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New Video: 'Wellbeing, choice and sustainability'

06 Apr 2012

Following the release of IPPR's latest report 'Wellbeing, choice and sustainability: What should economic policy target in a new era economy?', Amna Silim speaks about the causal links between GDP growth and income, and between income and wellbeing and opportunity, have broken down. In the report Amna calls for policy that directly impacts wellbeing, choice and sustainability. She argues that we need a political consensus around wellbeing, choice and sustainability.

Amna Silim on what the economic policy target in a new era economy should be?

Charles Leadbeater argues that we 'need to rebuild our capacity of cooperation'

New video: Vince Cable on industrial strategy

27 Feb 2012

In his speech at a half-day conference on developing an industrial strategy for the UK, hosted by IPPR in partnership with NEF (the New Economics Foundation) and the Resolution Foundation, the business secretary Vince Cable argued that the British economy needs to be remodelled to help increase exports and business investment and to lower government borrowing. He also touched on public procurement and the need to build confidence in the British supply chain.

Shadow enterprise minister Iain Wright delivered the conference's closing speech, highlighting the need for Whitehall to 'bat for Britain'.

Vince Cable on remodelling the British economy

David Lammy: Is GDP the best measure of the success of our economy?

28 Nov 2011

As part of IPPR’s New Era Economics, David Lammy, the Tottenham MP visited IPPR to discuss whether GDP is still the best measure of the success of our economy.

David Lammy appeared alongside Hetan Shah, director of the RSS and Martyn Evans, chief executive of Carnegie Trust, addressed an audience on the role of GDP and whether this is the right goal to guide economic policymaking in the 21st century, and if not, what other objectives might replace it. The session was chaired by Ruth Sutherland, economics editor at the Daily Mail.

Hetan Shah began the discussion by stating that the limits to GDP were already well rehearsed. GDP is not a perfect measure, and can account for factors that do not necessarily promote wellbeing. It also does not take the distribution of income and sustainability into account. For example, GDP increases after an oil spill as it records the clean-up as an economic activity. Clearly this demonstrates the weakness in its measurement. What is important, he said, is addressing the policy efficacy of a measure rather than exploring the problems inherent in its measurement. Does GDP allow you test policy measures? Shah is unsure how well GDP performs under this condition. He then went on to describe what possible alternatives exists – such as tweaking GDP or creating separate measures altogether of wellbeing and happiness. However, Shah stated that GDP is not completely irrelevant, and emphasised the relevance and importance of GDP, especially when looking at employment, GDP per capita and inflation. Addressing policy efficacy, he proposed exploring longitudinal studies to determine how people respond to their day-to-day life, specifically how people spend their time – this would prove to be an insightful exercise for policymakers.

Martyn Evans described his experiences measuring ‘More than GDP’. The Carnegie Trust UK has recommended that the new Scottish government adopt a new performance framework that is better able to deliver, measure and report on economic performance, wellbeing and sustainability. This should be guided by the recommendation of the Stiglitz report. He also encouraged more analysis and testing of this framework. The debate on GDP and wellbeing must be had at the national level, and a top-down approach is not the only one to adopt. Evans boldly stated that the debate on whether GDP is a good measure is done and dusted; the more pressing concern is what are the alternatives and how do we translate new policy into practice. This is a far more challenging task.

On a more pessimistic note, David Lammy responded by stating that the GDP debate was still wide open, and is reflected in the Treasury’s preoccupation with GDP. Additionally, the Treasury’s dominance in government operations also further reflects this preoccupation. He noted how economists dominate the way Britain operates and this needs to change. Lammy voiced his concern over the increasing workless poor and their wellbeing. He listed time, mentoring, and fostering better responsibility as essential to better lives. We must critically look at what liberalism has done for our economy – both the liberal economy and social liberalism. There have been significant advantages since the adoption of both; however this freedom has at times come at the expense of others’ wellbeing.

David Lammy on whether GDP is still the best measure of the success of the economy

David Halpern on behavioural economics

09 Nov 2011

As part of the New Era Economics policy seminars, David Halpern discussed the work of the Behavioural Insight Team or so-called ‘Nudge Unit’. Halpern described the policies currently being developed within the unit and addressed the criticism around behavioural science.

Gerry Stoker, professor at the University of Southampton and Daniel Read, professor at the Warwick Business School joined David Halpern on the panel to further explore the opportunities and challenges of behavioural thinking.

David Halpern opened the seminar by highlighting the importance of choice architecture, and more specifically the impact details have on how people make decisions. Choice architecture, the way in which decisions are influenced by how the choices are presented, has proved effective across many areas, for example pensions. Pensions offer substantial rewards in the future, however Halpern described that pain and sweat must be endured today in the form of reduced pay which leads to avoidance. However, details on how default settings are set, he says, play a significant role on pension enrolment. There are other areas where the behavioural insights team has used details such as wording to influence decisions. An interesting example of this is when the UK government first offered to insulate homes at no cost, it received minimal interest – however when the offer was put forward as ‘we will clean out your loft for you’ the results were markedly different. The Behavioural Insights team has also played around with wording to encourage people to file taxes on time by advertising that 9 out of 10 people in Exeter did so.

Gerry Stoker greatly supported the work by the Behavioural Insights Team, however he also pointed out the difficulty in translating lab insights offered by behavioural economics to policy interventions. Why might this be so? Stoker points out that nudge works best with traditional regulations or traditional incentives, and a mixing of approaches leads to more effective results. Therefore nudges should not be thought of as an alternative, rather a complement. There is also a misconception that all nudges bear no cost but in fact some of the best nudges can have a significant cost. He also described the broad framework that nudge offers, where people on the ground, communities, and individuals can apply these techniques in their communities and it need not be a top-down approach.

Daniel Read closed the discussion by describing the role of incentives in choosing between two activities and how incentives are the basic tools of economic thinking. We need to think what someone will get from choosing an action. He described that the nudges more likely to work are those where individuals are for the most part indifferent between the choices offered. They essentially do whatever is easiest to do. Also we must acknowledge that little nudges may not solve all problems; big problems require bigger incentives than slight nudges. The challenge is how to spread good practice, and there must be more room to experiment and local authorities should be more willing to experiment.

David Halpern explains that 'nudge' ideas potentially have wide applications

Behavioural economics and policymaking: Halpern

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Behavioural economics and policymaking: Stoker and Read

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Behavioural economics and policymaking: Q&A

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Government should do more to encourage employee-owned businesses, says boss of John Lewis

Seminar note: Reforming finance

27 Oct 2011

As part of its New Era Economics programme, IPPR held a seminar on reforming finance for a new era economy. This seminar explored the extent to which ‘rebalancing’ the economy away from financial services is possible and desirable, and what regulatory measures are needed to prevent future banking crises, while ensuring the sector remains competitive.

In the aftermath of the financial crisis there has been a growing call to rethink and redesign the economy because business as usual is no longer a feasible option.

Technological shifts, evolutionary economists argue, are significant catalysts for major crashes. Historically, crashes regularly occur about halfway along the diffusional path of a technological revolution. During these technological shifts, finance plays a significant role in choosing the leading companies of the emerging technological revolution.  In the period before the crash, bubbles are created that inevitably collapse, leading to a breakdown in the real economy. This breakdown is marked by increasingly divergent incomes, high rates of unemployment, unpayable debts and other failures. At this point, society cries out against the ‘culprits’ and calls for punishment and regulation.

These periods of turmoil are surprisingly followed by ‘golden ages’ where the full benefits of technologies are felt. Here production and not finance drive the economy, finance in this stage is used to support the full deployment of technologies and support its expansion. (For more on this cyclic model, read the speech that Carlota Perez gave in this seminar.)

The government has a significant role to play after crashes. This includes ‘intensive therapy’ to save the banking system, a redesign of regulation as a preventative measure and supporting the structural shift in the real economy. Critical to ‘saving’ the financial system is getting the economy on the right path. The past collapses exposed the toxic practices of the finance sector during bubble times and revealed the need for structural change to take advantage of the new growth potential.

The excitement generated by technological shifts ultimately ends up in a casino of financial innovation decoupled from the real economy. But this does not mean that finance must be constrained as a result. Finance plays an undoubtedly important role in the UK economy despite this casino. Therefore adequate regulation should steer financial practices away from toxic behaviours rather than restrain finance. It is important to note that this as finance is now a global sector. Therefore financial regulation must take place at this level, as regulating finance at the national level is largely ineffective. Suggested proposals for regulating finance could include strongly favouring long-term patient capital over short-term speculation. Other proposals may include favouring investment over real derivatives, futures and other betting types of financial activities; additionally it would be desirable to boost venture capital and enable funding of knowledge-intensive services.

In contrast to this response to the crisis, others suggested a radical redesign of the economy is unnecessary. They believe the financial crisis was partially brought about by the insolvency of the financial system which led to a mass withdrawal from the financial sector.  And in response to this crisis, increased regulation already being set in motion will steer the economy in the right directions. Bank balance sheets will look different compared to the run up to the crisis as they will be required to hold more assets and be more liquid. Contrary to popular belief, the effects of holding more capital will not lead to a smaller banking sector. The banking sector will shrink as a result of individuals using alternative financial intermediaries. There is a growing trend, especially amongst larger companies, towards using capital markets as alternative to banks. Other changes include reforms to the tax system, which would prevent preferential treatment of debt financing over equity financing. Overall, these changes have led some to believe that the finance system will sort itself out given the new regulations in place.

Ha-Joon Chang on industrial policy

12 Oct 2011

Leading Cambridge economist Ha-Joon Chang talked to an audience at IPPR about why a new industrial policy is so essential to kick-start recovery and help rebalance the UK economy.

Joining him on the panel were Jonathan Portes, director of NIESR, and Adam Lent, director of programmes at the RSA. Overall, the panellists agreed that policymakers must steer away from the ideological debate around industrial policy and suggested adopting a pragmatic approach instead.

Ha-Joon Chang opened the seminar by stressing the need to rebalance the UK economy. Looking ahead to the future Chang asked: ‘How will the UK pay for imports without regenerating manufacturing to a certain degree?’ He stressed the UK must ‘take on the City’ in order to rectify imbalances in the economy. Thus far, net exports of services in the UK have managed to cover its growing manufacturing trade deficit, but this is not a sustainable long-term solution. Infrastructure and skills among other weaknesses in the UK economy must be addressed. However the picture is not all gloomy: Chang emphasised that the UK excels in many sectors including but not limited to the pharmaceutical industry, creative sector and science.

Part of the solution to rebalancing the economy and kick-starting recovery is an active industrial policy. Chang asked the audience to consider how world leading companies are created. How did Nokia, a Finnish company, become a world-class company? This is achieved, he stated, through initial support from the state. The purist free market mentality that ‘industrial policy does not work’ does not hold, and further to this he argued that generic industrial policy it is not sufficient. The debate around industrial policy should not be whether or not a state should undertake industrial policy but rather what level should industrial policy be implemented. In other words, this should be a pragmatic debate rather than an ideological one, especially since the government is already active in industrial policy.

Industrial policy is happening more than people suppose. For example most of the US’s greatest technological advances have been funded and supported by the US government despite its official position of not having an active industrial policy. Another example of supporting world class companies was the Korean government’s early support of Samsung electronics. Overall, he encouraged questioning why certain countries are leaders in certain industries. Why do the Japanese excel at manufacturing cars? Why does Latin America excel at coffee? He also said it was important to learn lessons from abroad, and to learn from failure. Chang challenged the phrase that industrial policy tends to pick winners – he suggested that it’s not picking winners but building winners.

Following Chang’s opening remarks, Adam Lent described the increasingly competitive world in which we live and the role of the east in this transformation. Further to this, web 2.0, described by Lent as a disruptive technology, has played a large role in revolutionising many UK sectors, including the financial and manufacturing sectors. Unfortunately, these changes have not played out well for the UK –several barriers have made it difficult for the UK to remain resilient in this new space. These barriers include low business investment, a low skills base and a long tail of businesses that are not innovative. This has led to the UK’s lack of a global presence and vibrancy. Lent pointed out that in the east the UK doesn’t have the same presence as Germany. This is partly due to a piecemeal policy response that has often come into effect far too late. He agreed with Chang’s analysis that the tired debate of state versus market must be put aside, and instead we must learn from abroad and embrace the implementation of a state investment bank, that supports building long-term patient capital.

Jonathan Portes responded to both Lent and Chang’s comments on the dismal state of the economy. He argued that the UK economy was not faring as badly as was generally thought. More precisely, from 1997 to 2010 per capita growth was higher than in the US and Germany: a significant achievement that should not go unnoticed. Portes also stated that the UK had a ‘pretty good’ economic policy with the highest employment rate in recorded UK economic history. He broadly agreed with the other panellists that we need to work on the UK’s strengths and outlined briefly what bad industrial policy looks like, for example stopping immigration of foreign students. He closed by stating the gains to be had from horizontal industrial policy.

During the question and answer portion of the discussion, a number of people commented on the failures of previous attempts at industrial policy in the ’60s and ’70s. The panel said that this was not the approach to take – we must acknowledge that failure happens. Crucial to successful industrial policy is accepting that some initiatives will fail, and also that big successes require some level of risk taking. Taxpayers must be willing to bear the burden of the government occasionally picking losers as well as building ‘winners’.

Leading Cambridge economist Ha-Joon Chang talks industrial policy

Divided states and phantastic objects

14 Jul 2011

We recently hosted a New Era Economics seminar with influential professor David Tuckett, to discuss his new theory termed 'emotional finance' to explain financial market behaviour.

During the seminar, Professor Tuckett described his main findings based on 50 in-depth interviews with fund managers, offering a deeper understanding of financial markets and investor behaviour.

 Listen to a podcast of the seminar

Professor Tuckett discussed how markets unleash emotional responses, and he found that human emotions, storytelling and conflicts are at the heart of finance and must be acknowledged as part of their decision making process. He stressed how decisions are made in a state of uncertainty, where information is weaved into a narrative in order to come to certain decisions.

This leads to emotion being a motive in taking risks, where people often find themselves experiencing what he terms ‘divided states’, and ‘group feel’ and creating ‘phantastic objects’. This he says is what was experienced during the financial crisis: individuals perceived financial derivatives as phantastic objects, which led to divided emotional states and group feel, which eventually led to the financial crisis.

David Tuckett on 'emotional finance'

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Event review: Building a new era economy

01 Dec 2010

Building a new era economyThis high-level conference featured a keynote speech from energy and climate change secretary Chris Huhne and two discussion panels, focusing on business and policy for a new era economy.

Chris Huhne on building a new era economy

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Panel discussion: Business in a new economy

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Panel discussion: Policy for a new economy

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Laura Chappell introduces New Era Economics