The Pin Factory Blog

The development and restoration of Panmure House – Adam Smith's home in Edinburgh – has been the subject of long drawn out discussions between the Edinburgh Business School (its new owners), Historic Scotland, and the Edinburgh City Council planners.

Everyone is keen that this historic house should be accessible to the public as a venue for public meetings, concerts, seminars and other events. But it is obvious that the building's footprint is not large enough to accommodate both the meeting rooms and the services (staircase, toilets, lifts, kitchens) that a modern venue requires. Edinburgh Business School's architect solved this problem by creating a glass atrium housing an external staircase. It is a brilliant solution. It provides the necessary access in a stylish way that does not violate the house, nor require some ghastly solid extension, and indeed which keeps the main elevation visible and allows it to be attractively lit.

Historic Scotland have objected to pretty much all proposals for an external stair. It would be a shame if Edinburgh's planning committee, which meets next week, takes its cue from them and rejects the proposal. Panmure House will survive only if it has a viable function. Without that, it becomes a useless hulk that nobody will care for, and which will decay. I am sure that Historic Scotland does not want that. And given the sorry state that past public-sector owners have left it in – the only remaining original feature is one fireplace in the attic – the Edinburgh Business School's sympathetic restoration plans are definitely a welcome improvement. Let's not allow Adam Smith's home to decay and be forgotten as it has been over the last half century.

Despite government plans to teach children ‘money management’ lessons from the age of five, thousands of schools that have effectively controlled their finances are facing unpleasant repercussions. The Department for Children, Schools, and Families has released the expenditure of our schools and seeks to ‘name and shame’ those that have amassed significant surpluses. Headteachers of such schools have been warned that they should return ‘extra’ money to their local authorities, and might well be forced to do so under law.

This is an absurd idea: punishing schools for prudence and careful budgeting will simply lead to a further degeneration in the quality of the country’s education. Most schools control spending and generate surpluses in order to invest in large projects or improved facilities, such as a new science lab. Compelling schools to spend their entire budget each year creates little incentive to take a long-term view to investment for either the school or its pupils. By frittering away money for the sake of it, this creates an even greater waste of taxpayer’s money.

While we rightly don't like the idea of schools hoarding public money for the wrong reasons, the best way to combat this (and solve many other problems) would be through educational reform. With vouchers Parents should be free to send their children to the school of their choice, with the money following the child. In this way, schools which appear to stockpile funds yet make scant improvements would see themselves very short on pupils and money.

In The Australian today Alan Oxley, chairman of the US based NGO World Growth, outlines why he thinks the Copenhagen climate summit failed. For him the core reason is due to the presence of severe poverty in developing countries.

In the article, the leading American climate change economist William Nordhaus from Yale is cited as saying: “if developing countries cut emissions too sharply and too soon as advocated by Greenpeace, WWF and the European Union, they would further impoverish their people". This makes commitments to emission cuts contradictory to the political interests of politicians in developing countries, since immediate poverty clearly should overrule any real or perceived climate change. Perhaps a rather rosy view of democratic accountability in action, but it might just be true.

Mr. Oxley’s point is to “fight poverty first then tackle emissions". However, do we really need to tackle emissions at all? Emissions comes from the use of fossil and organic fuels, therefore the most efficient way of decreasing the use of those would be to find a more cost efficient way of producing energy. Making innovation affordable instead of taxing it would certainly help the governments to reach their political goals of decreasing the use of oil and coal.

Regarding the fight against poverty, the solution advocated for by environmental activists of increasing developing aid is simply unsustainable. Instead, breaking down trade barriers and government subsidies to agriculture and industry would be by far the most effective and sustainable way of fighting poverty.It is not the whole solution, but it is the best place to start.

8. Inflation and unemployment are not inversely related

Over half a century ago William Phillips argued that inflation and unemployment were inversely related. Put simply, the higher the rate of inflation, the lower the rate of unemployment would be. The 'Phillips Curve,' taken up by economic writers including Paul Samuelson and Robert Solow (both of whom later repudiated it), became the basis for government policy. Governments thought that they could reduce unemployment by allowing a higher rate of inflation.

In the 1970s this apparent relationship broke down, and very high rates of inflation coincided with very high rates of unemployment – a condition called 'stagflation.' The Phillips curve went vertical, with increased inflation having no effect on unemployment. Although some proponents of interventionism have tried to save the Phillips theory by introducing notions such as 'rational expectations,' many economists now recognize that the inverse relationship is only short term. In the longer term expectations change, and many economists suppose that only brief temporary changes can be made to the long-term non-accelerating inflation rate of unemployment (NAIRU). Some still try, however, to incorporate both short- and long-term effects into "expectations-augmented Phillips Curve" models.

When governments and their central banks inflate, the extra money and easy credit enter the economy at specific places, not spread evenly throughout it. The credit affects asset prices differentially. The money and credit send false signals which lead to over-investment in some types of producer goods. In the short term this does indeed mop up some of the unemployment, giving the illusion of an inverse relationship. People grow accustomed to expecting the inflation, however, and change their behaviour accordingly. When the extra spending stops, the long-term 'natural' rate of unemployment reasserts itself. The lesson is that governments cannot "spend their way out of a recession," soaking up the unemployment it features by means of huge public sector programmes, or by huge monetary stimulus (the fallacy offers a false rationale to both). These only distorts the economy and builds in future unemployment when economic reality reasserts itself. Nor can governments 'smooth' the business cycle by using high public spending to cushion against (and if possible prevent) cyclical downturns. Governments might enjoy more success if they devoted their energies not to preventing economic downturns, but to mitigating their social consequences, and in helping people to deal with them.

This is part of Dr Pirie's ongoing series: Philosophical Observations on Economics.

In the light of the unprecedented banking crisis, it is hardly surprising that UK gilt yields have remained quite low as investors have sought security in government-backed stocks. However, demand for gilts looks likely to change, a very worrying development given the Government’s horrendous borrowing requirement - £178 billion in this year alone. For 2010/11, a similar net borrowing figure has been projected.

To date, funding the Government’s borrowing has been surprisingly easy: much of this year’s enormous £225 billion gilt issuance programme has been undertaken successfully. The key to this success has been the Bank of England’s £200 billion Quantitative Easing programme, which seems sure to end shortly. Moreover, tighter capital rules have persuaded leading banks to buy more gilt-edged stock. Gilt yields, though, continue to fluctuate, with the 10-year 2019 benchmark stock currently yielding 4.1%.

With many major economies running formidable deficits, the UK may find it increasingly difficult to find buyers for its massive gilt-edged issuance. The recent decision of Pimco, the world’s leading bond house, to reduce its exposure to UK gilts and US government bonds is hardly reassuring.

If demand for gilts falls steeply, yields will rise. For 2010/11, the Government has projected a gross debt interest cost of almost £43 billion. This vast figure may prove to be an under-estimate. Indeed, if the outcome of this year’s General Election is a hung Parliament, the UK’s sovereign debt may be downgraded by the credit rating agencies – this would raise borrowing costs still further.

For the next Government, cutting the enormous public sector net borrowing deficit is paramount: substantial cuts in public expenditure are vital to achieve this aim. But political considerations are preventing the implementation of this policy – at least for the moment.

The current deficit is certainly unsustainable. But will the markets suddenly take fright and make it unfinanceable?

Nicholas D. Krist of the New York Times claims that Costa Rica is one of the happiest places in the world because it has abolished its army and spends that money instead on education. He might be right, but first there would have to be some indication that it is indeed one of the best places to live and that its education system is in fact good (not just expensive). That doesn't look like happening any time soon:

• Legatum Prosperity Index: 32/104
• Average Life Satisfaction Ranking: 19/104
• Per Capita GDP Ranking: 53/104
• WEF Global Competitiveness Index: 55/133
• UN Human Development Index: 50/179
• Heritage/WSJ Economic Freedom Index: 46/178
• TI Corruption Perceptions Index: 47/180
• Vision of Humanity Global Peace Index: 29/144

A report released today by the Children, Schools and Families Committee, entitled School Accountability, paints a highly uncomplimentary picture of the government, Ofsted and the regulations and impositions upon the schools of this country.

It is the same old story. Despite the best of intentions, “the Government has continued to subject schools to a bewildering array of new initiatives". The disease is simple enough to diagnose. But it could get worse with the government’s 21st Century Schools White Paper signaling “even greater complexity in an already overly complex system of school accountability and improvement initiatives".

The report is highly critical of the government:

The complexity of the school accountability and improvement system in England is creating a barrier to genuine school improvement based on the needs of individual schools and their pupils. We support the message in the 21st Century Schools White Paper, that schools should be empowered to take charge of their own improvement processes. However, the Government’s continuing tendency to impose serial policy initiatives on schools belies this message and the relentless pace of reform has taken its toll on schools and their capacity to deliver a balanced education to their pupils. We urge the Government to refrain from introducing frequent reforms and allow schools a period of consolidation.

Ofsted is also given a firm and fair wrap on the knuckles:

We note that Ofsted has a duty to encourage improvement in schools. However, we do not accept that Ofsted necessarily has an active role to play in school improvement. It is Ofsted’s role to evaluate a school’s performance across its many areas of responsibility and to identify issues which need to be addressed so that a school can be set on the path to improvement. Ofsted has neither the time nor resources to be an active participant in the improvement process which takes place following inspection, aside from the occasional monitoring visit to verify progress.

 It acknowledges the unintended consequence of the inspectorate system:

[M]any schools feel so constrained by the fear of failure according to the narrow criteria of the Tables that they resort to measures such as teaching to the test, narrowing the curriculum, an inappropriate focusing of resources on borderline candidates, and encouraging pupils towards ‘easier’ qualifications, all in an effort to maximise their performance data.

And even sketches out some enlightening conclusions:

We are persuaded that self-evaluation—as an iterative, reflexive and continuous process, embedded in the culture of a school—is a highly effective means for a school to consolidate success and secure improvement across the full range of its activities. It is applicable, not just to its academic performance, but across the full range of a school’s influence over the well-being of the children who learn there and the community outside.

There is also some good stuff about localising power away from central government, but despite an accurate diagnosis of the problem the report delivers no meaningful cure. Even with all the failure, they are still ‘satisfied that schools should be held publically [read governmentally] accountable for their performance as providers of an important public service’. Yet unless the state school system is returned to the free market, we will never see any real and lasting improvement. Whatever the frequency or nature of testing, Ofsted will only be measuring relative levels of failure.

The report should follow the logic of its own conclusion:

It is time for the Government to allow schools to refocus their efforts on what matters: children. For too long, schools have struggled to cope with changing priorities, constant waves of new initiatives from central government, and the stresses and distortions caused by performance tables and targets.

Those who hoped for a let-up in the blitz of government warnings that were so prominent at Christmas have been disappointed. Now government agencies try to ride the tide of New Year resolutions, urging behavioural changes upon the population, and giving grim warning of the consequences of not doing so. It has been a boon for the advertising industry and for the media which have benefitted from the bonanza of taxpayer cash funding these campaigns, but there are questions as to whether it achieves any good.

Since stress is regarded as a big killer, exacerbating many other conditions as well as causing its own problems, the wisdom of exposing us all to the stress of this relentless advertising has to be questioned. They want us to treat every meal as a minefield rather than as a source of relaxed pleasure. Is there too much sugar? Too many saturated fats? We are made to feel guilty about eating butter and cream, and made anxious that we might be exceeding our day's quota of salt. And so it goes on. That stress-reducing drink after work now has numbers of alcohol units mentally written upon it for us to fret about, and of course any smokers who want to relax and reduce their stress levels with a cigarette now have to do it in the snow, and feel outcasts as well as guilt-ridden.

Government environmental advertising is adding to stress levels as well. Now we are supposed to fret about ways of traveling five fewer miles a week, or turning thermostats down.

If, as is likely, we have a new government this year, one of its first moves should be to stop all such advertising. Instead of trying to make people feel miserable and guilty, especially at holiday times, it should allow them to relax and enjoy themselves, unbombarded by exhortations to worry about what they are doing. The theme should be lighten up, enjoy life, relax. There's much to enjoy about life, and we don't need killjoys to spoil it, especially those who waste huge quantities of public money in doing so.

7. There is no equilibrium position in economic activity.

Economists used to talk, and some still do, of the equilibrium position at which supply meets demand. Demand generally decreases as price rises, while more suppliers will tend to enter the market as prices rise. The equilibrium price is supposed to the price at which the supply exactly matches the demand. People use this (and other) 'equilibrium' notions to derive equations which aim to describe how an economy behaves.

The problem is that equilibria are entirely theoretical abstractions and do not occur in real economies. The real economy is characterized by motion. There never is a point at which supply meets demand. Demand changes from moment to moment, and so does supply. There are countless economic actions taking place every moment as potential consumers change their positions on whether they are in the market for particular items, and potential producers decide whether or not to put more produce on sale. Even further back, producers are deciding whether to commit resources now to augment production in a few months time, in anticipation of what demand might be.

At no point does the economy stop and allow itself to be examined. To study a frozen moment of it would be like trying to study a motionless human body. The body is constantly in motion taking air in and out, pulsing blood through veins and arteries, and sending neurons between cells. To study it at rest is to miss the whole point of it, its motion. Even a body at apparent rest is a mass of motion as information crosses between brain cells. The economy is characterized by constant change as it responds to the inputs of countless individuals. People do not respond to abstract economic equilibria; they respond to the changes actually taking place in front of them in the real economy, and their behaviour cannot be abstracted and studied as if it were a response to stationary conditions.

Inconveniently for econometricians, the numbers which describe an economy are changing from moment to moment, and equations which work with particular values can lose sight of the economy's most salient characteristic: it is a process.

Attempts have been made to bypass these drawbacks by using Dynamic Stochastic General Equilibrium (DSGE) models which try to factor in the preferences of the participants, and to account for random shocks to the economy. They attempt dynamic modeling, but face the problem that real economies develop in non-linear ways, and that people's behaviour changes in response to inherently unpredictable events.

This is part of Dr Pirie's ongoing series: Philosophical Observations on Economics.