A land built by economists?

Last week I took part in a workshop organised by the National Infrastructure Commission on the economics of infrastructure and growth. It was fascinating, and particularly for illuminating a dilemma for economists thinking about the newly-prominent issue of infrastructure investment. It’s a Good Thing – but how much is needed, and which investments? How should the NIC advise on the choices most likely to increase economic welfare and growth?

There is some well-understood machinery for answering such questions, in the form of appraisals (or post hoc evaluations) using cost-benefit analysis. The trouble is that although the technique, firmly embedded in policy advice, is useful for assessing relatively small changes, it is next to useless in the context of big investment projects that involve externalities such as environmental costs and benefits or network effects, might change people’s behaviour significantly, or might have non-linear impacts which accelerate beyond a point of critical mass. These are, of course, situations that might often arise with big infrastructure projects. And the challenge is all the greater because different kinds of infrastructure will affect each other (transport and communications networks will be complementary, natural capital and flood defence schemes will interact). To cap it all, there is an economic geography dimension to this, and infrastructure will affect the distribution of economic activity over space, which will also affect the distribution of economic opportunities and incomes.

So these questions are difficult, and nobody thinks economics can answer them. What was interesting about the discussion and subsequent emails was the emergence of a basic dilemma. One of the strengths of the conventional economic approach is the intellectual discipline it enforces. Cost benefit analysis looks at the direct benefits of a project to users, and converts them into a single unit of measurement, money (although it could be owls, or happy faces). It is a powerful brake on wishful thinking.

Economics also sets out the circumstances in which wider benefits might need taking into account: when there is good reason to believe that resources are misallocated so the investment might lead to a more efficient outcome (land use in the UK would be an example – the planning system enforces many inefficiences); when there is good reason to expect a project will bring about agglomeration externalities, the additional productivity arising from there being more people in one area because there is a deeper pool of labour and skills, and know how can spread more easily; when there is reason to be confident there will be non-marginal benefits that private investors will not capture; and when infrastructure can act as a mechanism to co-ordinate private investment decisions. The latter is interesting because it suggests the prospect of multiple equilibria depending on which place or project is selected as the focal point for co-ordination.

I would add another complication, which is the scope for small changes in transactions costs or frictions to bring about big changes in behaviour. In some contexts a time saving of 10 minutes will be marginal but in others it might tip a lot of people changing their commuting or house purchase patterns. A past example is the switch from dial up internet to broadband; many economists thought this would be a small change, but it turned out to be revolutionary. The behaviour change point makes post hoc evaluations tricky, because the behaviour is endogenous to the infrastructure choices.

Everybody in the workshop broadly agreed about the basic intellectual framework (well, we were almost all economists) but the dilemma is whether it is ever feasible or sensible to allow consideration of the wider benefits. The case against – and in favour of sticking to narrow, conventional cost benefit analysis – says stick to situations where there are clear signals from market prices. For example, is there a big difference in land prices indicating resource misallocation? Otherwise, there is a danger of the kind of mistakes that have always come with ‘picking winners’ in the past. The opposing case for being more open to trying to estimate wider benefits is to ask: what would the country look like if built by economists? It would be a dreary place of functional concrete boxes in a mesh of motorways. The Victorian infrastructure we still rely on would never have been built if subject first to a cost-benefit analysis. Britain used to be considered a world leader in infrastructure but then the use of cost-benefit analysis spread widely, and now we are clearly laggards.

I’m firmly in the camp that we should be looking to develop new techniques and data to inform a wider approach. The UK economy needs infrastructure investment that will make a big difference to productivity and growth, given the self-inflicted economic headwinds we face. We need faster growth in the great provincial cities, and significant investments that will make a step-change difference in the economic well-being of people around the country in terms of air quality, flooding etc. The NIC faces quite a challenge, but also a tremendous opportunity.

My favourite books about infrastructure are Brett Frischmann’s Infrastructure: The Social Value of Shared Resources; and my colleague Richard Agénor’s (more wide-ranging) Public Capital, Growth and Welfare. Ricardo Hausmann has written about the distributional impact of infrastructure (along with natural capital, the most significant capital people on low incomes have access to).

The joy of messiness

It’s hard to imagine that Tim Harford ever writes a duff word. His new book, Messy, is a pleasure to read. (It’s published in a couple of weeks but The Economist jumped the gun with a review so I’m going to go ahead with mine now.) Messy is closer in spirit to Tim’s Adapt rather than his Undercover Economist or Undercover Economist Strikes Back. It gathers research and stories from several different fields to weave them into the theme of the title, and make the case for appreciating mess and avoiding tidy-mindedness.

For example, early on the book tells the tale of Robert Propst, an engineer (and much else) who created a design for modular office furniture and partitions for the Herman Miller company – working 150 miles away from headquarters. But his innovative design empowering workers to create their own workspaces was subverted by managers who insisted the partitions stick to 90 degree angles to make regimented lines. The cubicle farm was born. “Propst was left to condemn the peversion of his ideas as ‘monolithic insanity’, ‘hellholes’, ‘egg-carton geometry’ and ‘barren, rathole places’. The account is in a chapter about workplaces, where mess is a sign of individual empowerment and creativity, contrasted with tidy centralisation and control. (Tim has an extract on tidy vs messy desks in the FT Magazine.)

There are many other accounts of mavericks and independent-minded innovators. The book gives examples from military campaigns, creative contexts (such as Bowie’s reinvention of his music in Berlin), business and nature. I particularly liked the example of the way 18th century scientific foresters in Germany tried to measure the forests using the metric of a Normalbaum, or standardised tree. The idea was to make sense of the messiness of the forest by assigning standard sizes to trees so it would be possible to count how many trees of what dimensions there were, and thus assess the total volume of wood. What happened? “The mess of old forests began to be tidied up. The confusing patchwork of threes of various ages and species was replaced with stands of particular species – the Norway spruce was popular – and of a particular age. The foresters lined up the rows to make the forests easier to survey, to police, and in due course to harvest. Dead trees were felled, rotting hulks dragged away, underbrush cleared. The Normalbaum, once a statistically convenient idealisation of a tree, took physical form.” In the short term this was profitable. In the longer term, it destroyed the ecology of the forests. Yields declined, and the Germans by 1968 had a term for it: Waldsterben or forest death syndrome.It’s a terrific, malign example of performativity.

This chapter, called Incentives, has a number of very nice examples of the perverse effects of targetting, with echoes of the manic modernism described in James Scott’s Seeing Like A State, and of the phenomenon known to economics as risk compensation. I’m not sure I agree with the prescription make it messy as a sure-fire fix. One example in Messy is the blurring of how urban space is divided between vehicles and pedestrians. The early schemes suggest a messy arrangement is safer: people take greater care because they are uncertain. But we don’t know what will happen over time as everybody gets used to the new arrangements. On the other hand, it’s hard to disagree with the idea that children need to be allowed to play in non-sanitised, non-health-and-safetied spaces if they are to ever learn to cope with risk in life.

The common theme in these chapters, which on the face of it seem to gather together a somewhat disaparate set of examples of non-conformism, is the need to design for unpredictability or risk, but also for the fact that people (and trees, and the rest of the natrual world) respond to actions and constraints. It is so hard for decision-makers in any context to realise that they are not social engineers, somehow looking down on the world and able to manipulate it. I entirely agree with this, so recommend Messy. It’s right, it’s a pleasure to read, and it’s out just in time for Christmas.51nrnvc3xcl-_sx329_bo1204203200_

Enlightened Economist Prize 2016 – Longlist

It’s always tough whittling down the list of books I’ve read in the past 12 months to the top 10 or 12, but here goes. The rules are: I’ve read it since this time last year (publication date is irrelevant); my choice is completely personal, idiosyncratic and final; the prize is that I offer to take the winner out for lunch or dinner should we ever be in the same city.

Stuff and Money in the Time of the French Revolution – Rebecca Spang (review)

House of Debt – Atif Mian and Amir Sufi (review)

Rise and Fall of American Growth – Robert Gordon (review)

Global Inequality – Branko Milanovic (I reviewed this in Democracy)

The Great Invention – Ehsan Masood (I reviewed this in Nature)

Platform Revolution – Geoffrey Parker, Marshall Van Alstyne and Sangeet Paul Choudary (review)

Matchmakers – David Evans and Richard Schmalensee (review)

The Inner Lives of Markets – Ray Fisman and Tim O’Sullivan (review)

Messy – Tim Harford (will be reviewing soon)

A Culture of Growth – Joel Mokyr (I’ve reviewed it for the FT – to be published soon)

Bourgeois Equality – Deirdre McCloskey (I reviewed this for the FT too)

Ghettoside – Jill Leovy (review)

Capital Without Borders – Brooke Harrington (review)

The Moral Economy – Sam Bowles (review)

The alert will realise this is 14 titles, but I’ll postpone the hard decision until later this month.

PS apologies for the fact that Amazon links are broken in old posts. I had tech problems this summer and the fix meant removing the old widget.


Fear of the unknown

It’s a grey, grey day. The nights are drawing in. A gang of crows has settled noisily on the roof of the house opposite, as if sent by Ted Hughes in a bad mood. Most of all, the state of the world in general and UK politics in particular is super-dismaying. So of course I found a blanket and sat down with a book that dropped through the letter box and wasn’t even pre-chewed by the dog before I got to it. The book is An Age of Risk: Politics and Economy in Early Modern Britain by Emily Nacol. Sometimes all you want to do is bury yourself in a scholarly book about 18th century philosophers.

Reaching the chapter on Hume, I read: “Hume understands how hard it is to live with uncertainty. More importantly, Hume is also exceptionally mindful of how, even if humans can push past the morass of uncertainty to identify probable future outcomes, the anxiety proviked by uncertainty remains untouched. He notes in A Treatise of Human Nature that even though uncertainty can trigger hope and fear in individuals, in practice it seems to generate mostly fear and discomfort. And this is true even when people are in possession of relatively sure probable knowledge about the future.”

‘Every thing that is unexpected affrights us,’ he wrote. Like the superb behavioural economist he was, Hume roots this in a diagnosis of cognition.

The book goes on to argue that one of Hume’s aims in writing his essays aimed at a general public was to shift risk attitudes toward recognising the benefits of taking risks, the oportunity for profit in economic ventures. He wanted to open the eyes of the fearful to ‘a counterpoising argument’: “Could such dogmatical reasoners become sensible of the strange infirmities of human understanding, even in its most perfect state, and when most accurate and cautious in its determinations; such a reflection would naturally inspire them with more modesty and reserve, and diminish their fond opinion of themselves, and their prejudice against antagonists.”

Hume specifically discussed the ‘groundless fear’ of open international trade. Nacol argues that he counters this by suggesting that an open attitude to risk-taking will enrich all parties. I wonder how far Hume would get with his argument these days? (NB, rhetorical question).51pmhydbyel-_ac_us320_ql65_

Resisting the temptation of quantum economics

On the train yesterday I finished an enjoyable book, The Quantum Moment: How Planck, Bohr, Einstein and Heisenberg taught us to love Uncertainty by Robert Crease and Alfred Scharff Goldhaber. It’s the book of a course this philosopher and physicist teach to students who are a mix of humanities and science majors, and it concerns the interactions between discoveries in physics and the wider culture. Now, I must confess that, despite the simplification here, I still don’t understand quantum mechanics, condensates, entanglement and all that jazz: it feels like my brain can almost grasp what’s going on but despite straining can’t quite get there. I’m not alone but at least I don’t pretend; the book has nice examples of ‘fruit loopery’, meaningless claims of spurious authority based on the impressive sound of quantum terminology. The idea of there being no ‘out there’ outside the model, from which an expert and impartial observer can analyse everything, has obvious resonance for a social scientist. But let’s not pretend to do quantum economics.

Even so, the book is convincing in its argument that the Newtonian world (as imported into culture) of straightforward cause and effect has been replaced by a more uncomfortable world of ‘gaps, inconsistencies, warps and bubbles’. The authors think this is a good thing – perhaps it prefigures a ‘new humanism’ they suggest. Hmm. I’m not so sure about that. But I would agree that: “Understanding and appreciating quantum language and imagery – along with the ability to recognise its misuse in fruitloopery – is part of what it means to be an educated person today.” But is there any truly accessible explanation of it for the non-physicist?  51otp0kfvil-_sx331_bo1204203200_