danieldwilliam: (economics)
Here are some economic trends I think are important.

Globalisation -

a) ability of goods and services, capital and people to move anywhere in the world

b) technology transfers from rich countries to poor countries that allow firms in poor countries to mass produce products for sale to rich countries or each other

Automation

the ability of machines to perform tasks with out human control or physical effort - ranging from simple automated production processes through to more complex processes requiring manipulation and processing of data during the production process in order to produce a final good or service

Betterment

The ability of an automated process to have access to the best control systems, the best information, the best expert system or the best design of outputs through the use of non-rivalous software.

Western Productivity

The slow and slowing growth in how much valuable work people can do in rich parts of the world.

Aging

The average age is increasing almost everywhere. In poor countries this is largely because children are living in to adulthood more often. In rich countries it is because adults are becoming old more ofren. Everywhere the demographic pyramid is becoming more of column with equal numbers of people in each age band.

Enrichment

The poor are becoming less poor. Global Income Inequality is falling. Many poor countries are getting richer and many, many poor people in poor countries are getting richer. By 2030 there will probably be as many people in China who earn more than the average European wage than there are people in Europe.

Energy Prices

A world with abundent, cheap, clean energy is a very different world to one with shortages of energy and energy that is expensive or polluting. Personally I think we're about to enter a long period of steady reductions in energy prices and steady improvements in the amount of energy available and the cleanliness of that energy but I could be wrong.

Climate Change

We're already released so much carbon dioxide in to the atmospher that we are already going to have significant climate change. Change presents opportunities and challenges but I think globally rather more challenges than opportunities come from climate change.
danieldwilliam: (machievelli)
I read this interview transcript with Robert Gordon, author of the Rise and Fall of American Growth.

He's in the End of Growth school and has some particular observations on the impact of this on the USA.

To summarise the End of Growth school's argument; they suggest that technological innovation has slowed and that the new products it is producing are not transformative in the way that the new consumer products of the 3rd Industrial Revolution were. We might make existing things a little more cheaply or a little better but we already have, warm dry homes, near instantaneous communications, rapid personal transport, effective medicine, easy to run homes and broadcast entertainment. They suggest that there is nothing that big to come, probably ever again. And that that nothing new is going to arrive much more slowly than we have gotten used to.

Both points I fundamentally disgree with. I think there are transformative technologies to come and I think they will come more, not less rapidly, than we say in the 20th Century. More on that anon.

However, even if I'm wrong I think there is a fundamental transformation of society to come brought about by the application of technology that is currently in development. What if everything was free?

I think, even without radical new products the combination of machine intellegence, robotic manufacturing, autonomously operating vehicles, machine vision, data handling, the softwareisation of knowledge and machine scheduling of manufacturing and ordering puts a long-term and sustained pressure on the production costs of many household items. A second trend I observe is that the long run cost of energy is about to be capped by rewewables and then that cap is going to slow fall over the coming decades. The combination of human free production of material goods and cheap and stable energy means that living a dignified life, for most people, most of the time, becomes practically free.

With expanded production frontiers some combination of increased leisure time (either voluntary or forced) or fierce competition for position goods or housing.

And along with the increased leisure comes a reduction in the precariousness of living. Dignity and comfort can be maintained for very little, so savings and social security can ensure the wherewithall for a decent material standard of living easily. No more fear.

Social housing, either mediated through the state of the family is going to be a crucial element of the 21st Century.

There may not be radical new solutions to problems that oppress humanity but quantity has a quality all of its own - especially that quantity is available for free.
danieldwilliam: (machievelli)
I was surprised by the resignation of Iain Duncan Smith. It's a pretty big event in British politics.

Duncan Smith says, better than Corbyn and McDonnell have managed to say, what the main problems with the Conservative economic policy are; that it is done for political reasons and not economic ones, that it hurts the poor and favours the rich, that it is done in a short term, grasping disorganised way, that we are not all in together and that it isn't actually working.

There are clearly interactions with the EU Referendum campaign and the shape of the Tory Party after that. There are clearly interactions with the inability of the Tory Party to disagree about Europe in a civilised way.

Cameron's retirement and replacement loom large.

And the three things collide - doubts about the Tories' economic policy and their fraticidal EU issues and their leadership issues.

Good, says I.

On Iain Duncan Smith himself I'm minded to take the resignation on face value - mostly. Reforming welfare is a big and difficult job. The only other organisations with as many contacts in their "customer" data base are, banks, energy companies and mobile phone companies. None of whom are exactly well known for their excellent levels of customer service and their cutting edge database management tools. It's a harder job when money is tight. Easier to transistion people from one set of benefit rules to another or from benefits to work if you can slip them an extra few quid and hire in some extra help to make it work.

And I believe Iain Duncan Smith is sincere in his desire to seek social justice for people by providing them with work and the opportunity to better themselves. They might be old fashioned values but that doesn't mean that the Duncan Smith doesn't hold them or that they aren't part of the solution to long-term unemployment, reduced economic growth, inequality, poverty and lack of opportunity.

And I can see how you can set off on one path and end up nudged on to another without noticing at first. That you start off trying to reform welfare so that it is cheaper to operate and targets more helpful social security at fewer people. That you aim to move in to paid work where you and they can. Then you find that not everyone has the same priorities as you. That as other people's mistakes come home to roost you are being asked to change paths from a reform of welfare with a consequent reduction in cost to an ever increasing reduction in cost regardless of whether this helps people in to work or regardless of whether they can actually live on social security.

And the mistake at the heart of this is Osbourne's. His basic failure to understand economics and his short term desire to keep beating the Labour Party with the stick of economic mismanagement by sticking to an austerity policy that by it's own lights wasn't working to reduce the deficit, was damaging other areas of economic policy consideration and which he could not abandon because he had used austerity to frame the election campaigns of 2010, 2015 and 2020.

Had Osbourne been right the UK economy would be growing at about 4% at the moment, productivity would be growing, wages would be growing and our main problem would be inflation. Oh, and the deficit would be a surplus and the ratio of debt to GDP would be falling quickly.

So I'm prepared to take Iain Duncan Smith at face value. Someone trying to do the right thing (in a way that I disagree with) who has been compromised by Osbourne's error and realised that no matter how much he reduced social security spending Osbourne would always be back asking for more.

I expect other resignations to come between now and the 23rd of June.
danieldwilliam: (machievelli)
Two thoughts on US defence policy and spending.

One - the amount of money the USA spends on defence should be viewed through the lens of transfer payments from rich parts of the US to poor parts and from rich US-ians to otherwise unemployed USians.

Two - the amount of money the USA spends on defence should be viewed through the lens of a desire to support basic research and foundational science as well as product development and innovation.

The ability to invade everywhere else in the world at once might just be a side effect of items one and two.
danieldwilliam: (economics)
Ronald Coase has died. He was 102 and one of my favourite economists.  I shall look forward to re-reading some of his work as a memorial.

His article, The Nature of the Firm is probably one of the most influential on my economic thinking and I find myself coming back to the concept of transaction costs often.
danieldwilliam: (economics)

I have recently read two monographs (1) that suggest that economic growth, particularly in the West, might be very hard to come by in the future.  That rather than a temporary set back the current economic stagnation is the start of a long, long period of very low economic growth. That 0% GDP growth is the new normal.

Both papers see a different cause for a long term forecast of zero economic growth. It would be easy to ignore both of the papers as a symptom of general depression and pessimism in the economic forecasting community. That the same people who brought you unlimited growth for ever are now chastened in to offering unlimited doom for ever and seeking some justification for it.  It would certainly be comfortable to ignore the papers.  I’m not so sure that that is wise.

Reason one for the end of growth comes from Robert J Gordon of the Cenre for Economic Policy Research.

http://www.cepr.org/pubs/PolicyInsights/PolicyInsight63.pdf

He suggests that the GDP growth rate of about 2% per annum we have become used to since the 1750’s is due to the long unwinding of three industrial revolutions, that of invention of coal powered steam driven engines, that of the invention of electricity and the internal combustion engine and the third one of the invention of information processing by machine. These industrial revolutions have overlapped with each and driven a large number of new capabilities for humans or reduced the need for human labour in many productive processes.

He talks about a number of one off improvements, improvements that are not available to happen again. We can’t re-invent being able to get most of the food we grow to our tables by increasing transport speed and quantity, refrigerating it and using telephones to tell us which market wants it. We can’t re-invent having homes that are a comfortable temperature all year round. We can’t re-invent the virtual elimination of communicable disease as a cause of premature death. We can re-invent the many labour saving devices deployed in the home that allowed woman to be released for non-domestic labour. We can’t re-invent the plane or the train or the automobile.

Gordon’s suggestion is that these industrial revolutions have run their course in the West. That the rest of the world will have caught up in a few decades. That there is no sign of a forth industrial revolution coming that both eliminate large amounts of human labour from productive processes or significantly improve the capability of humans to do things.

If you are going to nullify Gordon’s suggest I think you have to do a bit more than point at the iPhone.  You need to find a way to eliminate about 2% of the time people spend doing things every year for the next century.

The second reason, put forward by Dr Tim Morgan is that we have run into problems with our energy economy.  He restates the economic problem as not a problem of where money flows but where surplus energy flows.  He suggests that the history of economic growth is one of finding new ways to produce surplus energy and apply it to solving problems. Unless you have surplus energy in your economy then you have no growth.  The problem, as Dr Morgan sees it is that the Energy Return On Energy Invested for future energy projects is too low.

Energy Return On Energy Invested (EROEI) is the ratio of the energy that you get out of a particular project to the energy you have to  put in to to get that energy. A simple example; imagine you live in the country, a long drive from the nearest petrol station.  If you have to use half a tank of petrol to drive too and from the petrol station you only have half a tank of petrol left for running errands. (Your EROEI is 2:1.) If the petrol station is further away, so that you have to use a full tank of petrol to get there and back you don’t have any spare petrol. (your EROEI is 1:1).  When we first started pumping oil out of Saudia Arabia the EROEI was about 100:1. We got 99 barrels of oil for every barrel of oil we spent digging oil of the ground.  The figure today is closer to 20:1. For North Sea Oil the ratio for new reserves is closer to 5:1. Similar stories for coal and gas. As we dig up the easy to reach stuff it becomes more energy intensive to dig up the not so easy to reach stuff. (2)

This ratio lies at the heart of economic prosperty.  With an EROEI of 100:1 for every unit of energy we put in we have 99 units to do all the other stuff we want to do.  At 5:1 we only have 4 units of energy to play with.  As more energy has to go in to our energy gather system the cost of energy become greater. We tie up more capital in energy infrastructure and more of the energy we produce is used to run our energy systems.  We have less energy to do other stuff. We are poorer.

Dr Morgan suggests that at an average EROEI of 15:1 bad things happen to your economic growth. We are currently quite close to an average EROEI of 15:1. At worse figures a lot of accumulated growth unwinds as you stop having enough energy to transport food around and people start dying.

The combination of the two factors has a grim irony. All the innovation we are putting into renewable energy, if only moderately successful, just gets us back to the same average EROEI we have enjoyed for the last hundred years. We remain rich but we get no richer.

These factors affect different parts of the world differently.  If you live in China or India or Africa you probably still have large amounts of accumulated technology and associated capital to get hold of.  If you live in the US or Europe you are more likely to be at the technology frontier, a frontier that Gordon suggests might have stopped moving. The EROEI problem is more universally spread.

The message is clear but depressing. Unless we can come up with a fourth industrial revolution that is as potent as the invention of steam power and electricity and reverse the falling proportion of energy we have to spend on ourselves we are in for no economic growth, or even economic contraction.

So what can be done?

Well, we could get used to living with economic growth at the rate of mundane innovation and low levels of capital accumulation, 0-0.5% per annum.  That has some social implications that I’m not sure we are quite ready to address yet.

What’s out there for industrial revolution number 4? My brain storm throws up the following. None strike me as compelling.

Routine Innovation but BIG. The background rate of innovation outside of an industrial revolution is a drip, drip of marginal improvements.  For the last 200 years pretty much only the populations of Europe and North America have been playing because most of the rest of the world has been behind the technology frontier and not prosperous enough to divert significant labour to R&D.  What does routine innovation look like now that we have a population of 7 billion supporting it rather than 1 billion?

Big Data. With low cost computer processors are we able to do things with the huge volume of data we can gather and analysis about any activity?  We need to be reducing human effort significantly to get any real economic gains.

Quality.  We actually waste a huge amount of the effort we put in through poor quality. Defective goods, poor service, bad ideas. Goods that don’t last as long as they could.  What happens if we apply total quality management to everything we do?

Managerial revolution based on new understanding of neuroscience. Most organisations appear to be only tolerably run and the applied understanding of positive psychology appears poor. What happens if we work out how to get everyone to do a really good job and then let them get on with doing a really good job?

Peace dividend.  NATO targets for defence expenditure are 2% of GDP.  What happens if we stop shooting other people and invest this effort in building productive capacity?

Reverse the EROEI problem.  If we can improve the effectiveness of renewables we might be able to unlock a period of steadily falling energy costs instead of the long run of energy cost increases we’ve seen. We might get a similar, shorter term boost from energy efficiency programmes.

Service sector labour efficiency. Can we find a way to make the same labour savings with service jobs as we have with manufactoring jobs? (And what are we going to do with all the people?)

None of the these struck me as particularly robust. I wouldn’t want to bet the whole of Western civilisation on them.

(1) One is by Dr Tim Morgan of Tullett Prebon

http://www.tullettprebon.com/Documents/strategyinsights/TPSI_009_Perfect_Storm_009.pdf

The second is by Robert J Gordon of the Cenre for Economic Policy Research.

(2) figures for renewables are circa 20-15:1 for wind and 5:1 for solar PV.

danieldwilliam: (economics)

This thought occurred to me in the shower this morning whilst wondering if my dad was going to buy me Hydrogen Sonata for Christmas.  Does the level of piracy have an impact on content creators output and income?  If so, is the effect variable by the prior success of the content creator? In short, is there a Laffer Curve for content creators and piracy?

There is an argument that piracy of content has the overall effect of increasing revenues for content providers. That piracy acts as a try before you buy low-risk introduction to new work or new artists. Those who enjoyed the pirated copy are exposed to the work and more likely to pay money for future works.  I see this working most effectively with new artists who don’t have an existing supporter base. Sales would be low anyway and piracy acts as a free advertising.  So, even with quite high ratios of not-paid for consumption to paid for consumption the artists over all income is improved.

(Assuming a correlation (1) between artistic income and output high levels of piracy from low-sales volume artists would increase content creation.)

I suspect as an artist become more successful the piracy starts to cannibalise (2) sales that would have been for cash but are now for free. So a given ratio of piracy starts to affect marginal income.

This coupled with the decreasing marginal utility of more money for someone who is already well off and reservation wages suggests that more successful artists might be more likely to withhold their labour in response to a given level of piracy.

So my hypotheses is that early in an artist’s career piracy increases revenue and they would like the piracy rate set as high as possible to get all the free advertising and pick up as many contingent sales as possible.  Latter in their career the extra sales from piracy driven sales might be equal to cash sales lost to piracy, making the artist indifferent to the rate of piracy.  Latter on still, an artist might lose more sales from cannibalisation than they gain from additional exposure and so want a reduced rate of piracy.

When do we reach a point when Iain M Banks says fuck it, I’m rich enough already I can’t be arsed to write another Culture book just so it can be ripped off?

(1) Artists with no income can’t eat and therefore can’t produce art.

(2) there’s a cannibalisation – sales driver coefficient in here somewhere.

danieldwilliam: (Default)

The inestimable Andrew Ducker pointed me towards this article on Sundrop Farms. Sundrop farms use solar energy to desalinate seawater which they then put in a hydroponic greenhouse. They have a small proof of concept farm near Port Augusta in South Australia. I’ve been to Port Augusta so you don’t have to. It’s pretty arid land. They are expanding this to a 40 acre £8m facility that will produce 4  millions kg of vegetables a year. Which I think would supply fruit and vegetable for about 5,000 people.

 This is great. Fantastic and if I won the lottery I would totally have one.  The article was touting Sundrop as an end to world hunger. I was left wondering if it was.  It’s easy enough to set up one of these facilities right next to the sea. But there is a limited amout of land within a stones’ throw of the sea.  What happens if you have pump the seawater inland to the farm?

Based on data from here

Here from the NSW department of agriculture

 And

 here from a website on small scale solar arrays

 and Here from a long paper on building a very large water pipeline from Turkey to Jordan.

 I estimate the additional capital costs for putting a Sundrop type farm 10 kilometers from the coast to be about $10m US. That about doubles the cost of a Sundrop type farm from £8m for 20 acres to £16m. 

That’s going to cost about $600k in interest costs to service per year. Or about 2.4m lettuces.

The pipeline is the expensive bit.  I estimate about $0.5m per kilometre of pipe.  The cost estimates in the paper on the Turkey to Jordan pipeline have a low cost estimate of $1.5m per kilometre for 2.1m diameter pipe.  So, I’m reducing that by a third for the much smaller bore pipe needed for relatively small market garden farm using 10,000 litres per day. (Not sure if this is the current demo-farm usage or the usage planned for the 40 acre production site.)

Bit of sense check.  $500,000 per kilometre. Assume half of that is materials. $500 of materials per metre including hire of diggers, forklifts and so on. Not crazy.  So $250,000 for labour. Assume half of that is grunt pipe bashing work rather than expensive specialist control instrumentation or surveying. So $125,000 to spend on actually constructing the pipe.  A kilometre is 100 ten meter sections.  Assume two teams of 4, one building the support struts, one connecting the pipe, so 8 people on site. They cost a $1,000 each per day in total.  So that’s 15 days to build a kilometre of pipe. Or 6 ten-meter sections per day. Or one every two hours.  That seems not crazy to me.

You need two lots of pipe. One to carry the salt water in, one to carry the waste brine out.

The costs of the solar panels to provide energy to pump the water are comparatively little.  The NSW Department of Agriculture guide implies that it takes 500 kwh to shift a megalitre of water with a head of 120 metres. The 10,000 litres of water Sundrop need a day is 1% of this. So were talking 5 kwh generated over about 10 hours per day. Let’s allow for losses and power to run the controls and so and say we need about $40k of solar panels to power this system.

A caveat here that I was having some difficultly following the energy usage figures so I could well be understating this significantly. But even if I’m out by an order of magnitude then the rounded figure is still about £10m for every ten klicks inland.  

A thousand kilometre stretch of coast cultivated to a depth of 10 kilometers is about 5% of the UK’s agricultural land use.  They are using hydroponics so the yields should be higher than soil based agriculture.  I’ve seen yield improvements touted of 5 times. I’ve also seen improvements of 30 times.  Five times would take a 1000 kilometre by 10 kilometre strip to this being about equivalent to a quarter of the UK’s agricultural base. The UK meets about 60% of its food needs domestically. So we need 1.6 UK’s to grow all the food we consume, or we’d need about 6 and a bit of these coastal slots to support us in the manner to which we have become accustomed. 

The pipeline costs probably don’t scale with size particularly.  So you might well be able to pack 60,000 farms into the 10 klick strip with much more efficient pipe construction overall and not end up doubling the overall construction costs.  This might let you move a further 10 klicks inland. Maybe 30 klicks before you’ve doubled the cost of the installation again. As an aside, if you were able to move 30 klicks inland and assume 10 workers per farm and that each farm worker has .25 dependents and that each farmer needs one additional person nearby to provide support services like education for children, health, beer services and so then the population of this strip of South Australia goes from about 10,000 to about 3-4 million people.  

But the energy costs do scale.

(major caveat – these are pretty much back of the envelope figures which I did in a hurry over lunch. If you think they are wrong, you might well be right. If you are planning to base any form of anything on them I would do your own figuring out.)

danieldwilliam: (Default)

The government is trying to portray the UK’s recent return to growth as a vindication of their economic strategy of achieving growth through public sector austeriry leading to business confidence and lower interest rates.  Recent growth figures of about 1.2% per annum, and fragile growth at that, don’t appear to me to be the signs of an economy that is returning to normal after a successful Treasury intervention.

There are some patterns in the UK economy over the last decades.  You might argue that the current sitution is so unprecidented that previous patterns are of no use nor interest. You might be right, but they are what we have. I’m proposing to use them as a bench mark.  If the benchmark is appropriate then I conclude we are lower than expectation. If the benchmarks I’m using are no longer valid, then we have bigger problems ahead of us than we currently imagine.

UK long term trend growth is about 2.4%  to 2.5%. That is, each year on average since the Second World War our GDP has grown by about 2.4%.  There have been periods of recession, periods of slower growth. There have been compensating periods of faster growth.  More often than not when the economy suffers a shock and falls into recession it shrinks, has a spurt of strong growth, muddles about a bit, then shrinks again before growing strongly for a period then returning to trend.  Double Dip Recessions are the norm, rather than the exception.  The pattern from previous larger period of economic stagnation is that the period of muddling about is protracted before growth returns and when it returns it is stronger and faster for a longer period. 

The basic pattern is that something goes wrong, we stumble and then grow more quickly until we are about back where we would have expected to be had we not had the shock in the first place.

So, if we were expecting our GDP in 2020 to return to the same levels we would have expected to see if our 2007 GDP had continued to grow at 2.4% what kind of growth rate would we be expecting?  I calculate we would need to see a growth rate of 4%. That puts the annualised UK GDP growth figure for Q3 2012 of 1.2% starkly into context. 

And remember, to return to the position we would have expected to be in by 2020 we need growth of 4% every year for the best part of a decade. That’s about half of what China is expecting.

GDO Expectations vs Forecast

For us to return to expectation by 2017,  the end of the OBR’s medium term forecast, we need annualised growth of 5% in 2013, 2014, 2015, 2016 and 2017.

At current forecast growth rates we only return to our peak GDP from Q2 2008 in Q2 2014.  Essentially we are expecting 6 years of an average of zero economic growth.  That’s based on OBR forecast growth rates of 2.00% and 2.70% in 2013 and 2014. That’s about double what we are seeing today.  If growth continues at the much heralded 1.2% we don’t return to pre-crisis peak for another year and a bit after Q 2014.

1.2% growth is better than a poke in the eye with an austere stick but it is much much less then we would typically expect to see if we were coming out of a period of economic turbulence. If the Treasury's expecation is that we will return to our previous long term trend and eventually catch up with ourselves then we are still far off that pace, now and in OBR forecasts for future years.  If the Treasury think that we have permanently lost output from 2008 and that our longer term growth rates are now permanently lower than 2.4% then I think we all have some bigger problems than perhaps we realise.

danieldwilliam: (Default)

I’m going to talk a little bit about the rail franchise issue, public sector finance and public sector pay.

I don’t work for the Department for Transport and I’m not a hardcore modeller but I have spent a bit of time in the public sector finance teams and some time working with hardcore models. This is some educated guesswork.

I suspect that what’s happened with the rail franchises is a modelling failure.  When I use the word model I mean an excel spreadsheet which seeks to replicate the terms and conditions, prices and costs of a particular business or contract as a way on understanding how various decisions and events will affect the financial performance of that venture. The more complex the undertaking the larger and more complex the model. These are not simple spreadsheets.  They are about as far from back of the envelope as you can get.

The model I used to work with was for a power station.  The power station had four large contracts, each of which was over 100 pages long.  2 for power sales, 1 for gas purchases, 1 for maintenance of the gas turbines.  It also traded gas and power and carbon certificates in the open market and participated in a very technical power industry thing called the Balancing Mechanism. These all interacted with each other. As did the air and water temperature, rainfall, air pressure, water quality and a dozen or so other variables.

It even contained a model of what the contracts looked like from the other side, so we could guess what our counterparties would do.

Every business, contractual or operating decision was run through the model. It had to be able to answer any question asked of it.

The model ran to about 50 sheets on excel and weighed in at about 100 mb.

You put one number or one formula wrong in 1 cell out of several hundred thousand and your model will tell you lies.

I think the rail franchise models are going to be no less complex. The contracts involved are at least as big as a power station, perhaps an order of magnitude bigger.

In my experience working with models like this they are a full time job. You have one modeller working full time on one model.  If you are modelling one of these bad boys you live in it constantly.  It’s a very difficult job.  The skills and the attention to detail required are rare and hard to acquire. The introductory course in how to do it costs £2k. It takes months to build a model. It takes months to learn how to work with one.

Modellers at my old employer cost in the region of £70k a year, salary, pension, bonus and benefits.  A team of five of them were managed by a director level post who cost about £100,00. These are not cheap individuals to employ. However, compared to getting it wrong and costing your employer, say £40m, paying this money might seem cheap. In hindsight. (Which is somewhat defeats the point of a model.)

As I say, this sounds to me like a modelling failure. It sounds like either some duff information has been fed into the model, or the contracts involved haven’t been properly understood, or the  architecture of the model, the way it calculates different elements of the franchise agreements was built incorrectly. It could be that someone has just put a decimal point it the wrong place. These things happen. Everyone I know who has worked with models has made one howler and found someone else’s howler.

It may be the case that one error is to blame for the whole franchise problem. That the first model had an error buried deep in it and this was carried to each subsequent model and that the Department of Transport’s modelling team are entirely competent, just really, really unlucky.  Or it could be that the modelling team have been systematically under-staffed, with team members coming and going, staff not properly trained, or trying to handle too many models, with insufficient help, leadership and support. In which case, a howler was bound to happen, and probably had already and been ignored.

I don’t know for sure but I’m willing to bet that anyone who was good at modelling the rail franchise contracts for the Department of Transport was offered a modelling job somewhere else for more money. Probably, by one of the rail operators.

Here government are undertaking complex contractual arrangements which are difficult and therefore expensive to manage.  The public are rightly concerned that something has gone wrong.  I’d make this comment.

You can complain about the government’s ability to manage complex contracts and the costs of getting them wrong.  You can complain about public sector pay.  You can’t complain about both.

EDITED: to add

 

And it looks like the problem lies not in the modelling per se but in the assumptions going into the model.

 

http://www.bbc.co.uk/news/business-19816359

and a further Peston article on the capital requirements assumptions. via [livejournal.com profile] andrewducker
http://www.bbc.co.uk/news/business-19881240

danieldwilliam: (economics)

I was having a conversation with My Lovely Wife on the way to work recently. We were talking about work and progress and I mentioned the Coming Singularity. She told me she knew not of what I spoke. Below is the note I sent to her to explain what I was talking about.

When hipster geeks (1) like me talk about The Singularity what we mean is this.

There comes a point where the current rules, guides, methods etc. don’t apply anymore and predicting how people should behave and what they will do becomes very difficult. The only answer to a the question “What does the Future look like?” is a shrug of the shoulders.

There are a couple of potential Singularities out there. The most famous are around the creation or evolution of strong-form Artificial Intelligence and / or the ability to transfer human minds into computers and thence into robot bodies or spaceships. Some people get very excited about these. Some are actively planning for them. (2)

The one I’m thinking of is a bit more mundane and based in economics. Most of what follows doesn’t require any new technology, it just requires existing technology to be evenly distributed around the world and for the price to come down a bit. For the bits that do require new technology I believe it’s all already under development.

There are three trends, which have been running over different periods of time that I think intersect in some way in the near future. Probably our lifetimes, certainly the lifetimes of our children.

Firstly, the long running trend of technology affecting labour. Technology takes skills and places them in machines, automates and speeds up repetitious tasks and enhances human abilities by giving us more strength or speed or data processing capability. This makes human labour more productive. It increases our material wealth and reduces the amount of time we have to spend working, either physically hard or at al. In the process, as a necessary by-product, it eliminates labour. Generally, lower-skilled labour. This has been going on for the last 250 years. So far we’ve generally found something useful for the displaced labour to do, usually involving more skilled, more valuable work, but not always. This trend continues. We’ll see 3-D printers making bespoke items for mass consumption soon.

Secondly, over the last 40 years of so the high labour-cost West has been trading more openly with the lower labour-cost rest of the world. We’ve been transferring skills, capital and technology to them, they’ve been exporting cheap manufactured goods to us, we’ve all been getting richer. Jobs have shifted from Europe and America to Asia and Latin America and will shift again in turn to Africa, until everyone who wants to be as rich as us is.  As a consequence labour rates in the West have been held down and entrepreneurs have had a choice when they want to increase productivity per pound spent on production, invest in expensive machines or invest in factories near cheap labour. At some point this trend expires (3). Everyone has joined the first world.  What happens to sweatshop labour then in Asia and Africa? It gets replaced by machines, machines developed by Western firms who were competing against low wage sweatshops.  Trend 1 rolls through Asia and Africa until everyone has caught up with the state of the art.

At this point the wage differential between people like you and me and our Brazilian and Chinese equivalents has disappeared. There are no more cheap holidays, but they are buying Scotch and Chamber Choir tickets at an unprecedented rate. What happens to people who don’t have the skills to do a useful job when the sweatshop closes is, problematic.

The other effect is that instead of an economy of about 1 billion rich people, we have an economy of potentially 9 billion rich people. Commodities become expensive. Research and development and shared infrastructure becomes comparatively cheap.

The third trend is to do with weak-form Artificial Intelligence and expert systems. By weak-from AI I mean computer systems that are not actually intelligent but might appear that way to someone interacting with them.  The software that recommends things you might like on Amazon is an example of early weak-form AI. Or at least the kind of functionality. As the software gets better and better and the hardware to run it on gets cheaper and cheaper then more and more of our lives interact with weak-form AI.  Our house learns when we are home and when we are not home and tunes our heating system accordingly. Our phones / email terminals spot when we make an appointments and automatically check for clashes between your diary and mine and then try to book the cheapest travel. Planes fly themselves, cars drive themselves, factories run themselves. The super market can make a good guess at what you want to buy and knows how to sell you stuff it has a surplus of. A mining operation can operate a mine, from spotting the deposit to designing the environmental safeguards, to doing the digging and selling the output on the commodities market without much in the way of human intervention.

A whole bunch of what we think of as brain work gets the Edmund Cartwright and Henry Ford treatment. Just as fewer and fewer jobs over the last 250 years required human hands, fewer and fewer jobs in the future require human brains. (4)

So we reach a point where machines can do almost all labour and the amount of human labour required to produce a Western standard of living is hours a month but unless you own the machines you might not have anything to trade for the output of the machines. A trivial level on tax on those who are employed or own machines is sufficient to offer the unemployed a better material standard of living than you and I enjoy. If you can levy any tax at all on anyone.

The confluence of these trends presents really difficult questions for all of us. What skills do you need when a $5 piece of machinery can do most jobs better and quicker than you and it’s not clear which jobs exactly it can’t do better or won’t be able to do better in five years’ time?  How do we deal with the gap between those who own capital and those who don’t? How does our society look when we are all Idle Rich? Or half of us are and the other half are unemployed and there is no welfare system? Does wealth and property ownership even mean anything?

(1) I’m not really a hipster geek. I’m not sure such a thing exists.

(2) joke’s on them if the Zombie Apocalypse happens first.

(3) Already labour rates in some parts of China are approaching the point where factories are not being opened there but are staying in the West or being opened in other parts of Asia.

(4) Washing up looks like it might a difficult task to automate, so you’re okay but I’m going to be destitute.

danieldwilliam: (seven legged spider)

My series of blogposts on the Ten Pillars of Economic Wisdom has been in hiatus over the summer but I have a quite afternoon and long lunch to devote to the next in the series.

Actually, I’m going to take the next of my Ten Pillars articles out of sequence and go to Pillar Number 8, Creating Jobs and Creating Wealth are not the same thing.

If you lost your job it would be a disaster. If you lost your job but got to keep all the stuff you would consider yourself to a lottery winner, to be really wealthy.

What is Wealth?

You might define it as material things, including the technology embedded in them. Or you might count the amount of labour required to produce the objects. You could include services that are rendered to you. Some where in between goods and services are things like clean air and clean water.

You could include some good things like a reduced fear of crime.

You might say that wealth was about mental well being. That people don’t buy products they buy solutions to problems they have.  You might think about Maslow’s Hierarchy of Need and see wealth as a continuum from meeting basic material needs up to meeting our desire for self-actualisation. You could include in this issues of choice and control. You could equate wealth with good mental and physical health.

I’ve always liked the idea of wealth as a set of solutions to problems. And the less labour that is needed to solve my problems the better.

In a kind of self-referential implosion I’ve seen wealth defined as things of value, as defined by their ability to be exchanged for other things of value. Wealth is what you think it is.

It’s your money, pick your own defination.

What’s clear to me is that wealth is not the same as a job.  A job is something that allows you gain access to wealth. Other things that enable you to gain access to wealth are owning capital, social transfer payments and crime.

For me a job is labour that is exchanged for wealth through it’s ability to contribute to wealth for other people. Wealth and job are not the same. A job is just one way that we gain access to a share of the wealth that we collectively create and own. And in some ways they are a waste of time. I’m going to talk briefly about driverless cars (1). Specifically taxis and I’m going to assume that you, like me, find chat from taxi drivers to be of limited value. If I wish to get in a metal box and be taken from Waverley Station to where I live I could have a taxi, with a driver or I could soon have a taxi, without a driver. I will arrive at my home in the same time. I’m indifferent between the driven or the driverless cab. But one technology involves a human being having a job.

I’m no better of for them having a job. In fact, if I weren’t paying for a human driver my cab ride home would have been signifcantly cheaper. (2) I could have spent the saving on a nice coffee from Starbucks. I’d have been better off.

There is a familiar pattern in the Developed world over the last few hundred years of mechanisation, of work that was done by human beings being done instead by machines. Often the machines are better at it. A mechanical pump can pump more water from a coal mine than all the humans you can fit in the coal mine ever could.  Often the inventor can take the skills needed to do the job, embed them in a  machine and then run that machine faster than humans can work. In any event, work that once was part of someone’s job is now done by a machine.

That process of jobs disappearing as new technologies build machines that can do them better has been going on for centuries. Many of the jobs, most of them, are of no loss to the job holder, so long as they can find another job – in order exchange their labour for a share or wealth.  Who misses going to the well to draw water and would tear down the aquaduct? Who misses spending a month’s wages on a hand knitted jumper shirt when a machine can knit it in minutes?  Not me.

More stuff is available for less overall human effort. What happens to the person who used to do the job? What happens to my taxi driver once I tell him that I no longer care enough for his chat to pay for him time? Unless he can find another job he loses access to wealth, and some measure of dignity.

This is the crux of the discussion about creating jobs.  Without a job most people have no way of accessing the wealth that is being created. The agenda behind talk of job creation is a desire to avoid having a conversation about reallocating capital or continuing to widen and deepen social transfer payments. We’d rather pay someone to dig holes in the road and then pay someone to fill them in again than create a fairer society or admit that we’ve got plenty of stuff and share it around a bit more equally.

Jobs naturally follow opportunities to create wealth in ways that can’t currently be done by a machine. I don’t think there is any reason to think that the only worthwhile jobs are created in the private sector but we do have to be careful about taxing some citizens and using that wealth to create jobs for other citizen. That’s just a transfer payment in disguise. (3)  The money taken in taxes would have been spent on wealth for someone. Whenever I hear politicians talking about the state investing in Green-Collar jobs (4) for example I wonder if they can tell the difference between us subsidising a new technology so that we can all enjoy the wealth that might come from cleaner, cheaper, more politically secure energy and subtly taking money out of our pocket using electricity bills instead of taxes so that no-one notices that we’ve given a bunch of wealth to people but not created any additional stuff.

Our aim as humans should be to elimate the need for jobs. To move to a state where everyone one alive could not distinguish between their work and their play and where the reason for doing the work is not because we need a job to buy some stuff but because we need the work to lift our souls.

(1) Who would have guessed.

(2) I estimate between 1/10th and 1/20th the price.

(3) Are you Rangers in Disguise?

(4) A neologism which is in the dictionary due in part  to my efforts

http://zenpencils.com/comic/75-l-p-jacks-work-and-play/

danieldwilliam: (economics)

I’m confident self-driving cars will eventually replace person-driven cars.  Why am I so confident?

Partly, it’s driven by the economics. Self-driving cars allow the costs of moving people around in small pods to fall significantly.


For more back of a spreadsheet self-driving economic chat... )
danieldwilliam: (economics)

I’m fascinated at the moment by two particular technologies and their impacts on the economy and on how we live. 3D Printers and Electric Self-Driving Cars. This post is about a potential second order effect of the widespread adoption of electric self-driving cars; what happens to all the car parks?

There are thousands of car parks in the UK. NCP alone have over 700 with spaces for some 200,000 cars. Most supermarkets have a car park. Most shopping malls have a car park. Factories, out of town offices and retail centres, railway stations, airports and sports grounds have car parks.  With 17 millions cars on Britain’s roads they have to be parked somewhere. In fact, they have to be parked in more than one place; near where we live and near where we are going to visit.

Self-driving cars mean fewer car parks.  Firstly, I think there will be fewer cars.  I think self-driving cars in cities will function more like taxis or car clubs than privately owned vehicles. (1)  With no driver to pay it makes more sense for more people to rent a car for a trip or by the hour than to own one out right.  So the absolute number of cars probably falls. These are cars that don’t have to be parked anywhere.  Secondly, as people’s usage of the car changes they need to be parked near destinations less often.

As an example I offer up a trip to the supermarket. Currently a trip to the supermarke involves driving to the supermarket, parking the car in the car park for an hour of so, and then driving the same vehicle home. If cars operate more like taxis there’s no need to park the car at the supermarket. You take one self-driving car to the supermarket. (2)  Do your shopping. Take a second, different self-driving car home. Or take the car that dropped you off once it has finished its next job. In the hour you are inside the self-driving car you came in could complete 4 return journey of 2 miles. (3)

Now, you may think “I don’t want to take a taxi to Sainsbury’s.”  All well and good but the land that Sainsbury’s lets you park on is worth cash money to Sainsbury’s. Given a choice between having you park there and having you take a self-driving car Sainsbury’s will want you to take the self-driving car. They would rather operate a taxi rank at the front of their building and sell the land.

With fewer cars needing to be parked less often there appears to be a long term over supply of car parking spaces. There are already just about enough car parking spaces in domestic streets and garages to house all the cars we own. If we’re not parking when we go shopping do we need all those car parks.

I’m assuming that the car parking spaces to be liquidated are those which are a) most easy to sell b) those furthest from where the car is going to start its duties in the morning. So the large car parks of out of town retailers will be those that are liquidated.

So what happens to the land?

Presumably the land holders will sell it for the best price they can get for it. It’s worth less and less to them as a car park.

So a stream of realatively easy to redevelop brown field sites become available for housing.

Two follow up questions occur to me.

What happens to out of town or suburban shopping centres when the value of the subsidised parking they offer to their customers is reduced because customers don’t need to park to shop any more?

What happens to council income from charging for car parking?

(1) and I think the cost structure looks something like 31 pence per mile for a standard drive yourself car, 11-18 pence per mile for a self-driving car and £2-3 per mile for a driven taxi cab. I think self-driving cars are half to 1/3rd the cost of owning and driving yourself and tens of times cheaper than a traditional taxi.

(2) You might of course walk to the supermarket and then ride in a self-driving car home.

(3) At 20 mph urban driving speed 4 return journeys of 2 miles is 2*2*4 = 16 miles plus loading and unloading time. At a charge of 25 pence per mile this would yield revenue of £4, and a profit of about £1. £1 more than the car would generate sitting in Sainsbury’s car park.

danieldwilliam: (economics)

No housing benefit for the under-25’s.  There are quite a few reasons why that’s a poor policy.

I wonder if it is the start of an attempt to remove the minimum wage.


For more on how this Conservative Government is going to cut your wages... )

danieldwilliam: (Default)

The fourth of David Henderson’s Ten Pillars of Economic Wisdom is

4. The only way to create wealth is to move resources from a lower-valued to a higher-valued use. Corollary: Both sides gain from exchange.


Read on for ethical sneakers and sexual puns... )
danieldwilliam: (economics)

So, whilst pondering whether the leave Africans to die in their own cesspools or to bravely and selflessly take on the mantel of running their continent question for them I stumbled on the idea of Charter Cities proposed by Paul Romer.

The idea is that a developing country sings a treaty with one or more developed countries to create a city in (more or less) unoccupied land.  The developing nation gives the land for the city and the developed nation gives the rules, the enforcement of the rules and the guarantee that the rules won’t be changed after individuals and corporations have made difficult to back out of investments in the city.

The idea is based on the observation that rules matter. That one of the greatest barriers to developing countries developing is that they have bad and / or indifferently enforced rules that are subject to arbitrary change (1).

To give the city administration a long term stake in improving the lot of its citizens they own all the land and lease it to, well to whomever want to lease it. If they want to increase rents they have to increase the ability of people to pay rent by making them better educated, more productive, healthier, free-er. No gouging because anyone can leave at any time to either return home or move to one of the other Charter Cities.

People, either only from the host country or from all over the world can move in. They accept the rules of the charter city and get on with earning a living.  If the Charter City offers them a better life than they currently have, they will move there. If it doesn’t they won’t. This would be a third option alongside immigration, possibly illegal, to a place that doesn’t necessarily want me or stay in country that has a low standard of living and isn’t improving quickly enough for me.  A hoped for side effect is that with local competition for citizens local despots and kleptarchs, or local trying really hard but struggling to build consensus would pull their fingers out.

The benefits to the host country are that they end up with a well-run, prosperous city nearby which wants to buy its products and services and in turn wants to sell goods and services. The benefits to the administrative country are altruistic and a hoped for reduction in aid costs and security costs. The people who live in the city, well they benefit because they live prosperous lives in a well-run city. If they find they’re not living in a prosperous city, then they leave.

So, I’m wondering what could go wrong? That’s a serious question.(2)

(1) often as a result of the country being a kleptarchy but not necessarily.

(2) and I'd be obliged if your responses did not use the words Libertarianism or Colonialism.  I want to know what's wrong with Mr Romer's idea, not a straw man.

Some Links for those with a more than passing interest.

http://www.prospectmagazine.co.uk/magazine/for-richer-for-poorer/ 

Article by Paul Romer in Prospect

http://chartercities.org/concept 

The Web Page for Romer's foundation.

http://www.guardian.co.uk/science/2010/jul/27/paul-romers-charter-cities-idea 

A Critical - but in my view not very good article in the Guardian. The comments are more useful.

http://chartercities.org/blog/66/new-systems-versus-evolution

 Romer discussing systems.  (If [livejournal.com profile] widgetfox is reading this he may also mention hair and shoes)

http://www.freakonomics.com/2009/09/29/can-charter-cities-change-the-world-a-qa-with-paul-romer/

 A bit of a Q&A by Freakonomics

http://chrisblattman.com/2009/10/14/charter-cities-debate-round-2/

Part of a debate between a sceptic of the idea and Romer - the rest are findable.

danieldwilliam: (Default)

Today’s excursion into the Ten Pillars of Economic Wisdom takes us to Pillar number 3.

Economic thinking is thinking on the margin.

How does behaviour change as people have slightly more or slightly less of a thing? Or the opportunity to have slightly more or less of thing? What decisions do I make when looking at my current position and deciding whether to move to a different position?


If your marginal utility for economcs chat is high, read on... )
danieldwilliam: (Default)

Today’s foray into the Ten Pillars of Economic Wisdom is my response to the second of Henderson’s Pillars, Incentives Matter, Incentives  Affect Behaviour.


Read on for a discussion of why expensive machines get broken by cheap labour )
danieldwilliam: (Default)

I’m going to amuse myself by considering what I’m reminded of by each of the Ten Pillars of Economic Wisdom.

The first of the Ten Pillars of Wisdom is TANSTAAFL.

There Ain’t No Such  Thing As A Free Lunch.

If economics is the study of the creation, transfer and exchange of value than this pillar reminds us that none of that creation, transfer or exchange comes without a cost.


This essay is free - well nearly... )

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