We need to talk about productivity

"We need to discuss the complete disconnect between the marginal product of labour and labour wages," said Sir Chris Pissarides, speaking on the closing panel of the Lindau Economics Meeting.

I tweeted this comment. Laurie MacFarlane of the New Economics Foundation promptly responded with this chart that brilliantly illustrates Sir Chris's point:

"Quite why marginal productivity theory is still taught as something which explains the real world is beyond me," commented Laurie.

Marginal productivity theory says that profit-maximising firms will only employ workers who can generate at least as much additional return for the firm as they are paid. Expressed like this, it seems sensible: why would a firm employ a worker who is a net cost? But marginal productivity theory also says that the amount firms pay their workers is equal to their marginal product - in other words, that wages rise in line with productivity.

This is demonstrably untrue. Wages have not kept pac…

Tariffs, trade and money illusion

In the past few days, I have read three pieces from Economists for Brexit - now renamed "Economists for Free Trade" - extolling the virtues of "hard" (or "clean") Brexit and calling for the UK to drop all external tariffs to zero unilaterally after Brexit. Two are written by professors of finance (Kent Matthews and Kevin Dowd). The third is from the veteran economist Patrick Minford.

All three of these pieces wax lyrical about the benefits to GDP and welfare from unilaterally reducing external tariffs to zero. But bizarrely, not one gives adequate consideration to the currency effects of trade adjustment and the likely monetary policy response. Minford's brief discussion contains a schoolboy error (of which more shortly). The other two never mention it at all.

In today's free-floating currency regime, trade shifts and currency movements are intimately linked. Indeed, for some countries, trade shifts are driven more by capital flows and associated…

Calculus for journalists

“What do they teach them at these schools?” wondered the Professor in C.S. Lewis's The Lion, the Witch and the Wardrobe. 

The Professor, of course, was concerned about logic. But I wonder too - not about logic, but about maths. Especially among journalists writing about life expectancy and other long-term trends.

Here is the FT proclaiming "Average life expectancy falls". This is the headline for a chirpy piece about how reduced life expectancy could make things easier for pension funds facing big deficits. 

There's only one problem with this. Life expectancy isn't falling. And the report the FT cites does not say that it is.

This is how the press release from the Institute and Faculty of Actuaries summarises the findings of their report:

Recent population data has highlighted that, since 2011, the rate at which mortality is improving has been slower than in previous yearsHowever, mortality is expected to continue to improve and there is significant uncertainty…

Bitcoin and bimetallism

I wrote a piece on Forbes recently in which I described a bimetallic system of coinage and suggested how such a system might work - or rather, fail to work - for Bitcoin. These are the relevant paragraphs:
In a bimetallic system, there are effectively two currencies which are linked by a fixed exchange rate set by fiat. At the end of the 19th century - the time of Bryan's speech - Britain's copper penny was worth 1/144 of one pound. Other denominations of coin were created by multiplying up the penny: so the silver sixpence was unsurprisingly worth six copper pennies, and the silver shilling was worth twelve pennies, or 1/20 of a pound. All these relationships were fixed by fiat. So, suppose that instead of using bitcoin as the medium of exchange, we use some other coin - let's call it "satoshi". We decide that this other coin is worth 1/100m of 1 bitcoin. Of course, in the Bitcoin system, there is no government "fiat": the nearest they have to this ap…


Here is a very familiar financial bubble, in pictorial form:

And this is what it looks like, charted:

In those days, of course, tulips at least had to be able to flower. But things have changed since then.

There are three key stages in the lifecycle of a financial bubble:

The "Free Lunch" period. A long, slow buildup of price distortion, during which investors convince themselves that rising prices are entirely justified by fundamentals, even though it is apparent to (rational) observers that they are buying castles built on sand.The "This is nuts, when's the crash?" period. Everyone knows prices are far out of line with fundamentals, but they carry on buying in the irrational belief they can get out before the crash they all know is coming. Speculators pile in, hoping to make a quick profit. Prices spike. The "Every man for himself" period (sorry, FT, I couldn't find a reference for this one). Prices crash as everyone runs for the exit. This can h…

Asymmetric herding

Ten years ago today, Chuck Prince, then chief executive of Citigroup, dismissed fears of a financial crisis. “When the music stops, in terms of liquidity, things will be complicated," he said in an interview with the Financial Times in Japan. "But as long as the music is playing, you’ve got to get up and dance. We’re still dancing".

He wasn't dancing for long. Less than a month later, the first bank failed. Over the weekend of 27th-29th July, IKB Deutsche Industriebank AG, one of Germany's key "Mittelstand" lenders, was bailed out by a consortium of German banks after credit markets refused to provide it with liquidity. The music had stopped. 
The reasons for IKB's failure are now all too familiar. Anxious to diversify beyond its traditional core market of German small and medium-size businesses, IKB had set up an SPV called Rhineland Funding Capital Corporation. Rhineland issued US dollar-denominated commercial paper, and invested the proceeds in…

The Worst Political Storm In Years

A year ago, I attempted to look beyond the shock of the Brexit vote and its associated economic disruption, and see into the distant future. I saw a completely different political paradigm, though I could not discern its shape. And I saw a possibility that, like Hong Kong in 1997, the fears of economic disaster would prove baseless, and Britain would have a bright future, though one which I could not imagine. I called on everyone to try to make Brexit work:
Not for a long time has the future been so uncertain. In the short-term, there will be pain. But in the longer-term, the future could be exciting. I did not vote for this, but this is what my compatriots chose, and I accept their decision. So this is what we - collectively - have chosen. Now we must embrace it, fully. For only by committing to our post-Brexit world can we have any hope of making it work. While we hanker after the past, and try to find ways of hanging on to it, we remain condemned to a stagnant future. Risk is life…