Saturday, December 31, 2016

To what do we owe the Industrial Revolution?

One of the small pleasures of my year was watching the deft political manoeuvrings of Thomas Cromwell in the TV miniseries of Hilary Mantel's Wolf Hall.

Of course, this has nothing to do with the economy – or does it?

I've just been reading a paper by three economic historians, Monks, Gents and Industrialists, arguing that an important reason why the Industrial Revolution of the late 18th century began in England, and in particular parts of England, was the long-run consequence of Henry VIII's dissolution of the monasteries between 1532 and 1540.

Henry's right-hand man in orchestrating the dissolution was Thomas Cromwell.

The economists are Leander Heldring, of Oxford University, James Robinson, of the University of Chicago, and Sebastian Vollmer, of the University of Gottingen in Germany. Their paper is published by America's National Bureau of Economic Research.

We owe today's economy to the two centuries of economic development precipitated by the Industrial Revolution, a period of radical technological innovation beginning in the 1760s.

It involved the replacement of hand tools with power-driven machines, and the shift of production from artisans' homes to factories.

The initial changes were in textile manufacture and metals, using new forms of inanimate power such as the steam engine and new methods of transportation, such as the railway.

The newly ubiquitous form of energy was coal – the start of our ill-fated love affair with fossil fuels.

There's less agreement among historians on why the Industrial Revolution started in England. Some give the credit to Britain's superior economic and political institutions. Others see it as a consequence of various "economic shocks", such as the Black Death of the mid-14th century or the expansion of Atlantic trade.

These led to changes in England's social structure, to political conflict in the 17th century, particularly the English civil war of the 1640s, to the Glorious Revolution of 1688, in which William of Orange seized the English throne from James II and, ultimately, to favourable changes in economic institutions.

The famous English historian Richard Tawney argued that the dissolution of the monasteries caused a change in the rural social structure, which led to the civil war.

Later scholars have discounted this, but our authors argue the dissolution helped bring about something much bigger, the Industrial Revolution.

As part of Henry's break with the Pope – which happened at the time of the Protestant Reformation in other parts of Europe – parliament first decreed that the Catholic monasteries' tithes be paid to the king rather than Rome, then that the monasteries be dissolved, with their lands expropriated by the crown. The king was declared head of the Church of England.

In 1530 there were about 825 monasteries in England and Wales, housing about 10,000 people. The term "monasteries" includes nunneries, friaries, abbeys and priories.

Aside from maintaining property and collecting rents, the monks engaged in prayer and singing for the local community, were active in education and were expected to provide food and lodging to travellers and distribute alms to the poor.

The church is thought to have held between a quarter and a third of all the land in England and Wales.

Henry gave away some of the expropriated land – including to Thomas Cromwell – but sold most of it. Two-thirds had been sold by 1547 and most of the rest by 1554, during the reign of Edward VI.

A key part of the authors' thesis is that most of the land was sold to the "gentry" – all non-noble landowners with sufficient land or wealth to put them above the yeomen farmers.

It's estimated that the gentry's share of English land rose from a quarter in 1436 to about half in 1688. What Tawney called "the rise if the gentry" mattered because they tended to be more commercially minded rural entrepreneurs.

The authors hypothesise that, in parishes or counties where the gentry rose more, and where commercial farming was more advanced, the gentry would be involved in other activities which would ultimately coalesce into the Industrial Revolution.

Three mechanisms could have connected the gentry to industrialisation. First, they had the vote, were able to sit in parliament and to lobby for legislation favourable to their economic interests.

Second, it's plausible the gentry were part of "proto-industrialisation", where the necessary conditions for industrialisation were established. There are many case studies of such things as gentry establishing coal mines on their properties.

Third, to the extent that the gentry were entrepreneurial commercial farmers they would have been more innovative and productive, and this "agricultural revolution" could have directly stimulated the Industrial Revolution.

But the endangered species of economic historians isn't allowed just to think up plausible theories about the past. Academic economists' obsession with mathematics means they have to seek empirical evidence for their theses by using fancy statistical techniques to find correlations between whatever "data series" they can find.

The authors digitised the 1535 Valor Ecclesiasticus – a census of the monasteries' incomes, ordered by Henry – and compared it with the 1838 survey of textile mills, as well as figures from the British census of 1831 showing the proportions of the labour force engaged in manufacturing, retail and agriculture.

They showed that the monastic income in a parish in 1535 was positively and significantly correlated with the presence of a textile mill in the parish 300 years later. Monastic income was also correlated with the proportion of the labour force in manufacturing and retail 300 years later.

They then used a census from 1700 showing the number of gentry in each of 24,000 towns and villages. Again, a good correlation with the distribution of monastery incomes 165 years' earlier.

And they used other figures to show monastic income is correlated with the number of agricultural patents registered in a parish between 1700 and 1850, implying the dissolution may indeed have led to greater innovation.

So, thanks for your help, Thomas.
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Wednesday, December 28, 2016

How to get more enjoyment from the time available

I don't know about you, but it's at this time of year, when the Christmas rush is over and things slow down – even for those who are "working through" – that I get a bit more philosophical, a bit more reflective.

What exactly did I achieve last year? Is next year going to be all that different? What's the point of working so hard? How can I find a better balance between work and play?

To tell you the truth, I'm divided between all my old professional ambitions and a desire to slow down, smell the roses and have more fun.

Of course, one of the key lessons of economics is that we're often faced by conflicting but desirable objectives, and the answer is to find the best trade-off between them. The particular combination that yields most "utility" (aka happiness).

Unfortunately, that's about as far as economists' advice goes. Fortunately, psychologists' advice is a lot more practical.

Economists are big on working to make money, then using the money to buy the things that make us happy. Which things, exactly? Who knows? Economists cop out at this point by assuming you know what things make you happy.

Psychologists assume nothing, but conduct studies and experiments to see which things make us happiest and whether we always know to pick them.

Often we don't. Some years back I wrote up the recommendations of three North American psychologists in their paper, If money doesn't make you happy then you probably aren't spending it right.

Their advice included spending on experiences rather than objects, spending on others rather than yourself (eg Christmas) and on small pleasures rather than big luxuries.

Research shows that small pleasures – such as a cold beer on a hot day or, for my family, a hot cup of tea on a cold day – are some of life's most "salient" (noticeable) instances of happiness.

But soon after, three marketing academics, Jennifer Aaker, Melanie Rudd and Cassie Mogilner, published a complementary paper, If money does not make you happy, consider time.

Ah yes, time. One of the most valuable commodities we possess, but often spend unwisely. We work less efficiently than we could (guilty) and waste too much of our leisure time sprawled in front of the box watching reruns of Midsomer Murders (ditto).

Time tends to be laden with personal meaning – we live through it, after all – compared with money which, at best, contains potential. And time fosters interpersonal connection.

Since both personal meaning and social connection have been found to be critical to happiness, for individuals to consider how they spend their time ought to be important in their efforts to "solve the happiness puzzle".

The authors' first suggestion is to spend time with the right people. That doesn't mean cosying up to Malcolm and Lucy, it means that social leisure activities contribute more to happiness than solitary ones.

People who engage in social activities more frequently, experience higher levels of happiness than those who engage less often.

Whatever the activity, you usually enjoy it more if you do it with other people.

But it's not only whether you spend your time with others, but who the others are. More satisfaction comes from spending it with friends, family and significant others (or "the wife", as we probably should revert to saying during the Trumpocene) than with bosses and co-workers.

That's no doubt true but, since most of us have little choice but to spend much time with workmates, it makes a lot of sense to turn workmates into friends whose company we enjoy.

The authors say two of the best predictors of people's general happiness are whether they have a best friend at work, and whether they like their boss.

As the quality of workplace friendships increases, so do happiness and productivity, studies suggest.

The authors' second suggestion is to spend your time on the right activities. Regular checking by testers shows that hanging out with family and friends comprise the happiest parts of the day, whereas working and commuting make for particularly unhappy portions of the day.

But, again, if you can possibly wriggle your way into a position where you enjoy your work, you'll do much better in the happiness stakes.

Third suggestion is to enjoy the experience without spending the time. Neurological studies show people get much pleasure merely from thinking about activities they find pleasurable.

You can get a lot of pleasure from reading up on and planning a holiday even if, for whatever reason, you end up putting it off.

You can derive pleasure from window shopping, and the pleasure gained from shopping for a dress may exceed the pleasure from actually acquiring the dress, they say.

But the authors' next suggestion is roughly opposite to the previous one: expand your time. Rather than spending a lot of time salivating over future purchases or adventures, focus on "the now".

One possible benefit from being present-focused is that it slows down the perceived passage of time, allowing people to feel less rushed.

In one study, people instructed to take long, slow breaths for five minutes not only felt there was more time available to get things done, but also perceived their day to be longer.

Let me wish that 2017 is a year in which you perceive yourself to be less rushed.
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Saturday, December 24, 2016

We're on the way to peak everything

Some economists worry the world economy isn't growing fast enough. It's slowing down and reaching the point of "secular stagnation".

On a very different wavelength, however, environmentalists worry that if the world economy keeps growing the way it is, it won't be long before we run out of the natural resources on which that growth depends. Whoops.

But if all that's a bit heavy for the holiday season, here's something lighter. Remember all that crazy talk a few years back about the paperless office? What a joke.

Then there was peak oil. Whatever happened to that looming disaster?

If any of those possibilities piques your interest, I have news - courtesy of an essay by Professor John Quiggin, of the University of Queensland.

Quiggin thinks the paperless office is on the way, especially because the world has already reached "peak paper".

Despite continuing economic growth, peak paper was reached in 2013. "Global paper production and consumption reached its maximum, flattened out, and is now falling," he says.

Until relatively recently, the growth and spread of information was directly linked to the growth in paper, books and newspapers.

The closely related information revolution and digital revolution have broken that link. Businesses and governments don't print reports, they just put them on their website. We read e-books and online newspapers.

Banks and businesses want to stop sending us statements and bills through the post. If we hold out too long, they impose a fee for continued paper statements.

As for peak oil, Quiggin says that, in terms of oil consumption per person, the world reached it in 1979.

"In the developed countries, the decline in oil consumption per person has outpaced population growth, with the result that total consumption is declining. The average person in a developed country now uses less oil than her parents did 40 years ago," he says.

Why has this remarkable change attracted so little notice? Partly because much of the reduction in energy use has taken the virtually invisible form of improvements in energy efficiency. Both industrial processes and household appliances use far less energy than they used to.

But also because, until fairly recently, the main substitutes for oil have been other fossil fuels, such as coal and gas. Only in the past 10 years have renewable energy sources, especially wind and solar, begun to play a significant role, he says.

Peak coal has already arrived in the developed world. Coal consumption has fallen substantially in the US and Europe, and is set to fall further.

Until recently, the decline in fossil-fuel use in the developed world has been more than offset by rapid growth in the developing countries.

But even China - the planet's largest coal consumer by far - has changed course. Beginning with Beijing, it has begun closing down all the coal-fired power stations near major cities.

"In fact, China reached peak coal in 2013, at the same time as it reached peak paper," Quiggin says.

As for peak steel, it's different. Steel lasts a long time and can be recycled almost endlessly, but demand for it is finite.

In developed countries, the stock of steel reached about eight tonnes a person decades ago, he says, and has remained stable or slowly declining since then.

"With the stock of steel on a gently sloping plateau, the need for more can be met almost entirely by recycling scrap, rather than by burning coal to smelt iron ore in blast furnaces.

"The result has been described as a 'circular economy'. When this arrives, peak steel will have been reached."

All this has happened while economic growth has continued and living standards have risen.

Economists have been saying for years, particularly in the developed world, that growth is becoming "weightless". The part of the economy that's growing isn't goods - things you can drop on your toe - but services: people doing things for people, whether fixing their health, teaching them nuclear physics or waiting on their table.

With an ever greater proportion of gross domestic product - the quantity of goods and services produced in a period - accounted for by services, economic growth becomes ever less dependent on the increased use of natural resources.

Over the long term, growth in real GDP comes less from the use of more raw materials, human labour and man-made machines and structures and more from improved "productivity" - greater efficiency with which those inputs are transformed into outputs of goods and services.

What drives productivity improvement? Advances in technology and accretion of human capital. That is, the growth and spread of knowledge and information.

But an information-driven economy is very different from the one we've become used to since the industrial revolution, one driven by the use of natural resources to produce goods plus a few conventional services.

Natural resources are finite. If you want to use my coal or paper you must pay me (they're "excludable"). Any coal or paper you use can't be used by someone else (they're "rivalrous").

This makes economic growth relatively easy to measure. But knowledge and information are opposite to natural resources: they're often freely available (non-excludable) and my knowing something doesn't stop you knowing it, too (non-rivalrous).

What's the difference between a taxi and Uber? Information. What's the difference between renting a hotel room or self-catering accommodation and Airbnb? Information.

A knowledge and information-driven economy is one whose continuing growth makes less demands on the natural environment than many scientists and environmentalists imagine. That's particularly true as we move to renewable energy.

But a knowledge and information-driven economy is harder to measure, especially using the metrics (GDP) we developed to measure a raw materials and goods-based economy.

We're now in a world where GDP is going one way and raw-materials use is starting to go the other way.

That's why Quiggin doubts that world economic growth is grinding to a halt.
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Wednesday, December 21, 2016

Why I wish we'd had our credit rating downgrade this week

You can tell by when a government releases its midyear budget update how well it's going with the budget. If it's doing well, it publishes as early in December as possible.

If it's doing badly, it publishes as close to Christmas as it thinks it can get away with, when normal people are busy with parties and preparations and not paying much attention.

This year we got the update just six sleeps before Santa's arrival. Draw your own conclusions.

And this year the government was worried, we're told, that the continued slippage in its efforts to repair the budget would prompt the credit rating agencies to downgrade our AAA status.

Labor was already salivating at the prospect, with finance spokesman Jim Chalmers confidently predicting a downgrade would "smash confidence in our economy" and "push up borrowing costs for households and small businesses".

You beauty! If that doesn't improve Labor's chances of beating the Coalition at the next election, what will? A little damage to the economy in the meantime? A price Labor would be happy for us to pay.

In the event, however, all three ratings agencies announced the update had done nothing to change their views.

But the government isn't off the hook. The most aggressive publicity seeker of the three, Standard & Poor's, didn't confirm our AAA rating, it said the update gave it no reason to change its "negative outlook" for that rating.

So the agency's supposed fiscal sword of Damocles remains hanging over Scott Morrison's head at least until the budget in May.

To tell you the truth, I'm sorry it didn't fall this week. That's not because I bear the government any ill will, but because the sooner we're downgraded, the sooner the public will realise there's little to fear from a downgrade. The ratings agencies are toothless tigers.

In any case, there is no good reason any sovereign Australian government – federal or state – should allow a few American for-profit businesses to dictate how much it should or shouldn't borrow (nor engage in hugely expensive ways of disguising the true extent of its liabilities).

The ratings agencies' credibility has been destroyed by their part in the global financial crisis. Not only did these all-wise experts fail to see it coming, they contributed to the conflagration by awarding AAA ratings to the promoters of "collateralised debt obligations" – for the small fee – that soon turned into "toxic debt".

It's long been questionable whether the agencies were leaders or followers in identifying the risks attached to the bonds issued by businesses and governments, but since the GFC there's little doubt the financial markets don't need their advice.

When Standard & Poor's downgraded US government bonds in 2011, the financial markets took no notice and the two other agencies left it hanging out to dry.

S&P downgraded Greece's government bonds only months after its budget cover-up became public in 2009.

All three agencies downgraded Britain's bonds immediately after Brexit, but market yields (interest rates) on those securities actually fell.

So it's not at all clear that a downgrading of our credit rating would do anything much to increase the interest rate at which our government can borrow.

And while it's technically true a downgrading of Australia's "sovereign" credit rating would flow on to the ratings of our banks, it's not clear this would increase their borrowing costs abroad, nor that there would be any flow-on to home buyers and small businesses.

While Labor's Chalmers was telling anyone who'd listen of the disaster about to befall everyone with a mortgage, the chief executive of ANZ Bank, Shayne Elliott, was telling his shareholders that a downgrade had already been priced into the funding costs for Australian banks.

Should the banks actually pass on that increase on to their customers, it would tell us less about the Turnbull government's budget failings than about the failure of successive governments – Labor included – to do enough to encourage greater competition between the big four banks, generous party donors that they are.

It suits neither the government nor the opposition to admit that the rating agencies' pressure on us to cut government spending is diametrically opposed to the advice we're getting from the two genuine international economic authorities, the International Monetary Fund and the Organisation for Economic Co-operation and Development.

Their advice is that, with our economy weaker than it should be, we still have plenty of "fiscal space" to strengthen the economy by borrowing to finance increased spending on worthwhile infrastructure.

All this is why I say that, these days, the economic significance of our credit rating is long gone.

It retains much political significance, however.

Governments – federal and state – still live in fear of a downgrade simply because they know their political opponents would parade this as a disaster for the government, the economy and public and private borrowers, as well as objective, authoritative proof that they are utterly hopeless economic managers.

Credit ratings are now little more than something the politicians use to slag each other off.

This is why I'm sorry we weren't downgraded this week. Only when the public experiences the ratings agencies' inability to have much effect on the interest rates we pay will they lose their power over our governments, and the pollies lose credit ratings as a political football.
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Tuesday, December 20, 2016

Party blame-laying conceals budget truths

Don't believe anything any politician on either side says about the mid-year budget update and the expected further deterioration in the budget deficit it reveals.

And don't let speculation about whether the government will or won't lose its AAA credit rating worry you.

These days, our credit rating is little more than something for the politicians to use to slag each other off. Its economic significance is long gone.

According to Treasurer Scott Morrison, the government's long and unsuccessful struggle to get the budget back to surplus is all Labor's fault, first because of the terrible mess it left when it lost office and second because of its refusal to support many government savings measures in the Senate.

According to Labor, the Coalition's been in office for more than three years, during which time things have got worse rather than better, and it has no one to blame but itself.

In truth, neither side is as bad as the other side claims, but each is more at fault than it is prepared to admit.

It's true Labor left office with the budget in bad repair. It had two big new policies - the national disability insurance scheme and the Gonski schools funding scheme - for whose rapidly growing cost it had made quite inadequate provision.

But it is equally true that the Abbott government's first act was to make the budget worse by abandoning various taxes and tax savings measures it didn't agree with.

Morrison speaks at length about the government's efforts to "repair" the budget, but the truth is that, since the rejection of the government's first budget by the public and the Senate, it has made no further effort to improve the budget balance, either by net cuts in government spending or net tax increases.

When Morrison speaks about all the spending cuts he has succeeded in putting through, and all those Labor has helped to block, he hopes you won't realise that their purpose was merely to stop the government's new spending decisions from adding to total spending.

That is, he has limited himself to trying to stop government spending getting ever greater. He hasn't been trying to make it smaller.

It is true, of course, that Labor has blocked many of the government's proposed spending cuts.

But to imply, as Morrison and others argue, that Labor has a moral obligation to pass all the spending cuts the government proposes, is to absolve the government of any obligation to propose savings the Senate might regard as sharing the burden of budget repair fairly between the haves and have-nots.

In fairness, the further deterioration in the budget outlook revealed in the up-date arises almost wholly from slower than expected growth in tax collections, particularly the pathetically slow growth in wages, which is not of the government's making.

Labor refuses to accept this "excuse" as payback for the Coalition's refusal to accept Labor's "excuses" when similar revenue setbacks occurred while it was in office.

This is the point being missed in all the blame laying: the main reason successive governments have had so little success in reducing the deficit is the economy's weak rate of growth since the resources boom started busting in 2011.

Some may think the economy's continuing weakness should not inhibit the government's willingness to slash and burn. Not me.
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