narratives – again, subconsciously most of the time – in complex environments and these narratives can include some expectation of the future. People also typically have a sub-set of the information required to make decisions in their daily lives and, in complex social systems, the future is inherently uncertain.

Narratives form an important part of our framing of some situation or object but that is not to say they displace conscious analyses of the economy. The two are not mutually exclusive: narrative formation can involve a complex interplay of the conscious and sub-conscious aspects of the brain.
Narratives are also formed in part through social interaction. We listen to what others have to say: they influence us and we influence them, both at the same time. This important point means we are compelled to think of social systems as “Complex” (meant in the formal, Complexity theory sense), with people continuously interacting and co-evolving. The concepts of emergence and global cascades are useful for understanding how narratives are “exchanged”, how they spread, and how a particular narrative might become a “consensus” view among a group of people.

With these micro and system-wide points in mind, my argument is that recessions come about when a dominant narrative emerges within society, leading to behaviour that is consistent with a recession subsequently arising. If people believe a recession is likely, or imminent, they tend to behave “prudently” with respect to both consumption and investment. An important point is that the narrative of a recession and how people respond to that narrative make a recession both inevitable and self-fulfilling. In more technical language, there is “time-consistency” between the narrative-expectation and people’s behaviour.
An important difference between a recession narrative, which leads to a recession, and traditional theory is that in the latter, an economy is typically expected to gravitate toward some future full-employment equilibrium. For example, the models used by central banks (the terribly-named Dynamic Stochastic General Equilibrium models) normally show economies necessarily recovering following a recession. But if the consensus narrative is one of recession, and remains there, it is plausible that an economy can remain in that state, i.e. a “depression” narrative could emerge, reinforcing the slump. Alternatively put, a depression could be viewed as a sub-optimal equilibrium in a complex system.

I refer to recessions and depressions as collective action problems because they arise out of the collective action of agents in the system, operating in a way that is consistent with self-interest but which result in outcomes that are detrimental to all. An analogy is the Prisoner’s Dilemma game in game theory. As is famously known, the outcome in the Prisoner’s Dilemma is sub-optimal for both prisoners. If they could collude (a form of collective action), they could achieve a different outcome that is preferable for both. But this outcome is contingent upon the collusion being viewed as credible by both prisoners: some mechanism is required.

Now let’s turn to the policy implications of treating a recession as a collective action problem. In traditional macroeconomics, the mechanisms used to mitigate recessions (fiscal and monetary policy) are viewed as managing the overall level of demand in the economy. But if the narrative approach above is accurate, are these traditional tools of demand management sufficient for bringing about a recovery? Not necessarily.
What is crucial is the impact these policies will have on people’s narratives about the economy, not only their impact on “aggregate demand”. How these changed narratives influence individuals’ behaviour is another important question. A key point is that the overall impact of people’s changing narratives concerning an economy can dwarf demand management policies. A second key point is that narratives seem to be formed through an emergent process, which means prediction and control are highly problematic.
It is for this reason that I am sceptical of orthodox Keynesian approaches that imply a mechanistic view of the economy, whereby people adjust – deterministically – to macro management policies. Narrative formation is much more complex than that. Indeed, my colleague Paul Ormerod noted in November that the US appeared to be enjoying an expansionary fiscal contraction. This is possible if narratives change in favour of a recovery, leading to recovery-consistent behaviour by individuals, despite a fiscal contraction.
However – and this is a big however – demand management policies can and do influence narratives. But they should be viewed as one of a complex set of influences on how people view the economy, including its future.

UK GDP Growth (Source: ONS)

Before concluding, it is worth noting that these points relate to the fiscal policy debates of 2008-2010. During those debates the conventional Keynesian and Conservative perspectives were wheeled out. Keynesians said the fiscal deficit had to be expanded to counter a contraction in private demand; and Conservatives emphasised prudence to inspire “confidence”. A narrative-based framing shows that the Conservative perspective was not as unreasonable as Keynesians argued: we can re-state “confidence” through a narrative framing in stating that a prudent approach might inspire a shift away from a recession narrative to something more optimistic. But there is also a reasonable argument that a fiscal expansion might have inspired a recovery narrative. We will never know. What is clear is that we need to understand better how narratives emerge and perpetuate and how they can be influenced, including (if at all) by governments.
To conclude, I suspect that to those people not trained in conventional economics, this all sounds blindingly obvious. I would like to think that is because I started with a look at research based on empirical evidence, albeit based on the world of finance; and because I mixed this evidence with appropriate and cutting edge concepts from the new field of Complexity theory. But a lot more work needs to be done to deepen this framework, including by the academic community.

By Greg Fisher, Managing Director of Synthesis - associates of Volterra

HS2 gets Traction

Justine Greening has announced this week that HS2 will go ahead – which is enormously welcome. It is still surprising how many people have fallen for the proposition that is will be an expensive white elephant. Even the leader writers of the Financial Times have been captured by the Nimbys and the naysayers.
The fact remains that the long distance rail system is creaking at the seams. The West Coast Main Line is one of the busiest railways in Europe and managing its maintenance, even after its refurbishment, is a nightmare. The southern end, with massive commuter use, already needs more capacity. So we don’t just need HS2 to meet projected growth – we need it here and now.
Running infrastructure too close to capacity is risky, just as we see at Heathrow. This has to operate at 98% capacity, so that the slightest thing that goes wrong means lengthy trouble and hours to get the system back into normal running.
But the extra capacity will generate additional benefits. Accessibility is crucial to modern economies. With globalisation and the fact that cities are the focus of growth, intercity connectivity will be a key element in maintaining the UK’s economic performance. Our work for the Core Cities has shown that city centre growth will both generate and be generated by extra trips.

Bridget Rosewell

Minsky Mania: a Raincheck

The American economist Hyman Minsky is currently very fashionable, especially amongst those who are sympathetic to the idea of more government intervention in the economy.
Minsky argued that financial crises were an inevitable feature of capitalism, unless governments stepped in through regulation and central bank action.
He hypothesised that in prosperous times, when the corporate cash position became strong, exuberance developed which translated into a speculative bubble in asset and property markets. Private sector debt rose as borrowing increased to fuel the speculation, and at the ‘Minsky moment’ a crisis would occur. Following this, banks tighten credit, and even companies which are fundamentally sound may be driven out of business because of an unwillingness to roll over debt.
His theory is very seductive in the light of the experience since 2007.
But the theory does not explain why, over the past 80 years, we have only had two major financial crises, the early 1930s and the recent one from 2007. It is the dog which has not barked which causes fundamental problems for the hypothesis as it stands.
For example, in the United States, private sector debt relative to the size of the economy reached a peak of 2.1 in 1932. From a low point of only 0.4 in 1945, it rose almost without interruption to a new peak of nearly 2.2 in 2001. But there was no crisis. It reached 2.6 in 2006, much higher than its peak in the 1930s Great Depression. But again, no crisis.
The Minsky story is good at telling us after the event what happened in a crisis. It does not tell us why crises do not happen, even when the objective facts suggest they should.

Paul Ormerod

Health Spend At the Blair Benchmark

The Blair milestone has been reached. In a celebrated TV interview in the autumn of 2000 the then Premier Blair committed the government to raise NHS spending up to internationally comparable levels with our European partners or more widely with the OECD. Now our spending is over the OECD average –9.8 per cent of GDP compared to an average of 9.6 per cent. This is more than among others Finland, Australia and Italy. Spending on health per person is also now slightly above the OECD average at $3847 per person compared to the average of $3233.
For decades the problems of the NHS have been blamed on underfunding. It was said that the NHS may not have been the envy of the world but it was the envy of Finance Ministers. Now there are no more alibis. For the future there seems little chance of any large bail out where funds rise faster than inflation. The OBR Report paints a picture of falling tax revenues and might have said more about the forward commitments on public spending especially for an increased number of retired who expect improved public sector benefits and may not get them The NHS has its own forward commitments for PFI schemes and technical improvements.
The NHS and the private health sector are now much more important for the productivity of the whole economy than they were when the health service accounted for 3 per cent of GDP as was the case in 1950. There is also the potential for further drag on the economy as demand expands. Health services have a hidden economic and human opportunity cost in that they employ a large proportion of the most highly qualified personpower. How can we create conditions which would ensure that these abilities are fully used?
The key lies in a new drive for redesign of services. We have to improve quality and patient access for a level of funding which will be at best static in real terms. Yet we have a high cost, high tech model where spending has been growing by 4.8 per cent p.a. in real terms. Volterra is committed to working with health partners to make a creative and effective response to this rather large and threatening challenge.
There is an emerging model of healthcare which can deliver better services for patients. The model has four stages in prevention, early diagnosis, ambulatory treatment and care programmes. There is clear evidence from Scandinavia and from HMOs in the US that such a model can deliver better health for populations while containing costs.
Premier Blair in fact came to realize that his commitment to Euro level of spending was not enough for a good health service—for this were needed incentives and competition and patient choice. The agenda is still there and now inescapable.

(1)OECD Health at a Glance 2011. Key Findings United Kingdom.

By Nick Bosanquet, Director Volterra Health

Infrastructure Rules

It is fascinating how our attitudes have changed. Ten years ago, I was arguing the case for Crossrail – the London rail link which will increase capacity into central London by around 80,000 people in the peak – to an audience which was entirely cynical about our ability to deliver this.
An attempt to get the project off the ground in the early 1990s had failed and many experts were sure that the case could not be won. Indeed winning this case took a huge coalition of parties from business to local communities and the pressure of the new Mayor of London. I lost count of the meetings, conferences, campaigns and reports. Crucial to the case was the argument that this railway was about more than time savings. Instead it was about the economy. It was about delivering more people into the most highly productive part of the UK economy, thus enabling more jobs and more productivity.
I produced an entirely different kind of business case – one resting on output and jobs and the constraints imposed by a lack of capacity. This was crucial.
Now it seems that the argument about the importance of infrastructure is won. The Chancellor announced a long list of projects that were now going forward especially in road and rail, to be paid for by savings elsewhere. The justification is how this will support economic growth, which shows how the highest level of government has grasped that if the UK is to stay ahead, we will need an infrastructure which supports a 21st century economy – very different from the 20th century one.
London got lucky in the last thirty years. It was able to restructure away from manufacturing which was located around the ring roads and radial routes and towards services which were more productive in the central area because it had an overground and underground transport system with sufficient capacity to take up this shift in economic geography. That capacity had run out, but hopefully the re-investment will happen in time to prevent a sliding away of productivity.
However, new investment in still needed. The Chancellor has rightly supported the extension of the Northern Line to Battersea – a project which opens up regeneration on a major scale but can never be justified on standard transport grounds.
And he has recognised that London (and indeed the UK) needs to maintain its international status in aviation. A world class city needs a world class airport. Heathrow is too constrained to achieve this as air transport grows. The ideas for an estuary airport can give us the aviation capacity we need and also be linked to state of the art access for freight and passengers which will improve enormously the prospects for the rest of the country which will be able to access Europe by rail and the rest of the world by air while bypassing London.
What we now need to do is to sort out properly the funding for these projects, which should pay back. Whether in fares, development, or taxes we need to be clear that we expect these investments to pay their way, so that further investments can also be made. This will require a very different approach to project appraisal, risk and finance than those we have made so far.

By Bridget Rosewell

The August Riots: A Network Perspective

What can complex systems and network theory tell us about the summer riots?

There was clearly a great deal of copying going on, of imitating other people’s behaviour. This was both within a given community and across communities. Social network media did not cause this, they facilitated it. The incidents received much wider coverage in the traditional media.

But ex ante, it is extremely difficult to predict which events will give rise to ‘cascades’ across networks in this sort of way. Which events will lead to general riots, which will lead to local disturbances, and which will experience no problem at all.

This is a key insight of network theory. Networks are ‘robust yet fragile’. They are robust in the sense that most shocks, most bits of new information, most events are contained by the network, and their influence does not spread. But they are at the same time fragile, in the sense that an incident similar to others which have not spread, suddenly gets traction and spreads.

There are lots of examples of perceived police insensitivity towards minority communities, real or imagined. But in general these do not lead to widespread looting in British cities. There was nothing unique about the shooting of Mark Duggan, and his immediate family called for calm. But in this instance, the network was fragile. Rioting and looting spread.

Once an event happens, however, whenever copying or imitating the behaviour of others across networks is important, it becomes easier to predict whether it will really take off. The complex network structure which makes ex ante prediction very hard, paradoxically makes it easier to assess the eventual scale of the outcome than it would be if networks were not present. So, for example, early diffusion of activity across different communities is a much more powerful predictor than the initial scale of activity. Sometimes, locally large disturbances remain confined and do not spread.

Finally, although a key insight of network analysis is to break the common sense link between the size of an event and its eventual outcome, it is only broken in part. We now know that in networks, small events can have large consequences. This is where ‘common sense’ breaks down.

But a large event still has large consequences. So when riots and looting spread, you have two strategy options. First, to try lots of different small scale interventions and see if one of them takes off, if it is able to exploit the fragile property of networks. Second, to do something on a dramatic scale. For example, call in the Army and shoot 20 looters dead. But what you do not do is what it appears the police did, which was to be reactive only, not proactive. And if you want to follow the first option, time is of the essence. You want to experiment, so you had better do your experiments very quickly before the looting spreads out of control.

By Paul Ormerod

Healing the Finances of the NHS

The financial problems of the NHS are extremely serious—but more like anaemia than haemorrhage. It is the financial equivalent of a long-term medical condition.
The NHS Commissioning Board has just appointed Professor Malcolm Grant as chair and must now determine the likely funding, costs and demand over the next five years. Not just the cost commitments that are already there for example from PFI schemes, but also from increasing numbers of medical graduates, and rising energy and food prices.
Trusts' financial problems have probably been under-estimated. The Department of Health names 20 trusts it is concerned about, but 18 others with PFI schemes and at least three in the London area with known financial problems can be added to that list. Most of the 40+ trusts with problems are in or near London.
The NHS has to redesign services while facing deep uncertainty about budgets. By 2013 the 250 new clinical consortia will have allocated budgets but it will be 2014 at the earliest before they can be confident these are realistic.
There is a danger of funding for new programmes being blocked. Managers are preoccupied with short term survival and consultation activities when the service is faced with urgent funding and design problems, with great uncertainty about responsibilities, funding and service development. There are also problems looming regarding quality of care, especially for elderly patients.
PCTs have data on activity and cost which will not exist for new boundaries, and PCT clusters can work as development agencies for the consortia during their brief remaining life. A three way partnership between clinical consortia, PCT clusters and local government, in its new and positive public health role, is needed, with close co-ordination due to the four different funding streams: the clinical consortia, the National Commissioning Board, the health and wellbeing boards, and social care funding.

Local strategy must be defined first. As the old and wise maxim says, strategy has got to come before structure. New services are going to have to be paid for by savings on the old ones, but the incentives to make them would be much greater if people had some idea of what the money would be spent on.
The new consortia must make a start in developing these strategies well before 2013. Service redesign can use the new four-staged model of healthcare - prevention, early diagnosis, ambulatory treatment and care programmes.
Many current services are obsolete, provider dominated and the wrong side of the digital divide. We need a process of change that will take years but has to start with a clear statement from the new commissioners of what they want. They should signal their intent to use patient choice and willing providers as key resources in getting change. International evidence supports a new approach to hospital admissions. From 1999/2000 to 2009/10 hospital admissions rose 38 per cent in England, compared to 1.6 per cent in Sweden. Both nations have ageing populations yet admissions for the over 75s increased 66 per cent in England compared to 0.6 per cent in Sweden. Reduction in growth of admissions is essential to the improvements in quality of hospital care and should be a major priority for the new consortia.
The Nicholson challenge needs to be redefined in terms of 10 a per cent reduction in costs – and not just for hospitals. The immediate goal is for £15-20bn of savings but all of this cannot come from acute hospitals when they account for only 39% of PCT purchasing of services and the rest goes on primary care, community and mental health services.
Some savings need to be re-invested in better care for elderly patients and new drug therapies, where spending has been rising 10% a year. Such cost cutting is important as per patient costs will rise in response to reduced admissions.
Finally a bonfire of controls must be lit. The general aim of moving commissioning closer to patients is a good one but it will be tough to kick the central planning habit. Local commissioners and providers must regain their initiative and flexibility. The NHS has attracted many talented staff in the last ten years. Let's use them to get back to solvency.
by Nick Bosanquet, Director Volterra Health as featured in the Health Service Journal 10/11/2011

Demand for high quality residential properties in prime London remains strong despite the uncertainty surrounding the wider economy …

The riots in London set a sombre mood in the capital earlier this year. Alongside this America was downgraded amid concerns that the government is not doing enough to balance the books. The biggest issue at the moment however is the Eurozone crisis which continues to cause significant concern in the markets and dominate the news. The recovery from the recession was being bolstered by growth in the emerging economies but even this has begun to slow.
Forecasts for growth in the UK economy have been steadily falling over the past six months and the consensus is now for growth of just 1% in 2011, in contrast to the 2% being forecast at the start of the year. Forecasts for just 1% over the whole of 2011 would require only slight growth in the final quarter. The preliminary estimate for GDP growth in the third quarter of 2011 was 0.5% which was higher than some expectations.
Forecasts for growth in 2012 have been dramatically downgraded in recent months. In August commentators were still forecasting growth of 2% for 2012 but this has been revised down and now the consensus is for growth of just 1% next year as well. However this median position hides a wide range of opinions, with some forecasters expecting less than 1% growth and others forecasting closer to 2% growth. In reality all this really tells us is that considerable uncertainty exists at the moment.
However, despite this very uncertain outlook for the UK economy with economic performance being, at best, mediocre in 2011, prime residential property has still seen incredibly strong returns up until the end of the third quarter.
Despite national house prices remaining stagnant in 2011, London prices are 3.9% up so far in 2011 and as much as 8.4% in prime parts of the capital such as Westminster. House prices nationally remain 11% below their pre-recession peak levels, prices across London have returned to their previous peak but prices in Westminster and Kensington & Chelsea are now up to 13% higher.
Indeed transactions of prime properties in London priced £2m-£5m have hit record levels every quarter this year and Volterra now expect that prices will finish the year at least 6-8% above 2010 levels with growth exceeding this in the really prime central parts of London.
It is clear that the prime central London housing market is very different from the rest of the UK. While in most regions of the UK prices are mainly driven by the performance of the regional economy and the availability of mortgages, this is less true in central London. The prime central London market sees considerable numbers of cash purchases, largely because it attracts international investors. Therefore it depends more on the global economy than that in the UK and, despite the UK economy not being the strongest, it is still perceived as a safe haven for property investment especially with the current concerns over the health of the Euro. Buyers from emerging economies are growing in importance and this has been particularly evident in prime locations such as Knightsbridge where international demand and cash purchasers are much more prevalent.
There remains a shortage of good quality stock in prime locations. Demand is being driven by predominantly overseas, equity rich purchasers, particularly for higher value properties.

The uncertainty around troubles in Europe and wider economic concerns are now resulting in a more nervous sentiment which suggests that we may see a relatively stagnant final quarter; however, this does not take away from the fact that the market has still been one of the best performing sectors in an otherwise difficult economy.

By Ellie Evans

Paul Ormerod: Why Are Markets So Volatile?

Mainstream economic thinking has considerable difficulty in explaining the massive degree of volatility of financial markets over the past few months. Both shares and bonds exhibit large fluctuations on an almost daily basis.
The problem is particularly acute for the concept which is fundamental to a great deal of modern macroeconomics, based on the so-called ‘representative agent’. This would not matter if it were purely a piece of esoteric reasoning, but models which embody this concept proliferate in central banks and international financial regulatory bodies.
The simplifying assumption is made that the workings of the economy can be explained in a model in which there is just a single decision maker, deemed to ‘represent’ the behaviour of everyone.
The ‘representative agent’ is certainly a curious assumption to make in the light of the financial crisis, when much of the focus is on the differing behaviours of creditors and debtors. In the Euro area crisis), for example, it makes no sense at all to speak of the ’representative agent’, the German government has quite different behavioural rules and constraints from that of, say, the Greek and Italian administrations.

Kenneth Arrow, a Nobel Laureate, wrote in 2004 that the representative agent assumption cannot explain the fundamental existence of markets at all! ‘if we did not have [agent] heterogeneity, we would have no trade’. In other words, if people did not have different opinions about the value of a share or a bond, why would trade take place at all?

Keynes put it a different way. If all traders think identically, market prices will fluctuate between zero and infinity!

And here we have the explanation for market volatility. The more that traders follow the herd, the more the market as a whole begins to think as a single agent. And so prices fluctuate more.

Traders form their views on a mixture of their private opinions and on market sentiment. You may think the Italian government’s finances are sound, but if most other people disagree, it takes a very brave soul to stick to his or her private opinion.

In the current circumstances, when there is considerable uncertainty, traders are giving much more weight to market sentiment than to their private opinions. The more the world looks like the world of mainstream economic theory, the more volatile it becomes!

By Paul Ormerod

Paul Ormerod: Expansionary Fiscal Contraction

To many people, this phrase is an oxymoron. How can fiscal contraction be expansionary?
But the evidence suggests that this is exactly what has been happening in the United States.
In terms of national output, GDP, the trough of the recession was reached in the second quarter of 2009 (2009Q2). We have now had nine successive quarters of positive growth, and in 2011Q3 the level of output is above that of its peak level before the recession started. Growth has not been as strong as would be desirable, but there has been consistent growth. On any measure, the recession is over.
Where has the growth come from? Not from public spending! Between 2009Q2 and 2011Q3, current public expenditure in real terms fell by $38 billion, or by some 1.5 per cent.
The private sector grew, the public sector contracted. Private consumption rose by $450 billion, nearly 6 per cent, and capital spending by firms rose by $200 billion, or nearly 13 per cent. There was a slight deterioration in the net export position, but overall the private sector delivered growth.
The employment figures tell the same story. Employment changes tend to lag what happens to output, and the lowest level of total employment was not reached until February 2010, when 129,200,000 people were employed.
Between then and September 2011, public sector employment fell by nearly 500,000. But private sector employment rose by over 2.5 million, to give a net increase of almost 2.1 million.
The lessons for Europe are to have a co-ordinated fiscal contraction.

By Paul Ormerod

Wasting Lives - a statistical analysis of NHS performance since 1981

The last few months have seen regression in the public debate about health options in the UK with a disregard of key evidence. A new report published this month authored by John O’Connell,the Research Director of the TaxPayers‘ Alliance, analyses the performance of the NHS over the past thirty years (read the full report here). The TaxPayers‘ Alliance is to be congratulated on its restatement of what should be one of these key pieces of evidence—how far is the NHS delivering an adequate performance in terms of preventing mortality.
There is now an accepted methodology developed by McKee and Nolte at the London School of Hygiene for estimating numbers of premature deaths and a number of studies have shown that the NHS is performing poorly on this indicator. In this latest review the UK rate of mortality amenable to healthcare in 2008 was 33 per cent higher than the average rate of the Netherlands, France and Spain leading to 11,749 more deaths. Such evidence does not affect deep emotional loyalty but it should surely prevent the kind of uncritical endorsement of the current system which we have heard so much of from the BMA, Baroness Williams with greatest eloquence. They are uncritically endorsing a system which is not delivering rather than showing any sense of urgency in seeking explanations.
But why? It used to be quite possible to argue that the main problem was underfunding that England was spending less than the Euro average. The last ten years have seen an actual test of this hypothesis with a growth of spending that has brought the NHS close to the Euro average and above low spenders such as Scandinavia and Spain. Yet there has been no change in the rate of improvement in mortality. The ―UK has caught up with it European peers at a nearly constant rate between 1981 and 2008.‖ There has not been a surge of improvement related to the surge of spending. Of course the argument is already being made that the NHS needs more spending as a result of demand factors: but even if this were feasible there is little reason to expect any better results than in the previous period.
The Report reviews other health systems and presents a strong case that the real problem with the NHS is responsibility. People at the local level are deprived of capability for key decisions on performance. Where not frozen by politicisation, decisions are parked by bureaucracy. Any attempt at local initiative such as the recent strategy for London tends to be blocked for political reasons. Most key decision such as on pay and service are dictated from the centre. The TaxPayers‘ Alliance has made a worthy contribution which challenges the health establishment to act on evidence.
It is clear that triple nationalization – funding, resource allocation and provision delivers results which are deeply damaging to many patients. A single payer system linked to pluralism in supply – in effect the model in comparator countries – will produce better results for patients. Research by Cooper has shown that competition saves lives for patients with cardiac problems. Hospital competition lowered death rates from heart attacks 2002-8 by approximately 7 per cent. But will we ever shake the Groupthink of the health establishment and persuade them to put patients first?

Nick Bosanquet: Director Volterra Health

Why is economic growth stalling? May be it is Ricardian equivalence!

The British and American recoveries do seem to be stalling. The recovery profile is by no means as strong as is usually the case after recessions, even after pretty major financial crises like that of 2008/09.

One of the insights of complex systems is that the impact of any particular factor may differ dramatically according to circumstances.  So think, say, of a network of firms or consumers and ask how optimism or pessimism might spread across the network.  Each decision maker will for his or her view in part upon the views of others to whom he or she is connected i.e. pays attention.  And each agent (decision maker) will have its own level of persuadability.  In other words, how easy is it for other agents to get the agent to change its mind? 

A well established result is that changes in the opinions of a small number of agents can have dramatically different outcomes in terms of how far they spread across the system as a whole.  Most of the time, changes of mind by a few agents won’t get very far.  But occasionally, they can infect, as it were, almost the whole network.

Ricardian equivalence is an esoteric concept which much of the time has little or no impact. But it might be doing now.

David Ricardo was a great English economist who wrote in the early 19th century.  He made millions in the City and was also an MP.  During the Napoleonic wars, government expenditure grew phenomenally.  Ricardo asked: does it matter how this is paid for?

One way is to put taxes up now.  The other is to run a deficit and issue government debt (bonds) to pay for it.  Ricardo said it didn’t matter how it was done.  The latter way implied a future stream of interest payments on the debt, and rational agents would anticipate that taxes would go up in future to meet these payments.  So they would cut back their spending now to save for the increases in future taxes.  Their spending would fall by just as much as if they were taxed now.  The two methods are equivalent.

The current massive emphasis on government debts and deficits certainly alerts consumers to the idea that taxes might have to rise to pay for them.  So they are cautious about spending.  Companies, sitting on piles of cash, observe this caution and postpone investment decisions which they can easily afford to pay for.
So the economy stalls.  In more normal times, Ricardian equivalence is a pretty odd idea.  But it might be why the recovery is weak now.  Paradoxically, cutting the deficit more sharply might lead to a much stronger rebound.


By Paul Ormerod