https://www.economist.com/finance-and-economics/2023/04/04/why-economics-does-not-understand-business

When I was first poking my nose into economics as a teenager I came across the famous definition that it is the study of allocating finite resources. Since then I’ve worked in government, at a regulator and for multiple companies, and I can stand very firmly behind the opinion that academic economics has a very poor understanding of how resources are allocated within a commercial organisation, and how decisions are made.

However, there is a field that has been developing quietly over the past twenty or so years that seeks to understand firms as a collection of resources and how these resources can be optimally combined to improve firm performance.

My first encounter with it was while studying the relationship between investment in ICT and productivity. A number of studies looked at complementary business changes/characteristics alongside the introduction of things like email, e.g. email had more of an impact on organisations that had a flatter structure. Lowering the costs to communication makes more of an impact when you can be more effective by communicating with more people.

Now everyone wants to be data driven, but being more data driven is so much more complex than dashboards and data literacy classes. I am looking at how organisations can improve their decision-making by not only investing in fancy tech and data infrastructure, but changing how they make decisions and investing in organisational learning. It is not a simple story, and every organisation has different challenges, but there are common themes that can be used to help drive improvement.

Maybe there will be studies we can publish in the future, and someone can revisit this Economist article.

In this age of blogs, Twitter and newsfeeds the default position for most people is to ingest content that they find agreeable and which is presented in digestible chunks.  When 140 characters is the go-to format for most opinions, a 500 word piece for a blog or a newspaper is rarely on the menu.  Many of the arguments against the coalition government’s policy of fiscal consolidation have therefore attempted to conform to the preferred format of the content browsers who flit from one opinion tree to another.

This has meant that many opinions end up sounding shrill (Laurie Penny and Owen Jones, I’m looking at you) or failing to convey the subtlety that is important to so many economic issues.

An article by Oxford economist Simon Wren-Lewis in the latest issue of the London Review of books illustrates starkly why this is dangerous. (yes, it’s more than 500 words)

Public endorsement of the policy of fiscal consolidation (or austerity) has been fed by the presentation of the economy as being like a household or a business that has to balance its books to survive.  This simple analogy has been used by the Chancellor to demonstrate the Conservatives’ frugality and competence at economic management – everyone else has to try and stay in the black, so government should too.

This view has been mostly swallowed whole by the media and regurgitated to the public with little criticism. Media economic correspondents and commentators have tended to focus on the views of City economists who, as Wren-Lewis points out are generally either trying to be sensationalist or advance the interests of their investor clients.

The fact that the coalition government continues to poll well on economic management is based on the public having a completely wrong view of how a national economy actually works.  Regardless of whether you think the country would be better off with a smaller state, we should all be appropriately informed about the pros and cons are of the various ways of achieving it.

“Balancing the books” of government when the country is in a recession is a very bad idea. A very, very bad idea.

If a business or household is constantly spending more than it earns then its stock of debt will increase. For a business, increasing debt to make an investment can increase revenue, but using debt to finance your operations isn’t going to end well if there isn’t some external factor that is going to improve your margins.  Using debt to finance an investment is still risky as well because it may not pay you back – people might not buy the product, the oil well might be no good, the big machine may not be reliable.

When you’re running a national economy many of the constraints a business faces are absent.  For example, a government’s revenue comes from taxes.  Taxes increase with economic activity, either from income tax, corporate profits or consumption (via VAT).  Therefore, if a government can increase economic activity then they may be able to achieve a prolonged increase in tax revenue as people continue to spend money and add value with services and products.  Reducing current taxes is one way to do this – VAT was reduced in 2009 as a way to stimulated purchases.  Increasing spending is another way to stimulate economic activity.  Investment is a particularly good way to stimulate activity because an asset is created which generally delivers some improvement to the country’s infrastructure (better broadband connections, better roads etc, better school buildings) and also results in the people working on the infrastructure having more money in their pockets to spend on goods and services. The first effect is a bit risky; like the big machine, it may not work as intended.  However, if you pay a company to build a road then the workers and owners are definitely going to be better off.

The only thing that ever prevents this from being maximally effective is if people save the money they have.  In some countries this could be an issue: Japan and Germany.  However, one thing the UK population is particularly good at is spending money!

There are various ways to pay for these types of policies, but that is a separate issue.  The analogy of balancing the books with respect to budget deficits is completely bogus – the media should stop being so ignorant about the issue, academia should help them do this, and we the public should beware of politicians who present such simplistic arguments.

In 1925 Winston Churchill followed a similar policy to Osbourne’s in order to maintain the gold standard.  The British economy was crippled by debts to the USA after WW1 and Churchill’s attempts to ‘balance the books’ brought the country to its knees.  Things only really started improving with re-armament after 1935.  This was such an appalling misjudgement that John Maynard Keynes wrote a 32-page essay called The Economic Consequences of Mr. Churchill on why Churchill was an idiot.

If only Keynes were alive today (if only…), he would have written The Economic Consequences of Mr. Osbourne, and he would have been able to summarise it in 140 characters.

A wet Sunday afternoon has let to the exploration of my Netflix ‘to watch’ list, which is normally compiled by clicking through ‘more like this’ for about 20 minutes before I go to bed.  Today this led me to alight on End of the Road: How Money Became Worthless.

It’s been a while since I dug around the dark conspiracy-filled underbelly of the internet so I was not immediately looking for signs of film that had been produced by a team that all have a room in their basement lined with guns and cans of beans.

However, after a while all the pieces start to come together and by the end I was half expecting someone to accuse all the world’s ills of being caused by Jews and the Illuminati.  Although it is littered with comments which can quite easily be rebutted by appeal to logic, solid evidence or at the very least well-established conventional economics, there are some things said which I think worth responding to, in particular in the context of the current debate going on about Bitcoin and whether it is a currency that should be taken seriously.

The gist of the film is that currency backed by gold is the natural order of things and that the “experiment” that the world has been part of since the abandonment of the gold standard in 1971 is going to come crashing down, due to all the horrendous fiscal crimes which fiat money allows governments to commit.  Put slightly less alarmistly: a currency which is backed by gold means that the amount of money in circulation is determined by the value of gold, and this is something which is relatively stable over time – gold has always been valuable and trusted as a store of wealth.  Therefore governments were not able to print money unilaterally without very obviously risking credibility .

However, when the US ceased allowing dollars to be converted to gold in 1971, the countries involved in the first Bretton Woods system of international financial exchange moved to a fiat currency system where their own currencies were backed by reserves of dollars, rather than gold.  The film alleges that the value of the dollar in this system is held up by a giant ponzi scheme comprised of the US government, the international banking system and “the media”. This ponzi scheme results in enormous national debt which is used to fuel the economy, and then is financed by printing money.

There are umpteen other tinfoil hat arguments made, but the response to the question “is it preferable to have a currency backed by gold” highlights some issues about bitcoin.

What is a currency for? The purpose of a currency is to facilitate exchange, i.e. for me to transfer value to a you in exchange for something you are giving me.  A good currency is one where you can then take what I have given you and use it to buy something from someone else.  (This is why currency is generally superior to bartering – relying on someone simultaneously offering what I want and wishing to accept what I will give for it is very, very difficult). It’s also helpful if the currency is easy to move around and can be subdivided into small enough units to pay for sundry items.  The bottom line is that currency is a measure of value and key for success is that it is trusted by all parties.

How can a currency be improved by having a fixed exchange rate with gold? If you are suspicious of a currency: you don’t trust other people not to tinker with it, including the government, then you might want to have assurance that the money you are given for selling a product can be converted into something that you do trust, like gold.  If you live in a world where your government is debasing the coinage, then demanding convertibility to gold is a rational response! However, this sort of activity ultimately leads to instability and a government that wants to stay in power (as opposed to a divine monarch) has an incentive to maintain a stable currency.

So a backing with gold is one way of making a currency trusted, but clearly not the only way.  Furthermore, the value of gold is only derived from the fact that its supply is constrained and that humans like shiny things, and have liked them for a long time.  Other natural substances that are in similarly short supply (semi-precious gems, amber, meteorites) do not hold the same mystical value as gold.  It has been  demonstrated that people are happy to use anything as currency as long as other people will accept it and the value it represents doesn’t change unpredictably.

Which brings me on to bitcoin. To date there has been some debate over whether bitcoin will ever be recognised as medium of exchange with the same level of acceptance as any national fiat currency.  The strength of feeling on both sides of the argument has led some to stake a pair of alpaca socks on the outcome.

Bitcoin is gradually moving towards two of the criteria for being an effective currency:

• after you have dedicated a gigabyte of your home computer’s hard drive to the background data, you are away (it’s mostly portable)
• the current bitcoin system allows it to be subdivided into one ten-millionth, i.e. 0.00000001 bitcoins. At the time of writing this means that the smallest unit a single bitcoin can be divided into is equal to about 0.5c (1btc = 494usd)

Therefore the only quality that bitcoin lacks is general acceptance and trust.  The dramatic changes in its dollar value over the last two years, partly fueled by speculation, have not helped this.  The graph below illustrates the extent of this continued variation. (apologies for some of the sins of this graph – I’m still getting my head around Excel  2013 and was too lazy to boot up Stata).

N.B. it should say week-on-week change

Therefore, I would probably side with the pessimistic side of the bet.