World food prices are not (yet) showing any effects from climate change

Our ancestors lived in fear of famine. A failed harvest caused hardship and rocketing food prices. Two failed harvests was a disaster that could lead to widespread starvation. Today, starvation is mercifully rare. It is much more likely to be caused by war or the deliberate policy of despotic governments than a lack of food. The world produces quite enough for all of us to eat, just as long as we can transport local surpluses to make up for shortfalls elsewhere.

Nonetheless, there may be trouble ahead. It is hard to imagine anything more vulnerable to climate change than food production. Increases in temperature could lead to encroaching deserts, salt water flooding from rising sea levels, and crop-destroying weather wiping out the harvest. Material falls in global food production would be catastrophic if as the population continues to increase. Most dangerously, water shortages would decimate modern irrigation-thirsty agriculture. The question is whether there is evidence that these potential calamities are coming down the road. Of course, we read about many of the alleged effects of climate change in the newspapers. But the media is dominating by bad news, driven by short-term considerations and riven by political agendas. We are woefully short of objective information.

Luckily, for the global food supply, we do possess an unbiased source of data: the United Nations’ world food prices index, which has been running since the early 1960s. Markets, such as the one measured by the world food index, contain a vast amount of information. In the case of the food index, that information includes the total amount that all participants in the global food supply chain know about production in their own areas. That’s far more information than any individual could glean from the newspapers or scientific journals. If one person knows that there is a glut in grain in the Midwest of the US, while another expects a bad harvest in Romania, the market processes that information and adjusts prices accordingly. Crucially, and unlike in the media, good news and bad are afforded equal weight. If we are heading for a world food crunch, the markets will tell us.

Does the food prices index reveal any effects from climate change? In short, no it doesn’t. On the contrary, it shows that, in ‘real’ terms, food still costs roughly what it did fifty years ago. Sure, there have been ups and downs, but the overall trend is flat. Remarkably, over the same period, the world’s population has increased from three billion to over seven billion, while food production has gone up even more as calorific intake per head as increased. Even though 2015 and 2016 were the hottest years on record (thanks in part to the El Nino effect), it is reassuring that this does not appear to be reflected in food prices. In fact, as you can see here, there is a closer correlation to economic circumstances (such as the world financial crisis in 2008/10 and the first oil shock in the mid-1970s) than to climate. In fact, oil prices seem to effect food costs significantly, as we’d expect from the importance of hydrocarbons in the production of fertiliser. So, the half a degree increase in average global temperatures since the 1960s appears to have had no effect on the price of food. Interestingly, one possible driver of increased food prices from climate change is an indirect one: the wrongheaded drive to grow biofuels has driven out food crops like sugar, inflating its price.

The flat trend in the world food prices index doesn’t mean that climate change is having no effect. After all, the media is feeding us a near constant stream of research and anecdotes about the damage that global warming is doing. They can’t all be wrong. However, no one would call the media objective. Any positive effects of climate change are, at best, ignored and more often deliberately buried (see Matt Ridley’s experience on his reporting of global greening here). That’s what makes markets such valuable sources of information. The good news and the bad are given equal weight while actual events are more important than predictions. Of course, markets are not infallible. But because they are made up of vast numbers of individuals whose biases cancel out, they are more objective than any single information source.

For that reason, we should look to markets rather than the media, or even scientists, for the best information about the effects of climate change. For the moment, the evidence for impending disaster isn’t there. Nonetheless, we should keep an eye on the world food prices index for an early warning of trouble ahead.

 

 

 

 

 

 

 

 

 

 

Why no one believed economists over Brexit

One of the reasons that Leave won the referendum on the EU was that no one believed the dire warnings promulgated by economists. We were told by HM Treasury, the IMF and just about everyone else who’d ever wielded a slide rule that Brexit would be a disaster. But when it comes to economic forecasting, we are right to be cynical. It wasn’t just the Queen who asked of the financial crisis, why did no one see it coming?

Human beings are quite good at microeconomics. That’s the economics asking how individual people and businesses behave. It studies why coffee shops price their beverages in the way they do. It considers the best way to get people to pay money into a trust box. It makes useful predictions about the various methods to incentivise employees. Microeconomics isn’t perfect; but it is getting better as telling us about how the world really works. You can find out a lot more in Tim Harford’s superlative book The Undercover Economist.

Conversely, human beings are quite bad at macroeconomics. That’s the economics asking how economies as a whole react to government policies and other long-term factors. It studies why unemployment goes up and down in the way it does. It considers the best ways to increase economic growth. But it fails to make any useful predictions about when there will next be a recession. Macroeconomics isn’t a complete basket case in that it has one or two successes to its name, such as the efficient markets hypothesis. Although some economists even manage to argue about that.

I’m not an economist. But as a historian of science, I have studied the history of a subject -science – that, once upon a time, was like macroeconomics is today. For centuries, scientists couldn’t make serviceable predictions or tell true theories from false ones. There were two very good reasons for this. The first was a lack of experimental data that could be used to test the theories. Experiments are difficult and easily misinterpreted. They need to give clear-cut results and to be repeatable. In any case, few saw the point of doing an experiment to prove something their theory already told them had to be correct. Early scientists lauded observation and could gather plenty of data. But their inability to test it was fatal.

The second reason early scientists failed was that no one was very interested in which theories worked in the real world. They were primarily concerned with how science could justify political and ethical conclusions. Scientific theories simply provided a way to understand nature that supported a particular moral or religious viewpoint. For example, the ancient Greek Epicurus said everything was made up of mindless atoms, which dovetailed nicely with his ethics. Christians rejected atomism because it invalidated transubstantiation.

Modern science now has enough experimental data to choose between theories and make accurate predictions. Microeconomics is like that too. Of course, it is by no means perfect. Microeconomists draw lots of false positives, make various mistakes and torture their data. But, at heart, they all agree what they are about and how the method is supposed to work. Microeconomists and scientists are successful for quite similar reasons.

Not so for macroeconomists. As a profession, they failed the call the financial crisis and, if they turn out to be right about Brexit, it will be down to luck. Admittedly, a few economists did predict the great recession, but probably fewer than you’d expect if all economic predictions were made randomly.

Macroeconomists are also divided into schools and they argue about policy according to the lights of the school to which they belong. Remember what I said about early scientists using their theories about nature to back up their political or religious agendas? Macroeconomists appear to be engaged in the same thing. Here is Andrew Lilico of Europe Economics defending the Conservative Party policy of austerity against a Keynesian. Meanwhile, this lengthy screed by Oxford’s Simon Wren-Lewis is a political polemic on behalf of the Labour Party dressed up as Keynesian analysis. I expect Ha-Joon Chang at Cambridge would call down a plague on both chez Lilico and Wren-Lewis. The mere fact that macroeconomists can’t agree on the most basic issues is damning evidence of how much trouble their discipline is in. Whatever is happening in the world, the Keynesian, the Marxist, the Austrian, the non-orthodox and the neo-Keynesian economist think can explain it in the light of their own theories.

The near-perfect correlation between the views of members of different economic schools and their political inclinations suggests very strongly that the data does not determine to which school they belong. Academic economists are often Keynesians who believe in government intervention while private sector economists are more likely to be laissez faire. This contrasts with, say, engineering where the laws of physics are understood in a very similar way at universities and aerospace manufacturers. Neither can economists say what will happen next. When they do get something right, it is simply luck. None of their theories work at the most basic level of being able to make practical and testable predictions.

This diversity of views is not entirely the fault of the macroeconomists. They can’t do many experiments because the systems that they study are too big. A central bank won’t cut interest rates for half the economy and leave them the same for the other half just to compare the effect of different policies. That means macroeconomists have to rely on observation rather than controlled experiments to build their theories. That was exactly the methodology employed by Aristotle to construct his scientific system. The result was a system of physics that seemed so rational and convincing that it lasted almost two thousand years. But it was wrong in almost every respect. Freudian psychoanalysts and Hippocratic physicians were in the same boat. They had elegant and reasonable systems of thought with which they could explain pretty much any observation. The pathologies of their patients could always be interpreted within the bounds of their theories. And yet the their theories were completely untrue.

It may seem rather crude to compare macroeconomics to such discredited systems of scientific thought. But the problem is not confined to economics. Any subject dominated by a lack of solid data and beholden to theory will face the same issue. Within modern science, string theory is well up this particular creek. Arguably, climate science is as well. The failure of computer models to predict the climate has increased the importance of theory and hardened the political allegiance of those engaged in debates on global warming.

What is the answer? For macroeconomics, there probably isn’t one. The economy is too complicated to predict, even if we understood exactly how it works, which we don’t. So it is best to understand economic debates as proxies for political arguments. The good thing about that is we can all get involved. Macroeconomics boils down to informed opinion and when it comes to opinions, we all have one.

Luddites and the internet

When I was young, Yellow Pages was ubiquitous. Businesses paid a modest fee to appear in the directory (or a less modest one if they wanted a bigger notice). The big yellow books of listings were delivered free to almost every household. The company brought together Balham’s plumbers with its inhabitants’ leaking taps; and summoned minicab drivers wheresoever they were needed at 2am on a Sunday morning. So Yellow Pages made a healthy profit by providing a valuable service. They also produced some outstanding television advertisements. No more. The internet has seen to that. Hibu, as the company is now called, is now effectively owned by its lenders and doesn’t publish directories anymore.

Has the internet destroyed the value in this once profitable company? It has certainly destroyed many viable businesses.  And not just Yellow Pages. It has done the same to bookshops and it is beginning to eat into other retailers as well. So where has the value gone? The answer is that it has moved to you and me. We find it more convenient to do things online. It frees up time and saves us money. But our extra free time isn’t immediately monetised and we might not spend the cash we save. Eventually, we’ll reassign our time and resources to more profitable activities, but that isn’t much comfort if you publish a telephone directory.

It was the same in the late eighteenth century. New machinery like the spinning Jenny and the mule meant that fewer workers were needed to produce the same amount of cotton fabric. People saw the machines as a threat to their livelihoods. And they were right. A few went so far as to try to hold back progress by force. My old friend Jenny Jones, a Green Party member of the House of Lords, described the luddites as fiery and reasonable. You can see her point, even if the Luddites turned out to be on the wrong side of history (although when household appliances made domestic service obsolete, no one seemed so worried).

Productivity is a good word. Businesses and governments strive for it. But basically, it means fewer people doing the same amount of work. An increase in productivity removes money from the pockets of workers and deposits it in the pockets of consumers (as well as companies’ coffers). The service sector used to be immune to this effect (which is why the number of jobs in the manufacturing sector always seems to be shrinking relative to the services sector). No one ever managed to automate salespeople or waiters. But the internet has begun to increase productivity (or destroy jobs, depending on your point of view) in the service sector as well. For instance, I’ve stopped using my firm’s helpline when I have an IT problem. Just logging into a chat room is so much easier while the worker at the other end can manage multiple queries at the same time.

But of course, this is only part of the story. Markets reassign resources, including workers, to where they are needed. We can enjoy our extra free time or work even harder if we want to. We can write blogs, play computer games and read to our children. The hole in GDP left by the loss of telephone directories is filled by App designers and delivery drivers. Companies invent things like iPads that we never knew we wanted or needed. Making things more efficient is ultimately good for all of us. Doing away with Yellow Pages increases the demand for other things. But we should not forget that, even though capitalism’s destruction is creative, the destruction is still real.

The cause of recessions

There’s been a lot of talk about whether or not Brexit will cause a recession. Most commentators seem to imagine that recessions can be avoided if we do the right think. The former British Prime Minister Gordon Brown even turned this delusion into a political slogan: “No more boom and bust”. Of course, particular recessions have particular proximate causes. The subprime crisis was the catalyst that kicked off the great recession of 2008 that we still have not quite got behind us. But that was not why it happened. After all, the sovereign defaults and the LTCM collapse in 1998 didn’t cause a recession. Nor did the dotcom crash of the early noughties. So you need to look a bit deeper to understand why recessions happen and why they cannot be avoided.

Here’s one theory (which I very much doubt has the merit of originality). I call it the theory of crud. Actually, I don’t. But the word I use instead of ‘crud’ isn’t appropriate for a family blog.

When economies are growing, we can get away with quite a lot. If you have an underperforming employee, then firing him or her is probably more trouble than it is worth if your business is still making lots of money. Innovation is risky and there is little point in it if you can make money doing what you’ve always done. This is human nature.

Economic growth will also resist measures that might be expected to stifle it. Government regulation and taxation, as well as high debt levels, are cases in point. A growing economy allows us to feel we can take on more debt than is prudent. It encourages governments to increase public spending so as to look after their clients and stay in power. So they raise taxes, removing money from productive uses in the private sector to unproductive ones in the public sector. Governments also get themselves into debt more than they can afford. Growing economies let them (and us) get away with mortgaging the future.

Over-regulation is even worse. It is essentially a form of taxation whereby money is moved from productive sources into the hands of compliance officers and inspectors who are often, but not always, in the public sector. But regulation is also less obvious that straightforward taxation and can be disguised as a good thing when it purports to improve health and safety, or the environment, or whatever. This makes getting rid of red tape an enormous challenge. When an economy is growing, no one can be bothered. Protectionist policies have similar advantages. Free trade is a hard sell.

And it gets worse. A growing economy lets people make colossal and stupid mistakes without being punished. Utterly insane ideas, like joining Europe’s disparate economies into a single currency, can appear to be working when the damage they do is hidden under economic growth.

Crud is what I call all this taxation, petty rules, overhanging credit and stupidity. It jams the works of the economy like sand in a machine, wearing down the gears and gradually making the whole mechanism less efficient. But when the wheels are turning, they can overcome this resistance. The crud continues to build up, week by week, but while the machine turns, it is worth nobody’s while to do the hard work of clearing it out. Things are obviously much less efficient than they should be, but they still work enough for people to pretend everything is fine.

But eventually, the crud has built up to such a level that it causes serious damage. Important works clog up. Gearwheels crack under the strain of turning through the rubbish around them. The machine judders to a halt. A recession begins. Exactly where and when this happens is essentially random. But a time comes when an economy is simply not functioning well enough to overcome a shock. Only then does the clear-up begin.

That’s what makes recessions so painful. All those decisions that were put off when times were good can no longer be avoided. The shirking employees have to go; the debt must be repaid. Idiocies like the Euro show their true colours. The engine of the economy has to be steam-cleaned at vast expense and discomfort. By the way, the recession we have just had was so deep and prolonged not because of wicked bankers. It was just that long boom from 1990 to 2008 gave us so many opportunities to accumulate crud. Getting things going again with so much junk in the system is extra-hard.

And there is an added danger. A recession can lead people to demand even more regulation and red tape in the ignorant belief that this prevents rather than causes economic reverses. Keynesians cry that we have to shovel even more crud into the system to restart it. Roosevelt’s famous New Deal is now known to have made the depression of the 1930s even worse than it needed to be. And here’s why: the New Deal just showered crud over everyone. Sadly, the only way to get the economy moving again is paying down the debt, tearing up the regulations, slimming down the workforce and keeping markets open for business.

So, in summary, we get recessions because capitalism works. Capitalism generates economic growth. When things are good, human beings have a natural tendency to avert their eyes from future problems. But eventually we just have to roll up our sleeves up and carry out the necessary spring cleaning.

Will Brexit cause a recession? It might turn out to be a catalyst but it won’t be the cause.