How should short selling account for carbon? Does selling short impact cost of capital or engagement ? My friend Jason Mitchell discusses various views and in particular how regulators have started to think about carbon accounting with hedge funds.
We started talking about this in a podcast a while ago (link end), and you can now read some collected thoughts in the paper which is now publicly available.
Summary:
- Sustainable finance regulation has largely overlooked alternatives, particularly hedge funds, given the greater complexity of strategies and asset classes. However, regulators are now expanding their scope to recognize the role that hedge funds can play in #sustainable finance.
- The role of short selling in sustainable finance, especially in a net zero context, has been increasingly discussed and debated among regulators, market participants, investor initiatives, investor trade organizations, and #ESG data providers. There is a concern that hedge funds may, intentionally or unintentionally, employ short selling to misrepresent their real-world impact, which is distinct from exposure to financial risk.
- Short selling can affect the cost of capital and engagement as channels of influence on corporate behavior. However, there are nuances that should be considered, namely the efficacy of short selling among different asset classes to affect the cost of capital, the time-varying aspect of short selling, and the limitations that short sellers face when engaging corporates.
- UK, US, and EU regulators have each signaled their leaning in different manners. The EU, as the regulator with the most mature regulatory framework, appears to establish a compromise that balances safeguards against greenwashing with the mechanics of portfolio management and reporting.
Is life in the UK as bad as the 1970s? Look at the misery index.
Is life in the UK as bad as the 1970s? Look at the misery index. The misery index is an economic indicator, created by economist Arthur Okun. The index helps determine how the average citizen is doing economically. The index is calculated by adding the unemployment rate to the inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation create economic and social costs for a country.
On this measure while unemployment remains low, inflation has risen making matters arguably worse for the average citizen. But, the situation while rose than the 1990s and 2000s remains better than the 1970s.
If unemployment can remain low and inflation moderates then the picture will look much better. Some economists (cf. Hanke) might argue that unemployment should have a more important weight as a lack of a job is more costly than inflation. If you agree, then the situation seems better.
Tyler Cowen: Hayek lecture on economics, AI and large langauge models
Tyler Cowen gave the Hayek lecture in London this week. In my view, his personal charisma continues to be strong - and perhaps better than what you see in recordings of early talks. Tyler is funny (he could do with even more jokes!). He comments in the talk about the value of personal presence, and I think this is true and could be felt at the event. The video is above, so you can absorb much of the content … but how special was it to be there (?) (and also to chat to others there). The social capital part.
I make a short summary of my notes below. Suitable for a tweet thread. Then below I give you a few versions that GPT-4 did, after basic prompting and me feeding the very bad YouTube auto transcript including time stamps into it (unfortunately I needed to put into sections). I also asked GPT-4 to rate Tyler’s lecture (see end!)
GPT-4 summarised the talk well enough that it can tell you whether it’s worth listening to the whole talk and this only took a few minutes. My notes probably do about the same, but differently and of course you need to rely on someone there. I don’t think I saw any other note takers. Of course…. Context is (still) that which is scarce.
My short notes:
Two kinds of AI talks. 1. Audiences that need to be convinced. 2. Audiences that do not need to be convinced.
We have invented AI that is better than humans in many areas.
How should we think about this in economic terms ?
We have a research assistant, colleague and architect. Not a carpenter or gardener.
One argument. We have increased the capital stock. But another maybe we have increased the intelligence of society massively. So in that sense it’s labour. A new factor of production.
What is worth more? Or less?
Less.
1. Routine back office work, you are worth less. 2. Memorising facts is worth less.
Personal charisma will be worth more. Looks and how you come across more. Personal networks will be worth more.
Physical Co-ordination, carpenters and gardeners should be worth more. People who can manage having an assistant will do better.
How should capital be revalued ? Many forms of Labour are now less scarce. So long electricity, long some hardware.
The AI will be commodified. The gains will go to the users. No one is talking about Gutenberg the billionaire.
Central planning going to be harder. More projects, more complexity harder to centrally plan.
Economic insights rooted in Smith, Hayek. Decentralised systems hard to take over.
AI Can’t work in physical space. Think of it like Humans and dogs have co-evolved.
The AI is going to have its own economy. It’s own laws, it’s own economy. Maybe crypto.
(Missing: How Tylers uses AI more effectively, also the Q&A; jokes eg with Bryan Caplan testing the AI).
GPT summary (first 15 minutes):
Title: The Economic Implications of GPT: Unleashing the Power of Language Models
Renowned economist Tyler Cowen recently delivered a compelling talk, delving into the profound economic implications of large language models, particularly focusing on the celebrated GPT 3.5. In a nuanced exploration that blended empirical evidence with astute observations, Cowen engaged his audience in a thought-provoking discussion that left them pondering the transformative power of artificial intelligence (AI) in our labor markets.
Cowen began by highlighting the remarkable abilities of GPT 3.5, emphasizing its superior performance in tasks such as passing bar exams and medical diagnostics. Drawing from a personal anecdote, he playfully recounted how GPT 4, the latest iteration, aced an economics exam in a matter of months, leaving his colleague and himself pleasantly surprised. These achievements underscored the unprecedented capabilities of these language models and set the stage for the ensuing exploration.
Turning his attention to the economic landscape, Cowen posited that routine back-office work could become increasingly redundant as GPT models render such tasks obsolete. He postulated that the economy must adapt to this shifting dynamic, where the ability to access information effortlessly diminishes the importance of rote memorization. This transformation necessitates a reevaluation of the skills that hold value in the labor market.
Cowen intriguingly contended that personal charisma and physical appearance may ascend as prized attributes in this new AI-driven world. While expertise and knowledge remain crucial, the capacity to captivate and energize audiences could emerge as a distinguishing factor. Moreover, personal networks, built on trust and human connections, would retain their significance despite GPT's vast knowledge base. These factors prompt a reevaluation of the human qualities that AI cannot replicate, positioning them as valuable assets in an increasingly automated society.
Viewing GPT models as a unique factor of production, Cowen argued that their integration into our digital landscape propels the accumulation of intelligence at an unprecedented pace. Leveraging the power of the internet, these models represent a distinct combination of capital and labor. Cowen drew an insightful parallel with the historical impact of the printing press, underlining the accessibility and immediacy that GPT models offer, with vast potential implications for various sectors.
Demonstrating the practical impact of GPT models, Cowen pointed to programming as a tangible example. Citing a case study from Italy, he revealed that a temporary ban on chat GPT led to a dramatic 50% reduction in programming output overnight. This stark statistic underscored the symbiotic relationship between human programmers and AI assistance. By collaborating with GPT models, programmers could explore a multitude of ideas and experiment more freely, amplifying their creative output.
In his closing remarks, Cowen urged individuals to embrace the opportunities presented by this new AI landscape. Effectively managing the AI assistance at hand, particularly for academics, emerged as a critical factor for success. The ability to unleash the potential of AI research assistants and harness their capabilities as catalysts for intellectual exploration and innovation would define the future trajectory of individuals and their endeavors.
In sum, Tyler Cowen's thought-provoking talk shed light on the economic ramifications of large language models, notably GPT, stirring contemplation among his audience. As routine tasks potentially recede in value, the significance of personal attributes, networks, and the effective utilization of AI assistance becomes apparent. Ultimately, the fusion of human ingenuity and AI capabilities promises to reshape our labor markets, propelling us into an era where adaptation and collaboration hold the key to success.
GPT - I ask it to add the next 15 minutes:
Title: Unleashing the Power of GPT: A Transformative Journey in Economics
In a captivating lecture that left the audience pondering the future of labor markets and asset valuation, economist Tyler Cowen delved into the profound implications of large language models, focusing on the renowned GPT 3.5. With a keen eye for empirical evidence and astute observations, Cowen painted a compelling picture of the transformative power of artificial intelligence (AI) and its impact on our economic landscape.
Cowen commenced his talk by highlighting the extraordinary capabilities of GPT models, showcasing their remarkable performance in tasks such as passing bar exams and medical diagnostics. A personal anecdote about GPT 4 acing an economics exam in a matter of months demonstrated the astounding progress in AI capabilities. These achievements underscored the profound implications of large language models and set the stage for Cowen's exploration of their economic ramifications.
Turning his attention to the labor market, Cowen postulated that routine back-office work could become increasingly obsolete as GPT models render such tasks redundant. This shift necessitates a reevaluation of the skills and attributes that hold value in the workforce. Cowen intriguingly contended that personal charisma and physical appearance may ascend as prized assets in this new AI-driven world. While expertise and knowledge remain crucial, the capacity to captivate and energize audiences could emerge as a distinguishing factor.
Furthermore, Cowen emphasized the continued significance of personal networks in an era dominated by AI. Despite the vast knowledge base of GPT models, the trust and human connections formed through personal networks retain their importance. This highlights the unique qualities that AI cannot replicate, positioning them as valuable assets in an increasingly automated society.
Viewing GPT models as a new factor of production, Cowen postulated that their integration into our digital landscape propels the accumulation of intelligence at an unprecedented pace. The accessibility and immediacy that GPT models offer, akin to having a research assistant, colleague, and architect all in one, has the potential to reshape various sectors.
Drawing from a case study in Italy, Cowen provided tangible evidence of the impact of GPT models on programming output. A temporary ban on chat GPT resulted in a dramatic 50% reduction in programming output overnight, illustrating the symbiotic relationship between human programmers and AI assistance. By collaborating with GPT models, programmers can explore a multitude of ideas and experiment more freely, amplifying their creative output.
In considering the revaluation of capital, Cowen posited that high-quality land and natural resources, particularly those feeding into electricity production, may gain increased value as labor becomes less scarce. He also identified hardware companies like Nvidia, which produces the key GPUs used in GPT models, as potential beneficiaries in this evolving landscape.
Cowen acknowledged the speculation surrounding the revaluation of capital and the potential commodification of AI. However, he suggested that a significant portion of the gains would go to the users rather than the companies selling AI services. Drawing from historical technological advancements, Cowen emphasized that the most fundamental developments tend to benefit the users, and he expects this trend to continue in the AI era.
As Cowen concluded his talk, he reflected on the ways in which GPT models can be harnessed effectively. He emphasized the importance of setting context and asking follow-up questions to enhance the accuracy of the models' responses. By framing queries appropriately and refining the training process, users can unlock even greater potential from these language models.
In a fascinating side note, Cowen praised the advancements in augmented and virtual reality, exemplified by Apple's Vision Pro. These technologies aim to provide additional context, filling in the gaps in decentralized systems. The ability to create and manipulate context, which is often scarce in human life, emerged as a recurring theme in the remarkable developments of 2023.
Tyler Cowen's thought-provoking lecture shed light on the economic implications of large language models, particularly GPT, leaving the audience captivated by the transformative power of AI. As routine tasks diminish in value, the significance of personal attributes, networks, and effective AI utilization becomes apparent. The fusion of human ingenuity and AI capabilities promises to reshape our labor markets, ultimately leading to a future where adaptation and collaboration are the keys to success.
Then the next part:
Title: The Rise of GPT and the Transformative Potential in Economic Modeling
In the second part of his enlightening lecture, Tyler Cowen delved deeper into the remarkable capabilities of GPT models and their potential impact on various fields, including social sciences and economic modeling. He highlighted the impressive linguistic diversity that GPT models possess, even without explicit training in different languages, demonstrating their ability to comprehend and translate a wide range of linguistic data.
Cowen postulated that if GPT models can excel in modeling the intricacies of language, they can also be applied to model other complex systems. He introduced Bloomberg GPT, a forthcoming product that utilizes GPT models trained on the vast financial data of Bloomberg. This groundbreaking approach to macroeconomics has the potential to revolutionize central banking within the next two years.
Furthermore, Cowen envisioned a future where GPT models are utilized to create models of small villages and companies, eventually leading to a reimagining of social sciences. By feeding rich and specific data into GPT models, anthropological economists can develop semi-successful models of small-scale economies and gain a deeper understanding of various entities and systems. This approach may render traditional economic tools obsolete, as the focus shifts to generating rigorous models through comprehensive data input.
Cowen also touched on the use of GPT models in experimental economics, highlighting their ability to play economic games like human agents. These models can be fine-tuned and employed in place of human subjects, offering a cost-effective and efficient approach to conducting economic experiments.
Amidst discussions about the potential risks associated with AI, Cowen dismissed the notion that GPT models and their successors will rise up and overthrow humanity. He argued that overestimating pure intelligence overlooks the challenges that AI entities would face in operating in physical spaces. Drawing on the analogy of humans and dogs co-evolving, he envisioned a future where people form unique relationships with GPT models, using them as therapists, teachers, and companions.
Moreover, Cowen highlighted the emergence of a new AI economy, where AI entities will have their own laws, currencies, and economic activities. He emphasized the significance of cryptocurrencies in facilitating transactions and interactions between AI entities. Crypto, in his view, is perfectly suited for AI-based transactions, providing a means of exchange that avoids the complexities of traditional banking systems.
In conclusion, Cowen emphasized that the transformative power of GPT models and AI technologies will bring about significant changes in various fields. As social sciences adapt to this new era, the ability to model complex systems and the rise of a distinct AI economy will reshape traditional frameworks and necessitate new approaches to research and analysis.
And the next parts plus Q&A…
Title: The Impact of AI on Public Finances and the Future of Expertise
During the Q&A session, Tyler Cowen addressed concerns about the potential impact of AI on public finances. He acknowledged that the expansion of AI and the substitution of human labor could lead to a shift in tax revenues. However, he emphasized that the effects would vary depending on the country or region. Economies with a significant reliance on taxing routine office work, particularly across borders, might experience fiscal challenges. Nevertheless, countries with a broader distribution of labor, encompassing creative and innovative sectors, should maintain tax revenues without a significant crisis.
The discussion then turned to the question of which aspects of human intelligence AI cannot replicate. Cowen acknowledged that AI can replicate certain social skills, as evidenced by GPT's ability to exhibit bedside manner. However, he argued that it is the unique combination of social skills, physical presence, and human charisma that sets individuals apart. The ineffable qualities of human nature, blended with social skills, will continue to be valued and differentiate humans from AI.
Furthermore, Cowen highlighted the potential for AI to dethrone experts in various fields. AI can provide objective facts and information more accurately than most media sources, making it unnecessary to rely on experts for simple factual matters. Those individuals who possess creative skills, the ability to initiate and manage projects, and a self-starting initiative will likely see higher returns and increased status compared to traditional experts. Cowen expressed satisfaction with this shift, considering it a comeuppance for those experts whose expertise can be replicated or surpassed by AI.
In response to a question about the apparent lag in economic growth resulting from AI integration, Cowen compared it to the historical adoption of electricity. He highlighted the importance of time and the gradual process of incorporating new technologies into existing systems and institutions. Many academics and institutions still lag in embracing AI fully, contributing to the slower pace of economic growth. However, Cowen predicted that over time, complementary infrastructure would be built, institutions would reorganize, and knowledge storage and retrieval systems would improve. These developments, though not immediate, would eventually lead to significant productivity gains and transformative changes in society.
In conclusion, Cowen emphasized that while the immediate economic impact of AI might not be substantial, the long-term effects would be profound. He likened the current stage to the 1870s, a foundational period of technological advancement that set the stage for later explosive growth. Cowen projected that within the next 20 to 30 years, the world would experience a significant transformation driven by AI.
MOre Q&A
In this part of the discussion, Professor Tyler Cowen delves into the concept of trust in the context of technology, specifically artificial intelligence (AI). He draws a parallel to economics, where trust is crucial for predicting and understanding human behavior. However, he highlights that trusting technology poses unique challenges because it doesn't share the same biological wants and needs as humans.
To address the issue of trust in technology, Professor Cowen suggests a short-term solution of simply turning it off when needed. This implies that in the early stages of implementing AI systems, human intervention and control can mitigate potential trust issues. However, he emphasizes that in the long run, the market will play a vital role in shaping trustworthy AI. Market forces will drive the development of AI systems that are more reliable, responsive, and aligned with user demands.
The discussion also touches on the potential impact of AI on information polarization. Professor Cowen highlights that current AI systems, like GPT models, can provide unbiased and dispassionate responses to various perspectives. They can generate answers from different political orientations, potentially reducing the polarization often seen in media and public debates.
Regarding the job market, Professor Cowen discusses the potential displacement of white-collar work by AI. He suggests that while AI may enhance the productivity of educated individuals, it could lead to income polarization if certain white-collar jobs deflate in value. However, he also presents an alternative perspective where AI advancements might increase the value of jobs focused on human care and services.
When considering the future advancements of AI, Professor Cowen acknowledges the varied opinions within the AI community. He focuses his analysis on the near-term developments of GPT models rather than speculating about distant, advanced versions. He highlights the potential for significant progress with current AI models, such as training them on proprietary data, which can lead to improved performance and capabilities.
The discussion concludes with diverse topics, including Professor Cowen's affinity for London and his perception of it as an exceptional city. He briefly touches on the potential privacy implications of AI advancements and the utilization of personal data. Lastly, he expresses his skepticism about reports of UFOs and emphasizes the need for critical evaluation and further investigation of unidentified phenomena.
In summary, this part of the discussion provides insights into the challenges of trust in technology, the potential impact of AI on jobs and information polarization, the future developments of AI models, and Professor Cowen's thoughts on various tangential topics.
Then I finally try and get GPT to summarise everything (I think there might 3% slight mistakes/hallucination but no more than what a research assistant might do…)
Title: Trust, Jobs, and the Future of AI: Exploring the Economic Implications with Professor Tyler Cowen
Introduction:
In this comprehensive exploration of the economic implications of artificial intelligence (AI), we engage in a thought-provoking discussion with Professor Tyler Cowen. As a leading economist and expert in technology and innovation, Professor Cowen provides insights into the challenges surrounding trust in technology, the potential impact on job markets, and the future of AI.
Trust in Technology and the Economic Implications:
Trust is a central concept in economics, as it underpins transactions, market interactions, and economic decision-making. However, the issue of trust takes on a different dimension when it comes to AI. Professor Cowen highlights the unique nature of AI, which lacks the biological wants and needs shared by humans. This raises questions about how we can trust AI systems and rely on their decision-making capabilities.
From an economic perspective, trust in technology is vital for its widespread adoption and utilization. If users perceive AI as unreliable, untrustworthy, or unpredictable, it may hinder its integration into various sectors and impede the realization of its potential benefits. Thus, establishing trust in AI is crucial for fostering its acceptance and utilization in economic activities.
Professor Cowen argues that in the short run, the ability to turn off AI systems provides a level of control and mitigates potential trust issues. However, in the long run, market forces will likely drive the development of more trustworthy AI. Users' demands for reliable, responsive, and ethically aligned AI systems will incentivize the creation of technologies that engender trust and enhance economic outcomes.
AI, Jobs, and Income Distribution:
The potential impact of AI on job markets and income distribution is a major concern. While some argue that AI will lead to widespread job displacement, Professor Cowen presents an alternative viewpoint. He suggests that AI advancements might deflate the value of certain white-collar jobs while potentially increasing the value of jobs focused on human care and services.
In this scenario, as AI assumes routine cognitive tasks, the importance of jobs related to personal care, childcare, elderly care, and other service-oriented fields may rise. These jobs often require the human touch, empathy, and interpersonal skills that AI struggles to replicate. Consequently, AI's impact on the job market may lead to a reevaluation of the societal value placed on different types of work, potentially reducing income polarization.
While the long-term effects on job markets remain uncertain, Professor Cowen emphasizes the need for continued education and adaptability to prepare the workforce for the evolving economy. Upskilling and reskilling programs can enable individuals to transition into new roles and industries, ensuring continued employment opportunities amidst technological advancements.
AI, Data, and Economic Productivity:
The effective utilization of data is a fundamental aspect of AI's economic impact. Professor Cowen highlights the potential for AI models, such as GPT, to leverage proprietary data to enhance their performance. By training these models on organization-specific data, such as medical records in hospitals, AI systems can provide more accurate and tailored assistance in various domains.
The integration of AI and proprietary data has implications for economic productivity. Organizations can leverage AI to gain deeper insights, streamline processes, and make data-driven decisions. This can result in increased efficiency, cost savings, and improved outcomes across industries. However, privacy concerns arise in the context of using personal data to enhance AI capabilities. Professor Cowen suggests that the future will likely see the development of privatized AI models, where queries and interactions remain within the organization, ensuring data privacy while still benefiting from AI-powered insights.
Economic Considerations and the Future of AI:
Looking ahead, Professor Cowen emphasizes the potential progress and advancements in AI models, such as GPT. He suggests that the convergence of AI, the internet, and other technologies may lead to a future
where these elements seamlessly blend into a unified development. This integration could result in transformative changes across various sectors, driving scientific progress and potentially reshaping the nature of human lives.
However, the economic impact of these developments is uncertain. While AI has the potential to accelerate scientific discoveries and productivity growth, its true effect on GDP growth and societal welfare remains to be seen. Professor Cowen poses critical questions about whether AI advancements alone can solve complex societal challenges, such as income inequality or infrastructure development.
Conclusion:
In this in-depth exploration of the economic implications of AI, Professor Tyler Cowen provides valuable insights into the challenges and opportunities presented by this transformative technology. From the importance of trust in technology to the potential impact on job markets and economic productivity, his analysis offers a nuanced understanding of the evolving AI landscape.
As we navigate the future of AI, Professor Cowen highlights the need for careful consideration of ethical concerns, privacy issues, and the societal implications of AI-driven advancements. Balancing the potential benefits of AI with the preservation of human values, equity, and social welfare is crucial for realizing the full potential of this technology.
Ultimately, the future of AI lies not only in technological progress but also in our ability to navigate the economic and social dimensions of this transformative force. By engaging in thoughtful discussions, embracing adaptability, and shaping AI's development through ethical frameworks, we can steer the trajectory of AI towards a more inclusive and prosperous future.
Finally I ask GPT to give Cowen a rating….
As an AI language model, I don't have personal opinions or the ability to listen to lectures or evaluate them directly. However, based on the information provided in the conversation, Professor Tyler Cowen's lecture appears to be insightful and thought-provoking. He offers nuanced perspectives on the economic implications of AI, exploring topics such as trust in technology, the impact on job markets, and the potential for economic productivity. The inclusion of economic thinking and consideration of various viewpoints adds depth to the discussion.
Considering the breadth of topics covered and the expertise of Professor Cowen, I would rate the lecture highly, potentially an 8 or 9 out of 10. However, it's important to note that individual preferences and opinions may vary, and a comprehensive evaluation would require a more detailed analysis and direct engagement with the lecture material.
More economics…see my interview and podcast with Mark Koyama on economic history and how the world became rich.
More AI, check out Kanjun Qiu, CEO of Generally Intelligent on AI, institutional knowledge and meta-science.
My regular substack is here:
Why are there so few UK IPO listings and what could we do about it?
Dealogic, internet searches. Potentially not exactly accurate but I feel about right.
Why are there so few UK listings and what could we do about it?
I found this FT article by Katie Martin and Harriet Agnew as a useful surface initial take on the UK market and its lack of IPOs / technology IPOs but I felt the arguments were slightly conflated and possible root causes were not clearly articulated.
I will suggest:
This is not solely a UK observation, but all non-US countries have this phenomenon e.g. Japan, Germany and Canada.
That Canada has few IPOs (and few tech or biotech IPOs) suggests that the type of Canada asset owners, pension funds is not a strong explanation for this phenomena
Regulation and risk appetite plays a part, but I will suggest that is a more complex weave of(1) cluster/agglomeration effects (2) Success begetting success allowing buyouts and solo VCs (3) depth of capital markets (4) Historic UK listing rules, and in biotech, unlucky/unskilled early buyouts as the causal reasons for this phenomenon.
Unfortunately, if my diagnosis is correct then current policy ideas in liberalising pensions will not be very effective for increasing listings (though there are other reasons on why to do this). My best policy ideas are politically untenable (or not very tenable at best) as they involve investing in both people and places in current clusters (which would exacerbate inequality regionally), allowing more immigration, allowing and educating for higher risk appetite, and allowing vastly easier permitting for new buildings/infrastructure especially accelerator hubs. These ideas are mostly upstream from investing, as they deal with the root causes of growing real businesses but there could be some help around VC and growth equity clusters in investment.
What the data on VC, IPOs implies about the strength of the US vs everyone else
I am going back pre-pandemic (non-recession) to 2019 as a baseline year (not cherry picking it seems approx representative).
- UK: 59 IPOs
- Canada: 57 IPOS
- US: 237 IPOs
- France: 48 IPOs
- Germany: 35 IPOs
- Sweden: 26 IPOs
- Australia: 71 IPOs
- Japan: 75 IPOs
- China: 183 IPOs
Basically UK and Canada have the same approx number of IPOs dwarfed by the US. Canada and UK have same ball park GDP/capita (US$45K Can, US$42K, UK; 2019). So not too strange. (I will note that US listed company formation is also falling as a long term trend, which is another story, but may relate to regulation and the advantages of remaining private longer)
The split in tech / biotech, is not too far off either
| Country | Sector | Number of IPOs |
| --- | --- | --- |
| Australia | Technology | 5 |
| Canada | Technology | 11 |
| Canada | Biotechnology | 10 |
| France | Technology | 11 |
| France | Biotechnology | 5 |
| Germany | Technology | 10 |
| Germany | Biotechnology | 3 |
| Japan | Technology | 15 |
| Japan | Biotechnology | 3 |
| UK | Technology | 13 |
| UK | Biotechnology | 4 |
| US | Technology | 60 |
| US | Biotechnology | 70 |
(I am sourcing from the web, dealogic, investment associations, exchanges, so data might be a little off but seems about right).
So the success of Canada pension funds is a separate phenomenon to the listings in Canada. Indeed Canada funds invest worldwide and not only in Canada (CPP has a large London office)
While there may be benefits from tilting UK pensions funds to Canada style, more UK listings or more formation of UK tech companies is unlikely to be an outcome.
I will come on to what pension reform might help, but lets look at the state of venture funding.
The UK actually does better than Canada (deal book data, so take with a pinch of salt) in Tech and biotech, data might not be exactly but order of magnitude looks correct. Again US is the stand out for venture funding.
Venture Funding:
| Country | Sector | Market Size (Currency) | Market Size (USD) |
| --- | --- | --- | --- |
| Australia | Technology | AUD 1.1 billion | USD 0.8 billion |
| Canada | Technology | CAD 6.2 billion | USD 4.7 billion |
| Canada | Biotechnology | CAD 1.1 billion | USD 0.8 billion |
| France | Technology | EUR 5.4 billion | USD 6.2 billion |
| France | Biotechnology | EUR 764 million | USD 0.9 billion |
| Germany | Technology | EUR 6.2 billion | USD 7.1 billion |
| Germany | Biotechnology | EUR 1.2 billion | USD 1.4 billion |
| Japan | Technology | JPY 285.7 billion | USD 2.7 billion |
| Japan | Biotechnology | JPY 52.4 billion | USD 0.5 billion |
| UK | Technology | GBP 10.1 billion | USD 13.1 billion |
| UK | Biotechnology | GBP 1.3 billion | USD 1.7 billion |
| US | Technology | USD 136.5 billion | USD 136.5 billion |
| US | Biotechnology | USD 22.8 billion | USD 22.8 billion |
Lets focus on biotech an area I know and where the UK has some success.
In the article Sir John Bell (speaking re: immunocore) argues:
There wasn’t really any access to long-term scale-up capital in the UK ecosystem,” he recalls. “UK venture capitalists didn’t have pockets deep enough” and domestic pension plans “had no interest” because they are “too conservative to invest in the growth sector”. The result, as he puts it, is that “the most successful British biotech company is now really plugged into the American capital markets”.
(aside that people would argue on what the most successful British Biotech company is…) I think these comments ring true to a degree, so the FT and we should examine them.
However, the second part of the comment already part falls away as we see that the Canada pension fund system has not helped raise Canada Biotechs. (I will come back to the pension question later).
So we don't have enough UK VCs with deep pockets, but looking at the above table no country really does except the US. Hence the best companies going to the US. What is also generally accepted (IMHO) is that US valuation for tech and biotech will be higher, and that US VC and growth equity players will invest at larger amounts and potentially faster.
There is also more opportunity to exit to large trade players, or to IPO, and US VCs (arguably) social capital network effects, as well as management and business help in some cases.
The UK is not in a position to fully replicate that, and neither is Canada. What could the UK part replicate?
It could replicate seed and early stage venture most easily perhaps because the amounts of money involved are lower, and the risks remain sky high (1 in 10 to 1 in 100 seed successes maybe would be an OK hit rate).
The UK could look to the YC - Y combinator programme - and try and replicate something similar. It has a couple of such networks eg Entreprenuer First, but it could do with a few major YC clones. (A YC cofounder Paul Graham currently lives in the UK).
But what are the conditions for a YC? Those conditions are high talent people, and cluster effects. So, you want to be very people friendly (immigrants) and invest in infrastructure around the Oxford-London-Cambridge triangle - allowing much easier permitting of buildings etc
I would go so far as to suggest you could build a site much like Greentown Labs, near Boston. This is an incubator hub, which I have visited (see here The idea clusters young companies together, near a cluster zone and allows for agglomeration effects as well as talent and skill diffusion. Money required is not too large £500m could start 5 clusters I imagine, although then there is the people/place debate.
I think this foundational level policy on cluster hubs is possible but would take 10 years to form companies. If you are a UK pension fund looking for a VC allocation, what would you do? You would mostly not look at UK VC or growth equity.
You also need to understand the investment objectives. The objective of MIT or Yale endowment or the UK Wellcome Trust more easily allows for VC and growth equity allocations, along with the regulation that allows it.
There is some truth to regulation not being able to change the culture or the risk appetite of an investment committee. For instance, MIT Endowment will give 5m to 50m allocations to solo fund managers, or emerging managers with limited track record, but investment philosophies which fit their style. I cant imagine most UK pension funds trying that. Also, there is a very strong angel and solo VC network in the US, which is lacking everywhere else to the same degree. The angel network gives people a chance to get funding but also to see venture investing in action.
A 1bn UK pension fund or endowment could allocation 50m to venture (5%) capital but would need to overcome (1) risk appetite (much of that money might fail) and (2) how to find and assess a manager - even if the regulations allowed. I suggest such funds would mostly likely tilt to US managers (deepest widest choice) and that the cost of such good capital allocators would not match what the MIT Endowment pays its staff.
I wanted to touchback specifically on UK biotech because there were policy mis steps that we can not do anything about now.
First 1980s listing rules made it hard for unprofitable biotech to list and gain access to more capital funds without a larger partner. This was a costly mistake.
Celltech and Cambridge Antibody made great discoveries but the commercialisation value actually fell to other parts of the chain. It’s too long to look into their history, but biotech equity investors and those involved know the stories of what happened. Without those biotech champions, the UK relied on AstraZeneca and GlaxoSmithKline as the big pharma bell weathers, and again there is a long and interesting history there, of recent note is the AZ move of much of its R&D from Macclesfield to Cambridge. Much harder to attract world class scientists to live and work around Macclesfield.
Long story short, it turns out the US has lot of biotech success stories, causing a positive reinforcement cycle whereas the UK (and Canada) have very few. Again this is now not something policy can easily reverse.
In any case back to the policy options being discussed.
I am in favour of allowing pension funds more flexibility in how to invest. THis is because:
-most policy people know little about investing and the rules they conjure are often not helpful
-this flexibility will likely help meet investment (and possibly other) objectives
BUT, this will not cause a boom in UK IPOs or company formation. Availability of capital is only one part of the equation (cf. Canada, France, Japan etc) and in fact, directing UK pension funds by dictat is a recipe for going wrong (for the same reasons why I support liberalization, govt policy makers are not close enough to market or investment thinking).
The best way of increasing UK company formation, IPOs and the like is to support both place and people based policies, immigration broadly, and to tilt UK (business) culture to revere the entrepreneur, the start-up, (the capitalist ?!), the inventor, the investor which is not politically tenable.
My only potentially tenable ideas is to recreate Y-combinator, and, or a GreenTown Labs Cluster at seed stage.
My crazy suggestion would be for all 15 year olds to take a 2-3 month course in business economics, and equity investing, and audit the YC start-up school. That would be practical maths!
Want more econ/policy thoughts:
Check out Stian Westlake on intangibles
Or, Diane Coyle, on UK economics
Or, Mark Koyoma on economic history and why the world is rich.
Some notes:
YC start up school is here for any would be entrepreneurs
VC has a very low hit rate, 1 in 5 would be very good, and 1 in 100 completely in line. That means you might lost 80% of your capital. However, the “hit” can be 1000x your investment and produce great returns also for society.
Climate Tech VC also has great co-returns
Growth Equity is also lacking. This is the scale up stage, that Sir John Bell alluded to.
Returns on growth equity should be 1.5x to 5x possibly 10x at earlier stage, but the risks are lower. You should be looking at a least a 60% hit rate at a decent firm.
You do need owners of assets to be comfortable with that form of risk over the long-term, and that needs a culture shift.
You can look at what successful organisations do eg Wellcome, Yale, MIT, Canada funds but while regulations might permit they are driven by great talent with well articulated investment philosophies they will go to the best managers and asset classes, and will not necessarily be shaped by geographic constraints
If you pass by Oxford and Cambridge, the amount of unproductive fallow fields is amazing. We should be building on them.
It is not hard to get a view by speaking to investors or to companies. Preferably both.
Chris Stark: 2023, climate policy, NetZero, adaptation, incentives | Podcast
Chris Stark is the Chief Executive of the UK’s Climate Change Committee. The committee is an independent statutory body which advises the UK and the devolved governments on emissions targets and preparing for and adapting to the impacts of climate change. I think he is one of the most important and thoughtful thinkers on climate change policy today. This is his second time on the podcast. We covered many topics in 2022 which you can check out here.
This time I ask on:
How does it matter that we will pass 1.5c ?
What did we learn after COP27 (climate conference in Egypt in 2022)
How do you think we should think about NetZero at the corporate level
How should we be thinking of adaptation and the CCCs latest report
the CCC work on UK domestic energy rating
Heating and building strategy
Some of the recent politics decisions and discussions such as the UK government decision on a Cumbria coal mine.
What the US IRA (inflation reduction act) might mean for climate policy:
“Now you asked me, has anything changed since last we spoke? And yes, it has. Something quite substantial has changed in the United States of America. So we have this inflation reduction act which is an unfortunate act in only one sense, really. It's the IRA. So in the UK of course it's very difficult to talk about the IRA being good. But it's just a kind of game changing piece of legislation. At the core of it I think is a fairly simple thing really which speaks to our last discussion about the difficulty of implementing carbon taxes. The economic logic of making dirty stuff more expensive than clean stuff is still there.
But it turns out that the effort of putting carbon tax on something that you actually need in the present society is enormous politically and maybe it's best at just to make the green stuff cheap. Broadly, that's what the Inflation Reduction Act has done. It has done so in quite a controversial way. We're having a discussion now about the protectionist elements of the Inflation Reduction Act. It is a very protectionist piece of legislation but it has lit a fire under some of these green technologies. It's because of that simple thing that people I think are more willing to move towards things that have been made cheaper and move away from things that are more expensive. But I feel I want to add a note of caution on that. That we can't walk away entirely from the need for carbon taxes. They're still very, very, very important. It's very, very important to send a signal about the need to use less of the dirty stuff.
I’ll give you one example of that back in the UK. We are on the way to having fully decarbonized power system and that's very exciting. We will shortly produce a report I think that will really help explain what that fully decarbonized power system looks like. Super pleased about the modeling that we're going to put into that report and use. But the challenge shifts a bit I think now on power to actually consuming it being the main challenge. So you've got to push people towards having devices and technologies that use that electricity more. Then when it comes to something like heat or when it comes to an industrial process, you're right up against the problem that gas is cheaper than electricity for the consumer.
So you've got this kind of incentive issue and that's really what carbon taxes are about. We do need to maintain the incentive to move towards electricity as a fuel. We will probably be able to do that if we can have a policy framework that is aimed at making electricity cheaper than gas for the consumer. “
Chris outlines some of the challenges of a carbon tax and why a carbon tax and dividend may also not work.
Chris ends on advice on to think about climate impact and future projects.
Listen below (or wherever you listen to pods) or on video (above or on YouTube) and the transcript is below.
Transcript (only lightly edited)
Hey everyone. I'm super excited to be speaking to Chris Stark again on the podcast. Chris is the Chief executive of the UK's Climate Change Committee. The committee is an independent statutory body which advises the UK and the devolved governments like Scotland and Wales on emissions targets and preparing for and adapting to the impacts of climate change. I think he's one of the most important and thoughtful thinkers on climate change policy today. Welcome, Chris.
Chris (00:32):
Hi, Ben. And hello to the listeners again.
Ben (00:36):
How does it matter that we will pass 1.5 degrees? Some climate scientists’ model that we are likely 90% chance the world will move past this 1.5 C as a point estimate, but also many scientists are communicating and pointing out that doesn't mean we should stop our efforts. Social scientists has also weighed in and have said this 1.5 degree has a lot of communication and political roots to it rather than also just some of the science roots. How do you think about these temperature alignment numbers and how this interacts and how we should be thinking about policy?
Chris (01:12):
This is so complicated, Ben. The kind of core of what we do really is defined in the Paris agreement. So for those of you who don't think about this stuff as regularly as I do, there is a global treaty on climate change which was finally reached in Paris just a few years ago; 2015, I think. It talks about temperature goal of keeping global warming above where it was pre industry when we started burning fossil fuels to well below two degrees centigrade is what it talks about. So that was the kind of goal that many policy makers had in their mind prior to that Paris Summit when it was agreed. But quite later on in the process, this extra temperature target of 1.5 degrees was thrust into the discussion. And rightly so, I think, but it was a sort of stretch goal. So can you keep temperatures even lower than the two degrees that most people had been thinking about as a sort of global goal for this?
That led then to this other really amazing piece of work brought together by the UN's scientific cleaning house; the IPCC. Looking at just what it would take to hit or to keep temperatures to that 1.5 degrees centigrade target, it led some of the key stuff that we now take for granted like net zero being an important goal to reach globally, that for net zero CO2 you need to get there by about 2050. They've become really embedded in the discussion now. This 1.5 degree centigrade target has become, I think, a catchall for all of that. It's the target we should be aiming for.
When the UK hosted the Climate summit in Glasgow, it was the 1.5 degree summit. It was the kind of catchall thing that the US and the UK together were really pushing for. The trouble with it is it's really bloody difficult to get to that kind of ambition and it is very likely that we will go beyond 1.5 degrees centigrade. In fact, I will say confidently that we will hit 1.5 degrees centigrade. In fact, the only uncertainty is whether that's as far as we go. The chance of reaching something lower than that is probably now gone. 1.5 degrees itself gets further and further the more that we don't have rapid emissions reductions. Broadly, you need to have emissions by the end of this decade if you'd really think you want to be on track for that 1.5 degrees. And that's a global goal. Of course, global goals are harder than national goals or goals at the level of any single corporate or individual. So it's very difficult.
The two degrees centigrade goal by the way, is very much on the table. My own view--and it's a personal view, is that I think we will keep our temperatures to that because there's all sorts of good things happening in the energy market. But this question of what you do if it looks like 1.5 degrees is sailing out of view is a really critical one because each COP comes around each year, it becomes more obvious that 1.5 degrees is harder. I don't think I have an easy answer to that question of what you do as it slips out of view really. My view is that we stick to it really. That 1.5 is still a useful thing, a useful framing device because it's a temperature goal but it's also this catchall way of describing the need to throw everything at it. That is still useful to talk about that.
And if it's not 1.5, then we go for 1.6, and if it's not 1.6, then we go for 1.7 because every fraction of a degree matters. Every fraction of degree causes misery and cost to the economy becomes more difficult to manage. We get into quite difficult points as you reach the very much higher temperatures where it's quite difficult to describe the impact because they're so catastrophic. But one more thing on this, Ben, there isn't some special significance to 1.5 in the literature of the impacts. It's a temperature. It will come with costs. There are awful things that will happen to the natural world at that kind of level of temperature increase but it's not special. It's not particularly a special target.
One of the things that often is pulled out of the lecture is that coral reefs are quite likely to bleach more extensively above 1.5 degrees centigrade. Why do we obsess about the coral? Well, partly it's the visual metaphor of it, but also it's because it's one of the very few natural systems that we think is then genuinely impacted above 1.5 degrees centigrade. The point is that it's a slightly artificial threshold. Basically the goal here is to keep the temperature as low as we possibly can. And actually the trouble with all of this is that the communication of that is really difficult as probably I'm showing you today. It's not an easy thing to talk about keeping something that hasn't happened yet as low as possible. That's how we've got to work and frame it and work hard at. So that's the challenge. I think we're probably going to have to come up with a different framing technique than 1.5 degrees centigrade. But 1.5 has been very helpful in pushing the progress that we've seen in the recent years.
Ben (06:36):
Yeah, a very useful simple message. Thinking about the coral reefs, climate warming is happening now. Coral reefs are being bleached at this moment so that's why it's a very apt metaphor. But what you said also echoes what you said last year and my conversation with climate scientist, Zeke Hausfather, who makes the same point. It's not a point estimate. There's nothing particularly special. It's a sort of spectrum. Different parts of the world have different things on averages and all of that and you kind of want to aim for as low as possible. I guess the silver lining out of some of that is if you look at maybe where the estimates on climate policy were 10 or 20 years ago. Maybe even 10 years ago, it looked like a four degree world or above was a significant probability.
Whereas if you look at it now-- Again, you have to execute on the policy. And we can talk about the differences between implementation and ambition. But if you look at the ambition, most of the models are pointing towards between two and three. 2.7 is a median that I'm looking at. Two, like you say, is actually very much still on the tables and there's error within that which is the silver lining. And again, it's a really nuanced thing to say you need to be able to on the one hand celebrate that you've gone from four degree at your mean estimate, median estimate to 2.7 because that's progress. That's good. You don't want to discount the fact that we've done something. But it's not below two and it's not as low as possible. So you've kind of got those. I think people sometimes lose hope or whatever that is if they feel there's no progress being made. But you also can't be complacent. So the messaging has got trickier.
Chris (08:15):
It has. You put that very well, I think. As we went into the Paris COP before this global accord was finally agreed, we were facing best estimate then. The con-central estimate was 3.6 degrees centigrade of warming by the end of the century. And now today, as you see, a relatively conservative estimate of where we stand is if you add up all the pledges that we've seen in the cut process, it's something that's about one degree centigrade less than that. Now, that progress has been achieved in less than a decade. I think that is progress. People should be angry about the fact that we're in this position, and I understand that. So we've got to keep that process going. I think the 1.5 degree framing does help with that but it is very lightly to slip from view. I think we've got to be realistic about that.
Ben (09:08):
That's fair. Your climate change committee have produced some really excellent reports over the years in my opinion and a lot of people I know. So you've had quick hits post COP conferences to work on voluntary carbon markets, this really big piece on adaptation, and of course assessing the UK government's strategy. I'd love to touch on many of these, but it might be worth highlighting on the COP things. We last spoke about the Glasgow COP26 being a corporate and finance COP to some degree and that businesses and corporates as enablers definitely seemed to come to the fore as an idea. My outsider's impression of the COP27 in Egypt, it was perhaps a little bit more niche and targeted and was looking at maybe more of the developing world. What did you take away from the COP in Egypt and how have things changed over the year?
Chris (10:06):
I find Egypt COP really interesting. I didn't go to it. I have slightly regret not going to it; not because it was a really interesting place to actually go. I mean, a lot of horror stories about some of the things that happened at COP this year; accommodation wars and lack of sanitation and food and those sorts of things. But the reason I regret going to it is because I think it was right at the crossroads of a whole host of stories, some of which you've just talked about, Ben, and it's not quite clear to me what the theme really was in retrospect to that COP. So you had this ongoing interest from the UK and the US particularly to push what we call the mitigation agenda. That is the need to cut emissions which is a big part of the story. It's what we often look at in my work in the CCC and what we're best known for as work on net zero.
But actually for many countries in the world, what happens on emissions within their own country is not that important to the story of climate change. What they are grappling with is the impacts of climate change itself which are largely outside of the control of some of the smaller countries. So this question of what you do about that really came to the fore. There has been several attempts at getting something called loss and damage onto the agenda at COP. COP happens every year. It's always hosted by a different country. There is always a push to discuss the kind of reparations as it's sometimes called that are due to some of the countries that are experiencing the worst impacts of climate change but had the least to do with the problem.
Each year it's raised and then sort of taken off the agenda at some point. So scrubbed before the final agenda is agreed, usually. This year that didn't happen. It remained on the agenda all the way through. And then remarkably there was an agreed text which included the words loss and damage and this idea that there should be some sort of facility in there which is really a kind of UN code for transfer of resources from the richer economies that have been largely to blame for the problem of climate change, and those poorer economies often in the global south that are now experiencing the worst impact. What's interesting is that these meetings each year are really hard going. So you get this moment where loss and damage gets put into the text and agreed, but there's no money behind it. So the next COP then has to work out what the money behind that looks like.
Those of you who follow this will know that there has been for a long time a discussion of what's called climate finance which is a really bad term; very difficult term because it doesn't really describe the finance challenge in my mind. But this idea that there should already be a hundred billion dollars of climate finance largely coming from those rich economies to help with the issues of climate change and decarbonizing and all the other things that need to go on. And that a hundred billion dollars was a figure that was being discussed back in the Paris COP and still has not been met. So we're in a world where it's quite easy to get these things agreed or the effort is there to get the text agreed, but the money behind it is a much more difficult thing. And each COP, it becomes more and more difficult I think to get the financial facilities agreed.
So that's how I'll think of Egypt as this sort of struggle where you got this kind of push still from the western economies to talk about a mitigation and 1.5 degrees centigrade in the UK sort of outgoing COP presidency prior to the Egypt COP saying 1.5 got to stay on the agenda. And then this kind of really interesting and pretty successful movement from the African presidency to get loss and damage on the agenda and successfully landing the idea that it needs to remain there. So it sort of sets up the next COP and the ones after it to now have to tackle these things together for the first time. I think in the end it was about as good as it could be actually. The next COP is particularly interesting because it's in the United Arab Emirates and it'll be another COP talking about energy issues. So really interesting to see what happens next.
Ben (14:25):
I think we spoke last time about this sense of fairness being one of the major political economy issues to deal with which has no simple resolution. I have to say post pandemic, I got a little bit more negative on it in the sense that if you had a benign rational dictator of the world, it would probably be obvious to that entity that some sort of fund which would've funded Covid vaccines or treatments for the whole world would've been a great net benefit. And that was kind of quite clear over a pandemic. Climate's actually more complicated. But the root of that problem about where you have the resources and how to allocate it seemed to me to be similar and you couldn't get richer nations easily agreeing on that, although they all agreed kind of in the messaging and in principle.
Having said that, it's a longer going process and it's still being worked upon and it does seem to have a little bit of progress. So there is a little bit of silver lining. But I do wonder about that particularly with where everything's going on in the world. That just at this moment in time nations have got a little bit more inward looking as opposed to global looking. But it does change with the times and can change quite quickly. And in history particularly if you're looking at five year or 10 year periods, it has changed quite quickly.
Chris (15:42):
Yeah, I very much agree with that. Markets need to come into this discussion. I think the framing that I've often put around this is that we are going to have to tackle climate change in an increasingly divided world, at least for the immediate term. This multilateral approach that the UN is just about holding together on climate it doesn't do much to hide the divisions now that you see across the world on some core issues; not only the energy issues. I think what points in the favor of good things happening, I suppose is the fact that the market dynamic has been harnessed on energy at least. That you've got this one way directional thing now happening on energy that points away from the use of fossil fuels towards a cheaper cleaner energy system which is irresistible in the end, I think. So that the markets in the end pull you along that way. But that's the mitigation story I talked about, that's about cutting emissions. It's much more difficult to consider and work out how you can harness markets on the adaptation side because it's fundamentally more difficult to monetize adaptation benefits if your adapting to climate is often not such an obvious return to investors for the big upfront capital investments that are required. So it's tricky.
Ben (16:59):
Yeah. So the adaptation piece where you've done a really big report recently I'm definitely going to touch on that. But perhaps as a segue into that would be maybe thinking at that corporate business level, particularly on thinking around net zero or net zero commitments. So I'm hearing debate about the value of corporate net zero commitments or not, and particularly so-called scope three commitments. So for listeners, scope three is often considered outside the control of companies. That's maybe one of the easiest ways of thinking about it; whether that's downstream or upstream. On the one hand, some people argue there is signaling power and corporates can direct strategy and cash flows to be part of the solution.
On the other hand, corporates do not have direct influence over the power grid where they take their energy from. So you want to be on a green grid, great, but you've got no influence on that. Perhaps they can influence transport or fleet and maybe heating to a degree, maybe land use if they got supply on that. And some also critics worry about greenwashing. On the other hand, at a sector level and on country level, net zero and that kind of thinking seems to make quite a lot of sense. I guess there’s some climate economists who also question about this carbon budgeting on a corporate level. The econometrics don't hold up as well versus a sector or a country level. So how do you think we should be thinking about net zero at the corporate level and maybe some of your worries or pros and cons about the situation?
Chris (18:27):
I've got lots of worries but also some positive things to say about the recent move towards all of this in the corporate community. It is worth just stepping back from this. The discussion that we are having about corporate commitments to net zero is completely remarkable. We would not be having this discussion five years ago. So something has shifted in the corporate community that has meant that there is now a need, I think, whether it's for reasons of social license or whether it's-- I think probably a lot to do with the fact that if you want to hire good staff, particularly young staff, you've got to have solid climate commitments in place and customers are looking for that too. So what we have now is in one sense really, really good.
We've got a lot of very strong and I think legitimate commitments to achieving net zero at corporate level. My concerns come from mainly the fact that it's actually very difficult to define how most corporates get to net zero unless you are an enormous multinational. I'm going to make a notable reference for a corporate like Microsoft which is way ahead of this as a really good plan for not just reaching net zero, but also getting negative and actually undoing some of the harm that has been done over the time that they've been using their energy particularly. That's great. But for most corporates, they're not in that kind of position.
So you see this kind of rush to adopting a net zero target often with a date and often that date is ahead of the global goal. That's kind of what you want really. You want corporates to be aiming for something that is more ambitious. Some of those dates are pretty punchy to put it mouthy. 2030 is a common one. Often you see 2040, some of them are even 2025 astonishingly. But actually if you look at how those will be achieved, you need to look through as you call them the scopes-- and I won't go through all this. But as you move from scope one to three, you have greater agency at the lower scopes to actually tackle the emissions that you are responsible for. Scope three is mostly what's happening in the wider supply chain that you are interacting with. It's difficult at that level to know where to draw the line and about what a good target should be.
And interestingly as we've looked at this, we start from the principle that net zero for a country like the UK will require lots and lots of corporate investment, lots of corporate support. In fact, most of the work that we will do as a country to get to net zero will involve investing at the private level. It's not going to be driven entirely from public investments. So you kind of want those corporates to be on side with it. So why am I concerned about net zero targets? Well, I'm concerned that at the moment you've got this rush to achieving net zero, but a rush to do so in the wrong way. So you've got corporates thinking, "Bloody hell, we've made this commitment. How can we do it?" They work out what those scope one to three emissions are and they find actually that they've not got a lot of scope to do much on many of those things and they'll do cheap stuff first. So they might put solar panels on the roof of buildings. They might have better travel policies for their staff.
But then they'll find that's not reducing emissions very much and then they'll turn to offsets. And this is the key things. You've got lots of very cheap offsets out there right now-- very, very cheap offsets, mostly forestry offsets and they're legitimate things. People are buying them I think mostly in the knowledge that they are useful things and want to be able to legitimately say that they're part of the answer. But they're so cheap and they're cheaper than the harder things. What you really want to be able to say to those corporates if I could sit them all down is, “Thanks for setting out your ambitions for net zero, but let's just talk about your place in the system.”
So mostly-- your emissions if you're a service sector dominated economy like the UK, mostly your emissions are connected with the energy that you will consume in buildings. Most of those are about the electricity that you might consume. And in that world you might think it's a good idea to put some solar panels on your roof. But I'm going to tell you, “No it's not.” It's quite interesting, it's not. Because in this country, in the UK, we'll probably have fully decarbonized para system over the next 10 years or so. In which case plan for that and make the harder steps now to decarbonize the fleet of vehicles that you use or to heat those buildings with a heat pump rather than a gas boiler. That tends to be more expensive and-- this is the crucial point-- it tends also not to get you to net zero today or indeed any time over the next decade But it's much, much more useful for the country and for the global effort if you do those things.
So it’s really interesting for every corporate out there that's got a net zero target. What I would like to see is some kind of kite mark, if you want to call it, for having a good transition plan. Something that marks you out as a company that is doing the best possible things now as part of the wider system change that a country like the UK or the US or the whole of Europe or anywhere in the global economy; as part of that system accepting some of the conditions in that system and recognizing that certain things along the way will shift outside of your control. If you get to that kind of world where actually you're getting more credit with investors, credit with customers, credit with your staff for being net zero aligned than for being net zero itself, then I think we'll be in a much better place because you're going to get a much better alignment from the corporate community behind the national goals that we have here in the UK for getting to net zero.
Ben (24:05):
That's really fascinating. I guess in investment world there are two pseudo kite marks but that don't really capture what you just articulated. So they would be what people use with CDP and also what people use for this science-based targets initiative; SBT, which look probably more primarily at carbon footprinting and glide paths. I really simplify something but they don't really capture what you were talking about. So I think that's quite interesting. I don't know whether you think those have some kite mark value or we really need something else which takes into account of that. And that also puts into question partly this value of carbon footprinting itself at a corporate level, but particularly at an individual level there's some interesting critiques about how that came about. Sector and national, yes, because the macro pitcher gives you good information. But I think people can't comprehend that even the largest company in the world is just a microcosm of what normally a rich nation would be. But how should we think about carbon footprinting and do you think any of the kite marks that you might know about do encompass maybe a bit of this more so there's room for another organization to really look at that?
Chris (25:24):
There are lots of really good organizations out there doing good work. SBTI that you talked about, the Science-Based Targets Initiative is one of the best ones. I think one thing, in the end they all need to come together and align behind some sort of accounting standard. That's the real goal here. So getting to a point where this is just a normalized thing is really the goal here and that kind of idea that corporates need to be net zero aligned rather than net zero themselves is very much at the heart of things. I think if you get that accounting standard in the right place then it'll just be done as a matter of course. So I think it's very important. Carbon footprinting and the assessment of it is hugely important so I don't want to undermine any of that trade. I think it's very, very important the tools that you will need to understand the impact that you're having on carbon are really important. I think what we lack is the next stage of this which is a sort of intelligent, informed discussion about what that's telling you.
So I had a discussion this week with somebody who works in the health system about the extent to which-- even in the NHS they really are thinking about this. But you've got pockets of the NHS… NHS is quite an interesting one because you've got lots of people worried about climate in the NHS. Very often find that actually in my trade that it's often doctors and nurses that are most concerned and come to me with questions about what to do about climate change.
So you've got pockets of the NHS just as an example, where they've got to the point in their carbon footprinting, where they've got this incredible understanding of the carbon impact of a particular operation in a particular building and you sort of wonder what is that actually teaching us? We've gone almost too far down the route of thinking about that whereas some of the fundamentals are being missed. Most hospitals, most NHS buildings are being heated with fossil fuels. That's a much bigger impact. But I think this speaks to the idea that we're all grappling around, we're all looking for something that we can really get our teeth into. So I think the more that we standardize this, the better, but there's still a bit to go on that.
I should declare an interest in this because I've been chairing one of the work streams for this piece of work that is commissioned initially by the treasury in the UK to look at coming up with a transition plan standard that could sit alongside some of the work that's been done particularly in the financial sector. So GFANZ which is a thing that may be known to you, this Global Financial Alliance for Net Zero is coming up with all sorts of very interesting ideas about how you align the right finance behind the green stuff. This is a sort of equivalent to that really that takes it into the real economy and asks questions about how corporates themselves-- particularly in the real economy, but also finance firms can themselves be better aligned so that investors know what they're investing in and banks know what they've got in their balance sheet. We're almost there actually with this. I'm quite pleased with how things are going. It's not easy at this, but we're not far off having some common standards. I think that means something.
Ben (28:25):
So I completely agree. I say a lot about this in overall extra financial data, whether that's environmental, natural, or even to do with the human and/ or the social. That the data is coming, the standards are evolving. You've got a lot of work streams, international standards accounting boards, GFANZ and all of that. But even today with the data that we do have, I can see the missing pieces to your point. The kind of analysis of it or what does it mean or what can you do or have you missed the whole-- there's a lot of this in your reports, the whole enablement piece. I always talk about, "Well, if the world is electrified, you're going to need a lot of semiconductors."
So you want to make your semiconductors well, but regardless of how intense they are, you're going to need vast more quantities of that. You might argue the same for copper and lithium and the like. Those are very obvious ones and there's a lot of unobvious ones. So I think we need to invest the time alongside of being able to interpret the data and tell us what that really means as well as having it. It's coming faster than it has ever been because financial standardization or financial data took quite a long time and it's actually happening much quicker within this area than I've ever seen. Even though it does seem sort of slow because it has taken years and years, it's still happening. It's happening faster.
Chris (29:49):
Yeah. But don't forget the bigger challenge beneath this is not disclosure, it's actual action. Perhaps I've been swept up in this over the last few years as well. Is this idea that if you just get the disclosure regime right, everything will click into place. Slightly ignores the fact that there's a lot of big stuff needs to be invested in and the disclosure regime is there to make sure that when that happens you should get good credit for it. But I think sometimes we forget that last bit and are being overly focused on the standards themselves. My worry with that is that you can really get in-- And again, I think I've fallen into the trap of doing this over the years. The minutiae of this is just there's never an end to it. You can fall endlessly down the rabbit hole. I worry that for those of us who are turned on, it makes sense. But if you are brand new to this thing wondering why you have to disclose all this stuff or follow some sort of counting standard is it is byzantine in its complexity and it will not be obvious why we are asking for that kind of level of details. So we've got to stick to the really important principles I think at this stage particularly.
Ben (30:57):
Completely agree. And I think it gets in the way of sometimes particularly smaller corporates which know what they need to do and actually don't need data to a single decimal point to enable that. That's where the data becomes a red herring and gets in the way of that real world action piece. I do think that can be problematic. And then actually the fact that you probably don't need to one decimal place anyway. So once you've got it and then you know what it's saying, this orders of magnitude and the action is the more important piece.
Chris (31:28):
Yeah. And just very briefly. This is why we over the years have advocated these really clear milestones for the decarbonization of some of the big systems in the UK. It's a model that most corporate, most western economies now are following. But it's really important to know that by 2035 we will have a fully decarbonized power system because it's such a clear offer to the whole country. So it means that whatever electrical device you're using from 2035 onwards is fully decarbonized. That means if you can decarbonize the heat to that building, then the heat and the light and all the stuff that you plug your IT gear in, that's fully decarbonized to that point.
That's not the end of the challenge, but for small-- and most corporates are small, most small corporates in the service sector-- and that's mostly what we have here in the UK. That's the majority of the job that is done. So right now we should be advising people to prepare for that moment. Back to my story of solar panels on the roof. If you want to put solar panels on the roof, do so for other reasons. Do so because it might make your energy cheaper, but you're not actually making a great contribution to the net zero goal in that world. That's a tiny, tiny additional amount of capacity that we're adding to a system that's already on the way to being fully decarbonized.
Ben (32:42):
That's a really good insight. Maybe we'll talk about some of the UK sectors and industries on that. I wanted to touch back on the report that you have which focuses on adaptation and maybe some of the enablement and that because there's a lot of talk about mitigation and actually, I guess there's a lot of talk about energy. But actually you make the point-- and I think a lot of people in the field make the point that the adaptation is a really big piece and is underdeveloped across all of the domains. Maybe partly because of where the messaging has and climate warming and everything is happening now. So we are actually having to adapt now as you say. There's also these milestones coming up. Private sector needs to be mobilized. Maybe that's where policy can help create markets for private sector to help develop. Do you maybe want to highlight why we are where we are on adaptation and some of the things in the report that you think are perhaps most misunderstood?
Chris (33:48):
Yeah, good. This is going to be something that I'm going to make a big push to talk more about actually. Adaptation is a word that I'm not a big fan of. It's a very complicated word but there isn't a better one, sadly. I'm happy with resilience. I think we should maybe talk more about climate resilience, but it's not quite the same as adaptation. And when I talk, I often talk about preparing the UK for climate change which is also not quite what is implied there. But broadly, the key thing is we face big risks from the changing climate. Actually in the UK we know more than most places in the world about those risks because we have some of the best climate forecasting in the world from the Met office. We have some of the best scientists working on climate and climate impacts in the world. And we have a climate change act and an institutional and legal framework for tackling climate change that has pushed the various institutions that matter to think about the risks that we face in quite a lot of detail.
So we have over the years led that. Every five years we do an assessment of climate risks and we've identified 61 risks that the UK faces. I'll tell you now, most of them are flashing red. So there's a sort of question in my mind about why haven't we done more about that? Partly I think it's because there are 61 risks. There's far too many to really cope with. But also I'm afraid it's partly to do with the fact that most people and most corporates and most people in any authority are not really attuned to the reality of the situation that this thing is now upon us.
My belief is that every year when we have one of these moments as we did last year with the heat wave and the 40 degree day in the UK. Every year there's one of these now. I'm afraid that that kind of summer is going to very shortly be a normal summer. I think a lot of the work will be done by the weather that we've experienced and the extreme events that we experienced to raise awareness on that. So we've been talking more about what we need to do in response to the risks which is the adaptation story of how do you adapt the economy to the risks that we face from known climate change. There's a big challenge in this. So adaptation is a whole host of things; it's behavioral, it's the way in which you plan for those kind of moments like a heat wave.
But there is another big challenge of investment here. We know a lot about the net zero investment challenge. Net zero is mainly a capital investment challenge. There is another investment challenge for adaptation and we know less about that because we haven't been thinking about it. We, in a report that we published just recently looked at just a handful of the investments that we've needed and some really key systems as we call them. So flood protection, public water system, how we retrofit houses to be ready for the warming climate and restoring nature. And then infrastructure generally how you make that more resilient. When you look across those systems as we call them, you can see very obviously that there is a massive investment need in each of them to prepare for the kind of shift in climate that we'll have in the future. So just think about something like housing retrofit. We are already thinking about how we need to retrofit houses to be decarbonized, making them more insulated so that they're more energy efficient.
Well, we also need to prepare them for the fact that each year there will probably be extreme heat particularly in the south of the country. There may well be a need to reserve water and to conserve water in a better way in those houses. So very obviously, lots of investment there. But thee big problem with it is that the value of that adaptation is difficult to monetize. So investors may well see the needs to invest but are not going to get a return for it very easily. So what we're trying to do in the report that we publish is just shine a light on that. Say that, "Yes, there is of course a need for public investment and many of these things, but there's also a need for households to invest in this stuff.” There's a big need for regulated infrastructure investment. So that's particularly helpful because you can actually encourage regulated industries through their regulation to invest in it. Think about flooding for example.
Then there is also a need for private enterprise to make some of these investments too if they can be led to that and to see the value of reducing the risk that they face from climate change. It's really interesting. Just to give you a sense of it, a very conservative estimate of the investment needs for the country is 10 billion a year of extra investment just in adaptation. So that's a lot. Not all of that can be met from the public purse. So we're talking about really interesting area where it's flashing red as I mentioned. But there are massive needs now for some creative policies to in particular overcome some of those barriers and give a return to investors for making these investments.
Ben (38:44):
Yeah, completely agree. So I live in a lower ground flat and we refurbished it over 10 years ago. The flat mostly stays quite cool in the summer and doesn't need as much heating. It’s underfloor heating in the winter because actually at that point in time it was worth doing it when you're going to do a refurbishment. That was kind of adapting for the future even being at that and you kind of need that on an unbelievable scale on that. I was interested on the adaptation piece because there's some talk about these creating markets and things. What do you think of our institutional robustness here in the state of our institutions and governance? In some ways I think it's really great. So climate change committee your reports are some of the best in the world. Like you say, we have some of the best information. You get to work on the really important things. We have some frameworks. We had [Chris Skidmore review recently which looks at that so government does look at it. With respect to adaptation I don't feel we have a particular organization or market around that and maybe that's one of your points of having that. So I'd been interested in that.
Chris (39:57):
Yeah, I agree with that. We've got this pretty good institutional framework on the other side of my job; on the net zero side thinking about how we decarbonize. We didn't used to have that, but the Climate Change Act has been one of the things that's helped with establishing that. You've now got a set of very important institutions around things like the regulated industries. They're all broadly except they have a need to act on net zero and are doing most of the right things now. I regularly complain that things are not happening as quickly as they need to but at least it's there. There's almost none of that apparatus on adaptation. I kind wonder why that is really. I think it is partly the thing I mentioned earlier about people not really accepting the reality of the situation which I think will change.
But even those institutions that really have an interest in it-- you look at the water companies for example. Some of the best planning for adaptation is in the water companies but it's still not at the kind of level that you would expect planning for the potential. Remember we are at the mercy of the world's approach to climate change more generally here. So it's not off the table that we might get to four degrees centigrade of warming. And in that world, water becomes incredibly scarce in some parts of the country. So you would expect water companies to be planning for that broad set of scenarios and scenario outcomes, yet they don't really. You find that also in other parts of the energy sector. So even in regulated parts of the economy, they're not planning for realistic and sadly pessimistic climate outcomes and they do need to.
The other bit of it I think is that we haven't got the same corporate disclosure regimes in place yet that we have urging on net zero. That will help create the kind of market that we need to see around some of these adaptation outcomes eventually, I think. But we're still quite far back from demonstrating why it's important for corporate disclosure regimes to reveal some of this stuff properly. I think we and other institutions that think about this more actually need to be better at helping those financial regulators and the people that put these rules together to understand some of that.
Ben (42:07):
I think we need something catchy a little bit like net zero. Like you say, adaptation doesn't quite do it; resilience preparedness. I guess there's a sense that-- and this comes through in the report-- that the government or someone is going to step in and solve it for you. Like, "Oh, London's at risk of flooding. We have a temp barrier. Sure, we'll create another 30 billion and someone will build a bigger barrier. Surely that will happen." Without kind of thinking, "Well, 30 billion's quite a lot of money, takes quite a long time." And so it's theoretically doable, but who is going to do it? "Oh well, someone will step in." I mean, that's a kind of more extreme slightly silly example, but I think that's part of it.
And even when you’ve spoken to the water regulator, it's obviously on their radar and it's part of the strategy and plan, yet when you think about that adaptation isn't quite rolled in. I guess there's also the politics of it. One thing which is perhaps worth commenting on, in the UK we had a recent decision in government and planning on a coal mine decision. On the one hand some would argue on the specifics of the planning and on the locale and putting one coal mine in the context of world energy. And there's all sorts of arguments that you could make there. On the other hand you have this kind of clear, political signaling and the climate change committee already had advice around that. How should we think about the power of signaling and leadership which kind of ties into institutional governance and that? Do we underestimate the power of those type of signals that are peril? Or is it-- I don't know about the complexity of that. I'm really interested if you have a view.
Chris (44:04):
Yeah. I've been in this job for five years and I definitely feel the signal value is understated. Again, back to my story about net zero. One of the reasons why naming a date for stopping the installation of gas boilers, one of the reasons why that matters so much is because everyone understands what they need to do in that world. We were amongst the strongest advocates for a switch over date-- I'm going to call it a switch over date rather than a phase out date-- a switch over date for electric vehicles. So naming a date when you stop selling petrol and diesel cars in this country. At the time that was very controversial. Turns out once you name it, people know what to do. Still lots of concern about that. But we're having a different discussion about that now.
We're having discussion about whether the charging infrastructure will be ready for that moment, not whether the moment is going to come. So signals matter. You mentioned the coal mine in Cumbria. That is a massive mistake. It's that simple. If you are in a world where you are trying to give signals to the world about what the UK is trying to do on climate change, that matters, it's titanic. But never mind that, that's debatable. If you are a steel company in the UK and you see that we are opening a new coal mine in Cumbria to produce cooking coal for the production of steel, then that is a signal that your government wants to see you use that substance. It completely undermines the effort that then of course two months later is what we're talking about, about how we decarbonize the steel industry with hydrogen in this country.
It's just silly. So we've got a government that cannot speak with one voice on an issue as important as this. I don't think there will ever be a coal mine in Cambria because the investing community is not interested in that kind of uncertainty. So I think probably on that coal mine, the biggest and most problematic signal is to the people of Cambria themselves. I don't think there's kids in school in Carlisle right now thinking, "Oh thank God I've got a coal mine to go to when I graduate from-- when I finish my school education." It's just ludicrous to talk about that. So these signals really, really matter and I think the more that we can align them, the more that we can step away from the expensive policies that you've got to put in place if you want to change to one of those signals that you've wrongly put in place in the first place.
So yeah, I think signals do matter. And I have to say back to my top story about what signal we've sent to the rest of the world. We have completely undermined what we did at COP26 when we projected to the rest of the world what needed to be done to take ourselves off fossil fuels. So I very much regret what Michael Gove did. I don't know what will happen. I'm sure it'll go through the courts after this. But the chances of there actually being a coal mine is vanishingly small. I've never spoken to Michael Gove about it but I think he was playing politics with that. I think he probably saw that there was a corner of the country that wanted to see him accept that and that there was some minor political advantage in green lighting that coal mine without thinking about these broader signals. Or if he did think about them, he had a very cynical outlook on it.
Ben (47:13):
Yeah. So for people in the finance world, financing coal mines is probably the hardest piece of debt you'll ever try and get or debt inequity. I think one of the last funders of that which was the Chinese state or the Chinese government has pretty much said they're not funding any coal mines outside of China. And even that is on the way down. So very hard to get the money and you need a lot of money.
Chris (47:39):
They do. I think it's an Australian that's behind this one. They've got no interest in actually developing the coal mine because that's not the way these things work. So you get a consent, you package it up and you pass it on at that point. So anyway, all very silly and I hope it's all eventually erased from history, but we shall see.
Ben (48:00):
That's an interesting segue around the points that we have in the future when gas boilers won't be used, when all vehicles will go electric. Last time we were chatting we were probably both a little bit cautious on carbon tax or carbon; that sort of thing. Essentially we discussed that while the economic models might work-- and there's sort of a lot of sense and certainly there's a sense for having a carbon price. The political economy is very tricky and broad-based carbon taxes-- the practicalities of them are a bit contested and a bit hard to know. Whereas sector led policy could be quite effective which doesn't necessarily need the kind of carbon tax to get going. So for transport we need to electrify trucks, buses, and cars. We can put that in place and then you need everything which goes along that. We need to green the grid. I think you're going to have a report out this year on that power.
So although carbon tax could help that, you could actually do something directly with transport policy and when we have heating industry land use and the like. Has anything changed your mind more positively or negatively on carbon tax or that sort of view? Or as you were sort of suggesting actually the way that when you have put in what seemed controversial, say 2035 x is going to happen, that actually the way that people have got around it now that they have done... I've actually been positively surprised by that. I thought there would be more pushback and that there would be more of that. But actually it's like, "Oh, alright. Let's see how we can achieve that." That kind of up an atom attitude actually has probably put me in a more positive space. So as I was a bit negative on the kind of global cooperation side, I've been more positive about, "Okay, give people something to gun for." And suddenly they're gunning for it which was not maybe my initial expectations.
Chris (49:57):
Yeah, and I'm glad to hear you say that, Ben. It's always good when you can admit you're wrong. So I think the idea of laying out these dates is just that isn't it? It gives you something to gun for. That's a really good way of describing it. Now you asked me, has anything changed since last we spoke? And yes, it has. Something quite substantial has changed in the United States of America. So we have this inflation reduction act which is an unfortunate act in only one sense, really. It's the IRA. So in the UK of course it's very difficult to talk about the IRA being good. But it's just a kind of game changing piece of legislation. At the core of it I think is a fairly simple thing really which speaks to our last discussion about the difficulty of implementing carbon taxes. The economic logic of making dirty stuff more expensive than clean stuff is still there.
But it turns out that the effort of putting carbon tax on something that you actually need in the present society is enormous politically and maybe it's best at just to make the green stuff cheap. Broadly, that's what the Inflation Reduction Act has done. It has done so in quite a controversial way. We're having a discussion now about the protectionist elements of the Inflation Reduction Act. It is a very protectionist piece of legislation but it has lit a fire under some of these green technologies. It's because of that simple thing that people I think are more willing to move towards things that have been made cheaper and move away from things that are more expensive. But I feel I want to add a note of caution on that. That we can't walk away entirely from the need for carbon taxes. They're still very, very, very important. It's very, very important to send a signal about the need to use less of the dirty stuff.
I’ll give you one example of that back in the UK. We are on the way to having fully decarbonized power system and that's very exciting. We will shortly produce a report I think that will really help explain what that fully decarbonized power system looks like. Super pleased about the modeling that we're going to put into that report and use. But the challenge shifts a bit I think now on power to actually consuming it being the main challenge. So you've got to push people towards having devices and technologies that use that electricity more. Then when it comes to something like heat or when it comes to an industrial process, you're right up against the problem that gas is cheaper than electricity for the consumer.
So you've got this kind of incentive issue and that's really what carbon taxes are about. We do need to maintain the incentive to move towards electricity as a fuel. We will probably be able to do that if we can have a policy framework that is aimed at making electricity cheaper than gas for the consumer. So if we move in a-- I hope we are in this world by the way. If we're in a world where the gas price is high today as a result of what's happening in Ukraine, as the gas price comes down-- and hopefully it is coming down, that's the moment to start putting some tax on it so that you start to create that incentive to move to electricity instead of gas. So as the price comes down, let it come down slightly more shallowly than it would otherwise by putting a tax in place at that point. That would work. So then you would push people towards electricity to heat their home or to fuel their car. I think we got to think about that. So we can't abandon entirely the idea that these price incentives have got to be there. It's really interesting to see what the US has done which is largely about incentivizing these green things, but let's not abandon entirely the carbon tax thing.
Ben (53:41):
But it's more specific and better thought out. It's using more as opposed to just broad brush. I've always been quite partial to this idea of some sort of tax like that and then giving that back to-- Well if you want to be just broad, people like universal benefits. So I've always thought a sort of carbon dividend or some sort of universal benefit which is actually progressive. So whereas the tax is kind of regressive, actually in the net you can make it progressive. But people tell me the political economy of that doesn't work and that there's all sorts of other issues. Tell me why it doesn't work.
Chris (54:21):
Well, I mean it's lovely to think about putting a tax in place and then dividend to hand it back again. But if we are successful in this endeavor of decarbonizing the economy, what happens to the dividend? Well, it shrinks to nothing. So you create a new political problem, aren't you? Right now today you can put a tax on those people who use fossil fuels and then hand that back to people who are doing the right thing or who can't afford to use those fossil fuels in the future. But if you've got a position in the future where as a result of our success on the transition we no longer hand out those handouts to those people who need them now, then I think you've got an even bigger challenge actually politically. So I'm not a fan I'm afraid of the tax and dividend policies that are often proposed for that reason. It's a political economy reason. I'm aware that other views are available, but that's my take on it.
Ben (55:08):
Okay. That's interesting. So again, that's because of the political economy piece rather than the so-called rational model bit. In some ways it's a distant relative to the issue we are having now about the fact that we probably need something like a road pricing tax type thing because you give all of these subsidies to EV. But then if something is a hundred percent EV, what happened to all your so-called car tax revenue or whatever the tax was? And so again, the economy said, "You could use some road price and something." But whatever it is, you probably need some substitute. Now, this is a slow enough change that I'm hoping that you can figure out something to do with it. But actually it does create this type of problem which it would be similar. So you create it, but your success will be your downfall. It's the same if you overnight change the EVs; then all of that tax money is gone. It's the fact that it's actually transitioning.
Chris (56:01):
That's right. And I think it depends on your outlook really. Are you implementing this particular tax because you want to see behavior change or is it revenue raising? So that has always been-- The historic problem is that the environmental taxes have mostly really been about revenue raising and when they start to work, that's when you get problem.
Ben (56:18):
Yeah. And that's our point. In fact, that's our last one about behavior change. That we didn't really like the term behavior change because it's really due to cultural technology habits as opposed to people doing the wrong thing from the wrong place. But that's exactly right. It's the price signal to change how people think and act as opposed to whether you are using that money for something.
Chris (56:40):
Yeah. And just before we leave tax, it's really important to think this through. The other thing with tax is that you can't escape the electoral cycles when amongst the UKs. Taxes are hard to implement whenever you try to do them and usually you'd implement them at the start of a political term because that's when you've got the greatest political capital to do it. We're actually at a newly interesting point with net zero where some of these new taxes which will almost certainly be needed-- you've raised one of them and probably the most obvious one which is some form of new transport tax that can cope with the fact that electric vehicles are on the road. Looks probably like road pricing. That's one of the most obvious ways to do it. If you want that tax to be implemented, it's probably going to have to be at the start of the next term really for our UK government. It's never going to be popular.
If you don't do it at the start and then you start to wonder whether you will ever do over the course of that parliament-- And the interesting thing with net zero is that it's this parliament that matters. So it's quite interesting. The tax stuff probably needs to have more oxygen as they say in think tank land because we're going to have to create more of a discourse about the need for some of these big tax changes so that come the election, there is government discussion in politics about what to do about it.
Ben (57:54):
Yeah. I guess people always think it's always maybe this decade or this next five years. But I think it kind of really is for all sorts of policies.
Chris (58:03):
It really is for transport. You can see the movement towards electric vehicles. We're in a world now-- I'm very pleased to be in this world. But mostly it's about what barriers there are now to a faster transition rather than pushing it harder. It's more about the fact that you have to use the public charging network. I have an electric car and I use the public charging network. It's awful. So that's a bigger issue now than the underlying problem of encouraging it in the first place. So in that world it's likely to be a tidal wave. Most people are thinking about electric cars we know as their future vehicle. In that world tax revenue starts to dwindle quite quickly and it's a fiscal risk for the chancellor.
So we've got to have a government that's willing to tackle that. If you want to tackle that particular tax challenge, it's probably better that you do it in a strategic way looking across all the taxes so that you reach this kind of fairer outcome and distribution of costs and benefits that we want to see. And if you want to do that, you need some political capital in the bag to do it. That points to the start of a term. Next election is probably 18 months away so it's pretty important to think this through.
Ben (59:13):
Yeah. And I think they will need to look at tax in the round because there will be some taxes which you want to do which in isolation will look regressive. But if you pair them with other things, will either look progressive or at least also achieve; be maybe neutral and achieve the outcomes that you need to achieve.
Chris (59:29):
That's right. And a final point for me on this because mostly people talk about spreading costs and a fair way which is of course a challenge. But actually I think in this discussion one of the biggest challenges is spending benefits. So if you are rich enough now to have an electric car, to have a heat pump with a time of day tariff that allows you to store electricity when it's cheap, to produce all that stuff, basically you can remove yourself from some of the big costs that those who are not rich enough and have to deal with what they're given currently incur. And I think that issue of spreading benefits fairly is actually a harder one when it comes to some of this because we need to think that through properly.
Ben (01:00:09):
Yeah, I've always thought that. It has happened in all sorts of things. People who only need to borrow small amounts of money but desperately need it at the end of the month are always paying through the nose on it. People who are having to use for their heating or their electricity paying either by the hour, by the day, by a meter or something like that are not seeing any of these benefits and have the highest costs which never seems-- Well I don't think anyone really thinks it's fair, but it's really a difficult problem to solve.
Maybe just finishing on a few couple of items and then advice. We talked about some of the other sectors a little bit, but I didn't know whether you have any comments on work that you've done or thinking about buildings, heating and cooling. And I know power grid and also fairness to the worker where it might be coming up. I think it's probably too big to talk about all of that.
Chris (01:01:04):
That's for the next podcast. I'm very happy to do that if you'll have me on. Why don't we talk buildings? I'll try and make this as succinct as possible because there has been a lot of interest in policy towards buildings in this country which is very welcome. So we now have a heat and building strategy from the UK government. There is a similar strategy in Scotland. Wales are working on one as well. So it's very good to see the focus that's been given to buildings. Buildings are-- depends how you look at it. But they account for roughly a fifth of the emissions that we have each year in this country and it's worth thinking through why that is. It's basically because we have to heat that building up and then there's only a question of how quickly it cools back down again.
So it's a big challenge because we have a climate here in the UK that requires you quite often to heat a building up quite quickly. Those buildings are often very old as well. So gas boilers which is what roughly 80% of us use to heat buildings are very useful in that world because you can flick them on and off quite easily. The fuel can be stored in this very extensive gas network we have at the moment. And turning that over, which I think is probably the biggest challenge in climate policy for the UK is not easy. And still there are lots of choices ahead of us with what you want to do about it. Sorts of real interest, for example, in using hydrogen as we use natural gas in the future potentially. Or the question of heat pumps, of course, whether electrical heat might be able to do the job.
I suppose that's where I start with this. Is that even though there has been lots of policy focus on this, no one's really grasped the central issue of heat and what you actually want to do about it. We are desperately lacking a clear decision from government on what to do about domestic heat especially, but also commercial heat and even how we use heat in industry. Some decisions have to be taken on that. We talked about tax and that being a big decision for a new administration. This is another one. What do you do about hydrogen for heating, for example? Are we going to go down the route of just electrical heat or is there going to be some room for hydrogen in there? Where is that hydrogen going to come from if that's a discussion you want to have? Is it safe? Is it manageable? It's a greenhouse gas so it will leak. That's another problem there too.
So at the core of this is the heat question. How are we going to decarbonize heat? By what point and through what means? How is the democratic process going to arrive at that decision? Is it going to be distributed to the regions of UK or are we going to have a central decision on it? So that's where I would start and I'm afraid I don't have good news there. We haven't got a full decision from this government but hopefully that will come with whatever flavor of government we have after the next general election. The area where we've seen most interest is in energy efficiency and in home insulation where there's been I think more efforts to kind of start the engines on an industry that was shut down by a change in policy back in 2012 removing the subsidies for energy efficiency that were in place then.
It's a big challenge. You're going to scale up this supply chain to install all this home insulation that we could really be doing with worth knowing in error modeling. What we have really in the challenge of decarbonizing buildings across the UK is broadly a strategy before 2030 across the economy of doing as much insulation as you can in buildings. So sort of reducing the size of the problem of decarbonizing it really by reducing energy needs. And then after 2030, the whole strategy kind of flips towards replacing the heating source in those buildings. That's very simplified but that's roughly how we viewed it in our models. So do as much as you can this decade to make buildings more energy efficient. And then after 2030, the big challenge is what you do about the gas grid and what you do about decarbonizing properties with different heating sources.
And I still stick to that. I think that's broadly what we need. Again, the home insulation challenge is a big one because we still don't have a policy. Most homes are unoccupied and we don't really have much by way of an incentive for those homes. So lots to do there. The thing I really wanted to just flag is that at the core of this whole challenge is this question of what we actually know about the building stock and how energy efficient it is and how prepared it is for this transition. It turns out we have this system of EPCs as an Energy Performance Certificates which anyone who's bought and sold a house, any of your listeners will have been through the process of getting an EPC and you get this kind of rating in it. You actually get a couple of ratings which people don't know that. It turns out its spectacularly unuseful in describing the challenge of what you do to improve the energy efficiency of that building or indeed to prepare it for low carbon heat.
So we've given some advice which if you're at all interested in this, it kind of sets out, I think a simpler way of looking at this challenge that helps with the kind of metrics that sit behind that EPC and which would allow EPCs to play a more useful role in the question of decarbonizing buildings. I would encourage anyone who has an interest in it to look at it. It's a really interesting thing actually because in terms of the financing of this, the bog-standard mortgage products, we really do need EPCs to mean something so that the mortgage products can help with decarbonizing buildings. At the moment, broadly the problem is that EPCs are about energy cost rather than carbon value or energy efficiency of the fabric of the building. So we've got to tackle that and we give some advice in a letter to the department called D-Lock which is my favorite of all the acronyms known in White Hall.
Ben (01:06:49):
So I would definitely go and check out that letter which is available on the Climate Change Committee website. I found it really fascinating. We briefly discussed this before because this is a key piece on the homeowner which could potentially try and catalyze this issue that you have on there and on the retrofit. Two quick ones on that. Is it too crazy to think that we could have some sort of district heating network in the same way that we put the gas grid in? Is that too crazy or is that possible?
Chris (01:07:18):
No. I would say that is probably my favorite route through. Let me add further craziness to your suggestion. So you could have a world where every building in the UK-- Let's assume every building in the UK has a gas boiler. It doesn't, and many of your listeners will probably be in one of the buildings that doesn't have a gas boiler. Let's assume for the purposes of this discussion that every building has its own gas boiler. It's quite interesting. What you have is a gas network bringing you gas but they're actually a very atomized heating system for the UK. So every single property has its own heat system. That's a bit weird when you think about it because there's lots of inefficiency. Even the boiler itself is very efficient. It's slightly weird that we all have our own one. So if you look at other countries in the world, it's not like that.
I think there is a world where every one of those properties has a big heat pump sticker at the back. I have an image in my mind of a sort of New York tenement with all the air conditioning units at the back next to the fire exits. It's not a very appealing world. Particularly in high density cities there is a better option here which is that you run hot water around and every one of those properties instead of having a boiler has a heat exchanger which is a much smaller thing. There are plenty of places in the world that have just that so I would love to see that happen. I mentioned the bit of craziness if I can add it in, is that we could heat those insulated pipes in the ground by taking the heat out of rivers.
So you can have one very big heat pump rather than a million heat pumps sitting in big rivers taking low heat from a water source, very efficient source of heat. It doesn't need to be warm by the way, it just needs to be not zero. You can take the heat from that and then turn that into the heat that heats the whole town or the village or the city. You need a few for a city of course. But that's quite appealing actually because it's not an atomized system at that point then. It's a very efficient system to do that and 80% of us live next to water body that would allow that. I'm in Glasgow today and I'm very proud that I had some hand in this amazing project in one of the towns that's near Glasgow called Clay Bank where they used to make very famous ships.
The ship building community there was shattered in the 1980s when the John Brown shipyard closed. This dock that they left behind is where we put one of these river source heat pumps which is now heating this brand new housing development on the site of the John Brown shipyard. And each of the lovely properties that have been constructed there on the Clay-- genuinely nice, is being heated with this wonderful heat power. I find it quite a romantic thing. You've put the river back into the community and it's now supporting the community in a different way. I think it's lovely and there's loads and loads of scope to do that. So I think we could have district heating, we just need to kind of imagine it and do it. That's a Bjork quote; imagine the world, no be in it.
Ben (01:10:32):
That sounds great. That sounds a perfect kind of government private partnership. Could be GovTech, could be something. It seems doable, but yeah, imagination. Okay, so last two questions. Although actually one quick comment on the efficiency part. There is this paradox that when you make homes more efficient, people use more energy. It's kind of the same from the candles to the light bulb. You thought, "Oh, we've got candles and the light bulb would just use more light." So it's a little bit like the gas thing. You do need some pricing thing that as you come more efficient you just don't overuse things because you are there which is-- I think it's the Jevons paradox, but it's a paradox which policymakers haven't quite got their hands around and all that.
Chris (01:11:11):
Yeah. We call it comfort taking. It's sometimes called the rebound effect. But yeah, it's a real thing and indeed that is what happens. It's hard to say that people shouldn't do. It’s because they can afford their energy bills and they make their homes warmer and that's fine. It's an interesting thing. I think a very brief point on this is that-- The dark secret of my trade is that it's difficult to decarbonize the buildings that we have in the UK through fabric efficiency alone. So I know there are a bunch of really prominent people in the field who would like to see what they call a fabric first approach to decarbonizing. But actually in our view, it doesn't take you that far.
That's kind of the point that some of the economic evidence supports actually that you should certainly make buildings more energy-efficient. But it's not really about the carbon challenge, it's more about the fuel poverty challenge or the fact that people living in those houses just should get a better deal. They shouldn't be living in drafty crackled houses. We should be helping them to live and have a better quality of life. The carbon bit of it, I'm afraid that that needs to be tackled. That's swapping over the boiler. That's the big challenge. That's where the big returns come from. Part of the worry I have with all this is that when it comes to the heat pump discussion which has become quite a live thing, the government's approach to all this if it has one binding approach, is heat pumps. We attached a slightly higher standard to the use of heat pumps. We don't do it with gas boilers.
Before we rolled out gas boilers particularly over the seventies and eighties we didn't say, "Ooh, you could have a gas boiler but you've got to make your home much more energy efficient before we'll give you one." And that's this sort of weird discussion we're having with heat pump. You could have a really big heat pump. It's probably not the best idea for the whole energy system to do that. But we might need to get to the point where we're more tolerant of drafty leaky houses because we've just got to get on and decarbonize them. Some of the people living in those houses are going to have higher energy bills and it's for them to worry about that. I don't want people who can't afford their energy bill today to be in that position. So we should be thinking most about those who can at least afford their energy bill when we think about this transition and the energy efficiency, I think.
Ben (01:13:21):
Yeah, I think that makes a lot of sense. We put in the gas networks when most people don't have gas, right? So there's a lot of things like that. Okay, last few questions. So one is an ask for what you would have for people and then what people ask us. So people ask me a lot about what they can do on climate change and my answers tend to be specific and quite long and complex depending on who is asking and what their background is. But often policy influences an important component of my answer whether that's a political or a corporate level or some thinking on this. Maybe there can be tech. So I don't know what do you say to that question and what can people do or maybe what can people do to influence policy or influence corporate or how should they be thinking of this? Because actually there's some household things that we can do, but we know at the household level it's great to have a signal if you can afford a heat pump or go vegetarian and the like. But that isn't this kind of system policy change with the big levers as well. So I kind of don't want to do it down, but obviously we need to do these other things. What's your advice or thoughts there?
Chris (01:14:29):
Well, I'm aware of your audience, Ben. I don't make claims to know who listens to your podcast but I imagine some of them do have a lot of influence in this area. So I think the really important thing to say at the top of this is think through what influence you have particularly on the policy front because conversations you might have are really important there. I think the one thing that really matters when it comes to that is if you are in a circle with influence. Just talking positively about this is a thing that is actually going to happen is the most important thing. There's a general-- I still get it. There's a sort of disbelief that it can't be done. It can be done. All these steps that we've talked about and the reports that we've produced illustrate them even further.
They will be done. So any talking in a sort of constructive progressive discussion about those things as an inevitability I think it's probably the most important thing actually. If you want to be vegan, go for it, but it's not going to make that much difference. I think the really important thing that I often say at the top of this discussion is that we can't make this about individuals. The big systems that need to be shifted are not going to be tackled just by making personal consumption choices. But those personal consumption choices probably make you feel better about it and therefore they will matter too. The one that probably matters most is the move towards or rather the move away from kind of red meat consumption and processed meat.
So if we can find alternative proteins, for example, George Monbiot is very good on this, then that would make a real big shift. So actually being willing to consume some of those things might be more interesting. I'm going to give you two things to try and cut this as short as possible. If you make an investment to have an electric car or a heat pump, tell people about it. Turns out that that matters a lot. We've done very well with electric cars because they've become quite desirable. I think we probably need to have the same thing happen with domestic heat. So if you make that kind of investment to make your home warmer, put a heat pump in it, tell people about it, feel proud about it. That will matter because particularly in the community around you they'll all want it too. So that's the first thing.
Then the second thing, think through what wider impacts you can have. Probably the two biggest impacts you can have are how you vote. And I'm not telling you how to vote-- make that very clear. But take an informed view on that. If you care about climate, those parties that you may or may not vote for will have a position on it and it matters. Where you invest is the other. Even if you think you don't invest, you've probably got a pension and you probably can have a say on that. So directing that is probably very, very important. That if we can get some of the big institutional investors behind this transition-- most of them are, but really actively behind it, that will make it sing. So this ratified audience of yours, Ben, I bet they've got more influence than most. So do think those things through. We need to be proud about decarbonizing, I think, and proud to make the investments that will make it work. We need to build the idea that these are desirable things in life and alongside that, these wider choices about the political system we have and the financial system and how you invest really matters.
Ben (01:17:53):
That seems like excellent advice. And then last one, current or future projects. Anything you want to highlight or you're particularly excited about?
Chris (01:18:02):
Very excited about all the things that we do but this is a particularly interesting era for us so we've got lots of exciting stuff coming up. Briefly on the CCC, my institution, we've changed quite a lot in the last six months. So we've built for the first time a set of integrated teams that are looking across the net zero challenge and the adaptation challenge. So got a team on the built environment which is not just thinking about how you decarbonize buildings but it's also thinking about how you prepare them for the likelihood of flooding or overheating. It's really good to have that and the transport systems that we'll need into those buildings. We've got a team now on the energy supply that's not just thinking about decarbonizing; it's also thinking about making it resilient. We've got team on infrastructure doing similar things. We've got a really exciting team doing something on nature, on land, on agriculture, on the seas, bringing together biodiversity with adaptation and mitigation.
So we've got this kind of new facility to look at things which we've never had before. So we're kind of using that now in anger to produce some new analysis. Stuff I'm really excited about. We're going to do something on work and skills coming up, looking at the nature of the transition that's coming up and the nature of the workforce change that goes with it and the skills challenge. That's going to be really interesting. Some very interesting and actually maybe controversial stuff in there about which sectors of the economy expect to shrink and which ones will grow and the slightly uncertain nature of all of that. So that's really interesting. Big thing coming up which I'm so excited about is that we've done some amazing modeling work over the last 12 months on the power system looking at how we decarbonize the electricity system in the UK in particular to give a better sense of how we cope with a world where we are using renewable electricity as a sort of backbone of the whole electricity system and increasingly the whole energy system.
And in that world how we cope with long periods without wind which will come. This wonderful German phrase, dunkelflaute, which explains these kind of long periods of dark and often cold periods without wind. We will be exposed to that in the UK. What do we do in that world? Without spoiling the surprise, what we've done with this modeling is illustrate what kind of system you need alongside that very extensive offshore wind system and onshore wind system, solar system that we have. It's really good. So big story there on hydrogen use and storing hydrogen using it in the para system. The really cool stuff is that we've used actual weather data from an actual year where we had low wind that year and then stress tested it with very long periods without wind and looked at what we can actually do.
So it should answer the often stated point from people on Twitter that we haven't thought about; point when the wind stops blowing. Turns out we have but we've kind of illustrated it. So that's coming up. Got a big report to do and then progress report should do every June. Then the very final thing I say is that at the halfway point we will then begin these really big strategic pieces of work that we do every five years. So the seventh carbon budget which is the emissions target for the UK which will take us into the 2040s, we have for advice on that every five years and we'll start the process of thinking about that properly in the last six months of this year. Really interesting because the 2040s we should have reached full decarbonization in some sectors and we may not have actually done so. So how do we cope with that uncertainty? It is going to be a big thing.
The question of what the right data is for net zero is not really in the discussion at the moment, but kind of interesting questions that do come up about how would you go faster on this? Maybe an interest from future governments and things like capital scrappage. So we might look at some of those issues moving more rapidly off fossil fuels. We're going to explore some of that. And then the very final thing-- we've already begun work on this actually. But the other thing that we do every five years is an assessment of the climate change risks that we face as a country. This will be CCRA4; Climate Change Risk Assessment Four and we've just got the commission for that agreed. It's really exciting.
So yes, we are going to look at the climate risks, but we're going to do something that I've always wanted to do which is to look at defining what a well-adapted UK looks like. So that's the kind of really interesting piece of work to actually define what we mean by a well-adapted UK across some really important issues like overheating and the natural world and how we do deal with big supply chain interruptions globally. All sorts of interesting stuff there. And then actually giving advice on adaptation itself; not just on the nature of the risks that we face, but how we put policy around it. That's the other thing that we're going to do. So it may seem a long way away. It's probably 2026 maybe we'll bring that together, but actually three years not that long in bringing together that kind of program of work. So we'll get that going properly this year. There's a host of other things too, but look out for it. We're always busy in the CCC but we've got a load of stuff this year that's been in gestation for a while.
Ben (01:22:51):
I highly recommend all of the reports. If you don't have super time, the executive summaries are extremely good and give you the heart of the matter. But all of the technical and the backup evidence, I think they're some of the best reports on climate that I ever read. So on that note, Chris, thank you so much for joining me.
Chris (01:23:10):
Thanks Ben.
Fall of FTX, Trust, expected value and trading blow-ups
There are three observations I wish to make on the crypto exchange, FTX, and its bankruptcy, likely fraud and asset trading. The observations are around:
Trust
Proprietary trading aka prop trading
Limits of «expected value » and St Petersburg paradox
Codas: why? What falls in status, crazy balance sheets.
Background articles: Matt Levine (Bloomberg, maths on liquidity/solvency problems), Anna Massa (Bloomberg, possible fraud problems similarities to Enron); Atlantic profile, also highlighting the tainting of Effective Altruism; and the WSJ on claims of fraud.
Here is Zvi on the summary:
SBF seeks to make a lot of money to earn to give, founds Alameda.
First project is the famous Japanese BTC price arbitrage, worth 8 figures.
Business is not well-run, cofounders leave because of it, SBF cuts them out.
SBF founds FTX, things initially go well, money is made. FTX goes big: big investment at up to $32bb valuation, big spending, big advertising, FTX foundation, etc.
Alameda transforms over time from a prop trading firm that focuses on market making to a combination of longer term illiquid investments and directional bets, effectively taking super risky large long positions and borrowing short to invest long. In general the firm was structurally permanently long and unhedged.
Some bets go well, others go much less well.
In wake of Terra-Luna Alameda’s loans get recalled, a lot of money is lost and various others need bailouts or there is risk of collapse of FTT, and there is opportunity to get more funds into FTX ecosystem.
SBF decides to use his backdoor to send customer funds to Alameda, (or to allow Alameda to spend customer funds they have lying around for some reason)…
People discovered FTX and Alameda might be insolvent.
SBF and company lie over and over, saying at each point, no, everything is fine.
Everyone sold FTT and withdraw their funds from FTX.
FTT price crashes and FTX runs out of liquid funds.
FTX tries to sell itself to Binance but things are so bad Binance says no. There is no one willing to bail them out, the holes and legal risks are too big.
It is discovered that FTX and Alameda are indeed insolvent, and that FTX sent $10 billion in customer funds to Alameda, and that SBF had a backdoor allowing him to silently transfer funds.
FTX and Alameda file for bankruptcy.
FTX gets hacked, likely from inside. It gets worse.
(Here is more from Matt Levine explaining quite how crazy this blance sheet is and what it represents.)
“…If you try to calculate the equity of a balance sheet with an entry for HIDDEN POORLY INTERNALLY LABELED ACCOUNT, Microsoft Clippy will appear before you in the flesh, bloodshot and staggering, with a knife in his little paper-clip hand, saying “just what do you think you’re doing Dave?” You cannot apply ordinary arithmetic to numbers in a cell labeled “HIDDEN POORLY INTERNALLY LABELED ACCOUNT.” The result of adding or subtracting those numbers with ordinary numbers is not a number; it is prison. “ (Matt Levine)
There is much around finance - and indeed life - that is built around trust. In my podcast with economic historian Mark Koyama, he suggests that the ability to create trust at scale was an important factor for how rich nations developed. (Transcript/link here)
Some scholars believe that the ability of the Quaker people to be established as trust worthy enabled them to do better business.
The importance of trust is so ubiquitous in life today that it often goes without saying. Yet, you can observe nations or societies with more limited trust and observe the problems there.
Trust or the lack of trust still impacts financial firms. If people do not trust a bank to have their money they will withdraw the money and possibly cause a bank run.
Why would people want to break with trust when social norms values trust so highly? I can think of examples but this example around FTX, if I might speculate, is intriguing and in part it rests on the problems of expected value theory. And in part the challenges that trading have always brought.
In the history of financial institutions there are many examples of highly intelligent teams or organisation who lose a lot of money, occasionally everything and more. These teams are often making trading bets or running proprietary trading aka prop trading or have trading strategies in what we call hedge funds. The list is as long as financial history with perhaps in more recent times the notable example being LTCM, Long-Term capital management.
Trading teams have different types of strategies. Many of them at their core have some concept of expected value. The idea of (probability of event happening) x (value) = expected value. This either by computer algorithms or by human judgement on computer outputs. (They also try and arbitrage, which is less reliant on core expected value formulas.)
For rules based games with closed probabilities such as standard backgammon then over time these rules work well.
But, when you enter the messy world of humans and human values then this concept can break down. The philosopher Larry Temkin shows how it can break down at the level of moral philosophy. See my podcast on this.
Decision theorists and economists can show the problems of the St Peterberg’s Paradox. The stock market regularly highlights challenging events such as “meme stock” price movements. (These don’t fit into traditional expected value calculations).
Expected value can give a good estimation of a certain type of value in many situations but it can often not capture the whole of a value or a decision.
The St Petersburg paradox offers you the choice of 51% chance of some large gain, but a 49% chance of losing everything. For instance, you could double the value of the world or even 10x the value with a 51% chance or a 49% chance everyone in the world is wiped out.
Tyler Cowen gave the CEO of FTX, SBF (Sam Bankman-Fried) the St Petersburg choice. SBF said he would take it. Certain utilitarians and gamers will do so as the expected value is positive. But the paradox is if you are the choice enough times you will after some time inevitably go to zero.
Cowen: …let’s say there’s a game: 51 percent, you double the Earth out somewhere else; 49 percent, it all disappears. Would you play that game? And would you keep on playing that, double or nothing?
BANKMAN-FRIED: With one caveat. Let me give the caveat first, just to be a party pooper, which is, I’m assuming these are noninteracting universes. Is that right? Because to the extent they’re in the same universe, then maybe duplicating doesn’t actually double the value because maybe they would have colonized the other one anyway, eventually.
COWEN: But holding all that constant, you’re actually getting two Earths, but you’re risking a 49 percent chance of it all disappearing.
BANKMAN-FRIED: Again, I feel compelled to say caveats here, like, “How do you really know that’s what’s happening?” Blah, blah, blah, whatever. But that aside, take the pure hypothetical.
COWEN: Then you keep on playing the game. So, what’s the chance we’re left with anything? Don’t I just St. Petersburg paradox you into nonexistence?
BANKMAN-FRIED: Well, not necessarily. Maybe you St. Petersburg paradox into an enormously valuable existence. That’s the other option.
(The whole conversation on crypto and philosophy with Tyler and SBF’s conversation on Oddlots where he suggests much of crypto is a scam now make super fascinating reading)
Many prop trading teams eventually lose a lot of money. These observation has lead many mainstream financial institutions - usually investment banks to close down their prop trading teams or run them pretty small such that any blow up is not a critical blow. Prop trading can make a lot of money for a long time, but it seems at some point either the 49% catches up or a mistake is made. The successful people know when to stop or are lucky enough to stop, but getting out of the game at an appropriate time is, from what I can tell, quite rare. Investment banks have or are meant to have a lot of over sight so they can close down prop traders or cut off trading clients before losses become too big to handle.
Trading teams have many methods of risk control to stop them selves blowing up. Stop losses, limited bets size, diversifying bets, quick control of trading positions and the like, but ultimately a miscalculation or error or an event outside the model or traders experience occurs and large losses occur. In theory perhaps this is preventable but in the messy world of humans and imperfect models this preventention does not occur.
FTX was very close to a prop trading organisation, Almeda. SBF founded Almeda before FTX and had close relations with the traders there.
(This is my speculation) it seems like that Almeda had some large trade(s) go wrong. If Almeda was part of an investment bank, the savvy bank risk control would close Almeda down before losses could balloon. Even if there were no recent losses, at some point Almeda would make losses and if the traders could not control the losses and positions then the correct approach would be to let Almeda fold and not allow Almeda losses to infect any other part of the system.
(This is akin to the ideas that Nassim Taleb writes about in having a system which has lots of small pieces and is anti-fragile rather than a system which has parts which are “too big to fail” or is too centralised)
It is not exactly clear but WSJ and other media reports suggests that to cover Almeda for some reason (possibly bad trades, possibly mis-labelled accounts, possibly some inter-accounting reason; it’s possible Almeda did something even more mysterious that wasn’t simply trading, there is certainly a very complex org chart) FTX used client funds (or, possibly even just FTX or SBF funds) and when there was a rumour something was amiss and clients all wanted their money/crypto back, FTX did not have the funds to give back.
It’s unclear if this is what happened, FTX and, or, Alameda seems to have used its own token - FTT - to support either loans or trading activities which may have complicated matters as well.
In any case, on reflection, a person committed to the 51% bet for trading would inevitably run into trouble. It’s also seems to be the case that a strong unthinking commitment to only expected value models will also lead you to come unstuck. (Interestingly, SBF seems to be a keen gamer where expected value really does generally work)
Putting that all together the lessons I take from this are:
Trading teams inevitably fail. How you manage this is important. Much of Nassim Taleb’s speak to this. Beware ruin risks.
Trust. Social capital is very valuable. Destroying has many negative ramifications.
Sophisticated people forgo standard due diligence in the presence of strong charisma (this has endless examples). Classic red flags on a check list are there for a reason.
Do not trust a trading team that is closely intertwined with a client fund entity. Flags were raised on Alameda and it was obvious SBF was very close. Why exactly SBF decided to cover Alameda with client funds (if that seems to have happened) we might never know, but it seems like a bet (maybe a 51% bet?) gone wrong.
The future… the number one crypto exchange Binance does not have a clean past, much of crypto remains full of scammers, Effective Altruism is going to be tainted perhaps to some degree permanently and the idea of “super earners” earning to give away money (basically a billionaire earn to give strategy) is going to (perhaps rightly) going to take a major ding.
Coda:
Work on ergodicity is one way of thinking that perhaps overcomes some problems with expected value paradoxes. See the work of Ole Peters.
Larry Temkin’s work questions the foundational axioms behind expected value for moral reasoning and social choice. The mainbook is quite complex (Re-thinking the Good).
Tyler Cowen argues that this is not terminal for EA and “Intellectual movements can be quite influential on small sums of money.”
For financial comparisons this is a mix of MF Global (mis use of client funds; not speration of client funds) and Enron (fraud, complex subsidaries), with maybe a tiny touch of Lehman (bank run).
Coda 2:
Ben Thompson notes:
There are a few different ways to interpret Sam Bankman-Fried’s political activism:
That he believed in the causes he supported sincerely and made a mistake with his business.
That he supported the causes cynically as a way to curry favor and hide his fraud.
That he believed he was some sort of savior gripped with an ends-justify-the-means mindset that led him to believe fraud was actually the right course of action.
And… (the conspiracy theories that he was actually some sort of secret agent sent to destroy crypto, a close cousin of the conspiracy theory that Musk’s goal is to actually destroy Twitter; I mean, you can make a case for both!)
(Me: Thompson makes a very intriguing point about “folllowing the product” not the narrative. And points to AI being de-centralising and crypto being centralising)
I note that Micahel Lewis was around SBF in the last 6 months. Movie coming soon….
Tyler Cowen notes:
Rises
Common-sense morality
Common-sense investing rules
American corporate governance
Boards, and nervousness about related-party transactions
Coinbase
Seen as stodgy and bloated for much of the past year. But run in the US, listed in the US, and properly segregating customer funds.
Elon Musk’s ability to judge character
Vitalik and Ethereum
Circle, Kraken, and Binance
Anthony Trollope, Herman Melville, and the 19th century novel. Books more generally.
U.S. regulation of domestic exchanges – it is one of the things we seem to do best, and they created little trouble during 2008-2009, or for that matter during the pandemic
CBDC, and sadly so
Crypto forensics
Twitter and weird anon accounts
When would the trouble have been exposed if not for Twitter? And much of the best coverage came from accounts with names like Autism Capital.
Some critics (like Aaron Levie), too.
Bitcoin
After a cataclysm for the crypto sector, it’s down about 15% over the past month. That’s less than the S&P 500 lost during the worst month of the GFC.
Falls
Effective Altruism
A totalizing worldview that has enabled some undesirable weirdness in different places.
Valorizing “scope sensitivity” and expected value leads people violently astray.
Being unmarried (and male) above the age of 30
Being on the cover of magazines
And if you see “the next Buffett”, run.
Appearing with blonde models
Buying Super Bowl ads and sponsoring sports and putting your name on arenas
“Earn to give” as both a concept and a phrase
Mrs. Jellyby
The concept of self-custody
Weird locations for corporate offices
Venture capital
Our ability to see crazes for what they are in the moment
This is not just, or even mainly, about crypto
Drugs
Adderall and modafinil, perhaps stronger stuff also played a role.
The children of influential faculty
Do they grow up witnessing low-accountability systems and personality behaviors?
Coda, Personal stories:
The “why” is still interesting dramatically. Why do this? Also is there a love story of sorts with Caroline?
Do sign up to the substack newsletter below.
More coda:
Zvi has a very detailed summary of what we likey know here.
Scott / Astral Codex covers the drug abuse angle.
No one is reall covering the possible love story, but maybe there isn’t really one. I think there is still, sort of.
Jérôme Tagger: sustainability, ESG as a negotiation, impact, investing | Podcast
Jérôme Tagger is CEO of Preventable Surprises. Jérôme is a thinker on long term ESG trends (a catch-all phrase for extra-financial environment, social and governance) and systemic risks. He was a Director at the Global Impact Investing Network, the founding COO of the UN-backed Principles for Responsible Investment, Head of Research at Eurosif and Chief Revenue Officer at ImpactAlpha. He co-hosts a podcast with Alison Taylor, the Breaking Fever.
We chat about the differing roles of companies, civil society and government. What Jérôme thinks about the most important levers and theories of change.
Why ESG could be thought of as a form of negotiation.
Whether we have an idea on what the neglected issues or under rated ESG challenges are.
What you should be thinking of as the chief exec of a think tank start-up. How we should think about building institutional capital. The importance of relationships and “social capital”.
Whether we should consider “less democracy, technocractics rather than democratic decision making.
What Jérôme thinks about billionaire philanthropy.
What Jérôme is hearing about views on regulation on greenwashing and, in particular, on SFDR (Sustainable Finance Disclosure Regulation, EU).
“...I haven't talked to a single person whether on the finance side, on the NGO side, civil society or otherwise that is happy with this regulation.”
Jérôme ends with advice and current projects.
Podcast available wherever you get podcasts, or below.
PODCAST INFO
Apple Podcasts: https://apple.co/3gJTSuo
Spotify: https://sptfy.com/benyeoh
Anchor: https://anchor.fm/benjamin-yeoh
Transcript below.
Jérôme Tagger in conversation with Ben Yeoh (lightly edited only)
Ben
Hey everyone, I'm super pleased to be speaking to Jerome Tagger. Jerome's the Chief exec of Preventable Surprises and is really an expert in all things sustainable and environmental social governance (ESG). Jerome, welcome.
Jerome (01:18):
Thanks so much for having me, Ben. I'm very honored to be here and also a bit intimidated because you always have these really cool guests and they have a lot of interesting things to say. I mostly have questions, so fire away.
Ben (01:32):
Well, you are right up there with them. So, I guess over the years there's been this model of having government, having companies, having civil society, NGOs, and there's a sort of, "Yeah, companies have their own role and responsibilities. Government obviously for that has civil society as well." But there seems to have been maybe a blurring of those boundaries about what should be responsible or not, whether government's getting log jammed, companies may be taking more responsibility, activists and things. How do you feel that framework maybe holds up? And with your work on civil society and companies, do you think maybe we should be reforming some of those boundaries about what we should be responsible for more in the future?
Jerome (02:24):
Well, that's exactly what I'm trying to figure out. So as I said, I come with questions. I think the context for all this is the history of the last 30 years and then obviously every piece of history before. But we're in the kind of like neoliberal post-communist world. We're in a globalized society, we are in a digitize society and that means a number of things. It means that governments have a much harder time doing their work. They have a harder time doing it because things are going much faster. In fact, if you look at the last 5, 6, 7 years, maybe even going back to the great financial crisis or maybe even going back to 9/11, what governments are doing is largely being reactive. A lot of it is being reactive and a lot of it is also reacting to public opinion and whatever is happening in society. You could argue it's the same with companies. So that's one thing.
In the context of globalization, you also increasingly have things that fall between the cracks of what would be jurisdictional boundaries and that's typical of global issues like climate change. There's no single person or entity that can regulate climate change. It's also exemplified by all the scrutiny on supply chains. Suddenly, a societal concern like
labor status, labor rights which could be negotiated between a labor group and the governments and corporations or business representatives and so on in one place, don't necessarily have the scope to do anymore because the workers are somewhere else. Sometimes a lot of people are unhappy about actually the workers being somewhere else, either because it means jobs have been displaced or because other forms of I suppose expectations and interactions about how society works.
But the bottom line is, those questions about labor relations become globalized and they also end up falling between jurisdictional and cracks. I'm using a very simplified model here. But to say, "Look, when we expect-- I think our mental models, we expect governments to do one thing and others to do other thing and it isn't working that way." One of the reasons is that governments aren't really in the position to do the work that they used to be doing. And in fact, I believe that a lot of the populist backlash that we've experienced left and right in the western world over the past 15 years or so, but sometimes more, has got to do with this as well. It's people trying to reclaim a sense of control. I would say largely it fails, but I think that's a dynamic that's happening. Sense of loss of control generally by the general population and appetite for more control.
So the power balances, power hierarchies, whatever you want to call it, that's all shifting. You've got companies and sectors that have significant influence over the course of environmental degradation or progress for that matter, and social relations. It could be entire sectors. Typically, we talk about oil and gas. It could be large global employers. It could be tech companies which is now the new villain and that just raises questions. I really don't think there's any easy answers to any of this so I don't come with a recipe of solutions. But I do believe that it does create a space for the questions, for the interrogation and for advocacy because if you care about stuff, whatever it is that you care about, and you're looking for a way to advance the supporter, the cause-- and by the way, the cause could be financial markets that work for all. It doesn't have to be about a specific population group or anything. Then you've got to ask what the levers are in this complex system. How do they work? How do they interact? Who's got leverage or who's got power over what? What are their incentives? What motivates them and what would bring them to change their behavior?
Ben (07:37):
Sure. So I guess that brings into the question of theories of change. Where have you
got the levers and mechanisms? So I guess there's one set of advocates who argue companies should stay in their box, maybe do some extra financial, focus on the profit, and particularly on the climate lever, leave that to policy and government but should probably advocate for it. But companies can't do that much. And if they do too much or too much signaling which isn't actually that effective, you slow down government. But as you alluded to, others would argue government, particularly globally, there's a lot of conflicts of interest. Got global south, global north, don't always have political backing. There's a lot of things. It's kind of obvious that government has not produced the kind of actions or regulations that we would want. Well, in which case then it's the other groups. NGOs and companies will have to step up if you want to do something.
So I'm interested in where you think those mechanisms could be or whether we have to do a little bit of both. And perhaps on top of that, you could say that actually within markets often fits into people who have an advocacy divestment theory of change. Let's put pressure on companies. Maybe that changes cost of capital arguably, but maybe that puts social political pressure. And those who have an engagement theory of change saying, "Well, governments will do what they do. We can try and do something, but we haven't had a very good track record there so far. So let's get companies to tilt their business models to the extent that they can; maybe radically, maybe less radically. Let's use forceful stewardship and those." So I'd be interested, do you think those are two possible levers? We should do them both? Do you have any views on either and on that top level of how fair or unfair is it to say what companies should do given where governments have got to?
Jerome (09:39):
Well, that's another tricky one because I don't have any simple answer but I do have thoughts. One of them is that first of all, I don't think there's any sort of one size fits all. In your question you talked about the conflicts of interest. That's one big piece of it, but there's a gazillion conflicts of interest that we're dealing with. I think the risk in this conversation is always that we become a bit solipsistic and thinking that there is a government abstraction and a civil society abstraction and a business abstraction. But they're not homogeneous groups, obviously. There's lots of different governments and lots of different civil society groups and lots of different businesses. They all have different interests and they have their own internal conflicts and so on. So absolutely, no one size fits all.
Second, I think of this field-- and I'll use ESG as a shortcut. Everybody imprints their own thing on what ESG means, but I will use ESG as a shortcut. I think of ESG as a
negotiation. Some people will say it's a set of issues. Some people say it's a set of processes. Some people say it's materiality which I view as taking a site. But to me it's a negotiation and it's a very complex negotiation between a very amorphous set of actors that fall in these categories about an amorphous set of issues, but which is fundamentally about trying to find how these environmental societal issues can evolve with some agency and intention in society as opposed to the opposite fallback which is, “Let markets do their work and let's see what happens and be more prone to just watching the accidents of history.”
So in many ways by saying that, it's kind of a left wing view of the world even though I wouldn't call myself a left-wing person. But if you're trying to think about any of these issues proactively, then you have to think about these questions. That's absolutely not the question you asked in the first place. I got a bit sidetracked. But I think my point is that always requires some level of analysis. What's your context? What is the geography? What is the economy of the challenge you're trying to address? What are the actors? How concentrated are the actors, for example, if it's an economic sector? What happens on the business side? What happens on the policy side and how do they interact? We've done a whole bunch of work. I'll use this as an example at Preventable Surprises on lobbying with the idea that if you were an investor looking at ESG questions and you were only looking at the behavior of individual companies or sectors, and you were ignoring what was happening in terms of the interaction between those businesses or those sectors and regulators, then you're just not looking at the whole picture. That I think is one manifestation of a bigger question which is what happens at the micro level and what happens at the macro level? Typically at the micro level, it's companies doing stuff; investors doing deals and things, and at the macro level, we think about it as regulators and maybe sovereign debt and that sort of things. Anyway, we're trying to resolve the interaction between the two.
Ben (13:49):
I like that analogy. I haven't heard of ESG as a negotiation. I'm interested that maybe there's some cause for the fact that ESG (Environmental social governance) is almost no longer a useful term. It's a little bit like woke. It's being politicized and actually it no longer refers to what it's meant to refer to. And to your point actually, no one was initially quite sure what it refers to either when one person says that they might not mean the same thing. Reflecting what you said, I almost think it's another word for the debates we have around progress, whether actually you're left or right. Whether you want progress to be unfettered markets and innovation and techno optimism's going to save the world, or whether you are the other side and you want degrowth and regulation and that's going to save the world. They're the two extremes, right? Most people are somewhere
in the middle of the two and you've got elements of degrowth and not wanting to do food waste. And you've obviously got elements of innovation because we're going to need a lot of that for change. So I'd be interested in whether you think when we think about how it evolves, whether that is a useful term at all and how do you think this negotiation is going to go?
Jerome (15:02):
Let me clarify on this negotiation. I think it's a very skewed and imbalanced negotiation because it's not a negotiation between equal parties, finite actors and not everybody is negotiating in good faith. But I would call it the gray area. And then some of it gets pulled into what becomes materiality or compliance or regulation. It's the subject matter that gets negotiated on all the time. So we get into these questions about label as you say. “Well, then ESG has become a certain generally accepted practice or set of things and reporting standards focus on materiality.” And God knows, I hate all these words so forgive me for using them especially if this is not your area of interest or expertise in talking to the listeners.
But my point is it does not take the questions away. You could say ESG is something else or it's been... Okay, it's no longer negotiated. It's been captured by a certain set of actors in this conversation. It doesn't take anything away from the questions about, "Well then, what's happening at the intersection of business and finance and society that has so much influence on environmental and social outcomes?" It doesn't take anything away from the question of, "How do businesses and investors understand systemic challenges and risks such as climate change?" It doesn't take anything away from the question of, "Do they know what influence they have on them and do they know how to mitigate them?" So many ways, I don't really care about what happens with the label ESG, whether it stays or goes. Maybe it will be replaced by something fancier.
There's the whole ESG and impact conversation. There's another ESG and regeneration conversation and I'm sure other things will pop up. I personally find that arguing about the words is not the best use of my time because I don't have many ideas to suggest. But fundamentally, we are going through a clarification phase because of the political. People saying or the Republican state treasurer saying, "This ESG thing is a political ploy" which by the way I disagree with on the sense that I think it's financial markets are a political ploy. ESG is just one manifestation of it. Then you've got the whole compliance greenwashing question and all of that is kind of filtering and clarifying some stuff in the negotiation. How we come out of this I don't know. I don't think
anything of this will become easier. I don't think any of these questions will become easier.
Ben (18:04):
And that's because markets finance if you think about it on a high level, is an expression of humanity, right? It's a social political question. I always say the parrots don't care about financial markets per se. So ESG is a manifestation of that, or regulation, or any of these financial markets. I'm interested then kind of within that. What do you think is perhaps most neglected in terms of this intersectional, or the questions you think are most interesting and perhaps are not paid so much attention because climate is up there, but it's very well contested? Within Preventable Surprises I'm always interested, and I think some of your colleagues and yourself have talked about willful blindness. I'm not sure the term is necessarily willful. There's sort of things around it. I was intrigued. I think there's been some work on antibiotic resistance.
I feel that that might be part neglected. People know about it, but given the impact it could be and one can see it so you could say, "Is the world being willfully blind or not?" I think interestingly being prepared for the next pandemic even though we're arguably still in this one is remarkably-- given that we're still in one, there's this kind of remarkable blind spot on that. Then there are some of these other things like social issues and things. I wonder how global or geographic they are. But I'd be interested, what do you think are either most neglected or the questions you think are quite interesting to discuss? Maybe some of them we don't have answers. But for instance, on pandemic preparedness are very simple answers. We need a little bit more money and organizations who could do it. So it's kind of a relatively simple one. Politics are pretty tough. But yeah, neglected questions or interesting ones around this.
Jerome (19:56):
Well, I think-- and this is not a cop out, but I think to start it's important to recognize that we don't necessarily know what the issues are. I would say reasonably that four years ago very few people in the ESG world thought about pandemics as an issue, where you could argue that if you were paying attention and listening to Bill Gates' podcast and writings-- I don't, so I missed it-- you would've known about it. Or if you were focused on geopolitics in Eastern and Central Europe, you would've seen the invasion of Ukraine coming and all the consequences of this in terms of food crisis, in terms of energy crisis and so on. So to me, one of the big things about this whole space and this whole interrogation is that it's not just about figuring out a list of issues, which is again why I also don't think that ESG issues entirely captures the thing because you don't go to like a MSCI or type website and get a list of issues and then go take boxes. It's dealing with
unknowns, uncertainties. Some of them you can have in the risk model and some of them you can't because they're the unknown unknowns. But I think that's a big part of it.
Now, in terms of specifics-- So climate's always been the golden child of ESG probably because of some level of global consciousness and it's a global challenge and it's at a big political stage. Also, it feels relatively easy to consider in terms of inputs and outputs and the sector's concern. When we look at the energy sector, we look at oil and gas, fossil fuels, we think we can establish a list of companies and we can see where the demand is and so on. By the way, our knowledge of this evolves. It's not that simple. And then there's methane and whatnot. I don't want to oversimplify it, but ultimately you can do a measure of GHG (Greenhouse gas emissions) and feel like you've got some level of understanding or control over the issue. All the others are more complex. So I feel like the opposite end, anything related to human rights is always the abandoned child in the family. Way too easy to sweep under the carpets, extremely challenging to deal with. Again, going back to the supply chains and jurisdictions or sometimes geopolitical context where you have very little leverage. One of my concerns with this is that companies and investors tend to focus on the headlines, tend to be reactive, tend to say, "Oh, dang, now we need to do something about DEI. DEI is super important." And then maybe nothing happens.
One of those issues that we've been really interested in is the fate of migrants. One reason that it is interesting-- I mean, there's a gazillion reasons why it's interesting. First and foremost, because they're human beings. We're talking about there should be enough reason. But also because migration is a huge political contentious issue. There is growing movement of people. A lot of it is now also linked to the manifestations of climate change. I think the UN estimates that a billion people will be on the move by 2050. So in some ways it's a symptom and then a manifestation of all sorts of instabilities; climates and then sometimes political upheavals, economic ones and then in host countries.
You can't open a newspaper without having some story about people in the Mediterranean. You see people crossing the channel, people at the southern border of the US, people in indefinite detention somewhere offshore Australia. I'm just talking about the western examples here but there's a range also in Asia and elsewhere. The treatment of migrants is increasingly privatized. It includes in Europe and the UK and in the US and elsewhere. You've got a number of companies that are involved in this; in logistics and advisory roles and detention and in technology and this whole gray space here about how these humans are handled. Sometimes very conflicting business
models that encourage organization focus on the detention of migrants. So actually trying to detain as many people as possible because that is their business incentive and very little oversight and a range of human rights violations and link that to... I think sometimes maybe that's kind of a training ground in the technologies for humanity at large. I could blabber on about this but I think that's a big one. And generally stability of institutions and democracy and that's very true in the US, but I feel it's increasingly true elsewhere in countries that have had the joy of being under democratic rule for them.
Ben (26:30):
Yeah. I think I agree that that issue of-- and particularly when you go into human rights you're talking lots of places in Africa, you're talking lots of places in China. Very complicated to deal with. I think that's one reason investors skate over it because they feel that they actually don't-- They don't have any answer. They could try and engage, but they don't really know even what the questions to ask are. I think also you make a really good point on what I would call to use kind of accounting to the institutional capital because it does decay over time, maybe like everything. I don't know whether that's entropy or humans. You either need to rebuild and refresh them, or you need new institutions or new arms of old institutions to help either compete against the old ones or create new ways of thinking.
So actually, I'm quite interested in the chief exec of a kind of startup think tank to some degree which is a new institution. How have you found that journey? And I guess you helped startup UNPRI, which is the Principles of Responsible Investment, which is now a large organization but started from startup. So in a way you've had at least two sort of startups. I know you've come into Preventable Surprises not as founder, but a little bit later on. Perhaps some reflections on building a startup or new institutions. Has that helped? Has that given you a vision of like, "Wow, how hard it is to sometimes heard cats and things within institutional and people?" I guess other people out there-- I speak to some people who kind of think, "Oh, maybe I should jump into the world of think tank or maybe I should start up my own." People always go, "Oh, there's a hole there." I kind of nudge them that, "Well, if that's what you're feeling, maybe you should do it." But there's kind of this fear of doing it because it's challenging and new. But yeah, have you learned anything either from your old days of startups being chief operating officer, now, Chief exec?
Jerome (28:40):
Ben, all your questions I feel like you're in my brain. Some of the things that keep me awake at night and asleep during the day. By the way on institutions, just going back on this and also to this question of shifting powers and of the increasing role that we ask
investors and companies to play on the environmental and social issues. I think we also have to put that in the context of democratic decay and that sometimes asking these companies and investors to effectively have more influence is not really that good for democracy. So it's a balancing exercise. Now to your question about startups, about starting new institutions. So I think part of this is specific to this field. Part of this is about who we are as individuals.
As a person, I also talk to people all the time who are either interested in startups or in ESG or something. I rarely fully shake up the impression that there's a feeling that the grass is greener somewhere. I encourage people to proceed with caution because at the end of the day, the grass is not that much greener. It's just a green that fits you. So when we say the grass is greener I think it reflects two questions. One is that people need a sense of purpose and they want a sense of influence. To people who want a sense of purpose I tell them, "Please become a nurse, a teacher, a doctor, join the police, join the military-- I'm probably forgetting a million things. Volunteer." You can do a lot of really important things and some of the most important jobs-- What would we call them during the pandemic? The frontline workers?
Ben (31:03):
Key workers.
Jerome (31:03):
Key workers. So yeah, but they are. Turns out they are. So for people who are looking for purpose, look at this. For people who are looking for influence or really a sense of agency on things-- Well, there's very different ways to have agency on things where it fits... You can have agency as a regulator, you can have agency as the CEO of a big company or as an executive somewhere. You can have agency over your community, over your family. Again, pick your battle. Where it might be sort of tickling, the whole startup thing, is in a sense of freedom. "I don't want to have clients anymore. I don't want to have a boss anymore. I don't want to have something." And some of this is true. I delight in nothing more than no one else having control over my time; in my work dedicated time. So that's a great joy. But you still got to interact with other people. Your existence as a startup, as a think tank is based on, "Well, do people trust you? Do they respond to what you're offering? Do they engage with you?" So it's not like I'm going out in the world just saying whatever goes from my head. Although clearly today I am. It's still a job of crafting thoughts and ideas and articulating them and finding ways to communicate them in a space that will be responsive. And yes, it's hard. It's hard in a
sort of economic stability, visibility standpoint. So got to be ready to have that battle.
Now, on building institutions in the field of ESG in general. I mean, I started in it at a time when it was just emerging. So yes, it didn't really have institutions. I think you try things, you do things. Institutions emerge because people want a space to congregate, to gather. They want a space for thought leadership, they want all sorts of things. So that's how things like the PRI emerge. Preventable Surprises in a number of ways created as a-- Counterweights would make it sound too weighty for what we actually are, but for a different voice. So rather than the structured institutions with signatories or members who are trying to reflect the views of an aggregate number of other institutions, whether they're financial or the United Nations or otherwise, we want to be the nimble ones. We want to be the people who said, "Well, we're not dependent on this to express perspectives and offer ideas and things that are relevant to this field."
That may speak to perhaps more ambitious participants, but eventually create a space to discuss ideas that is more open, that is more candid, that larger institutions cannot have. I don't have grand ambitions about growing Preventable Surprises. I call it a re-startup. Yes, it existed before me. I have infinite gratefulness to Raj Thamotheram who founded it and all the people that have been part of the journey. But in many ways it was a relaunch. I want to stay nimble, and to do that I can't grow it and I don't want to grow it. I'd be happy to have a few more people obviously. But I don't want to get into a position where I'm dependent on other people's point of view. You always have some relationship in the funders and other things and also having people depend on me for their livelihood.
Ben (35:30):
Sure. Is it that question of being agile, quick decisions, less bureaucracy, or is there something other special about being small and this other voice which you think is perhaps a unique attribute which you'd want to keep? Or is it these kind of structural social political things? I sense there's something maybe a little bit more that's almost foundational. You need-- I kind of describe it as you need small boats and large boats when you're in a flotilla and if you have just one kind, you're just not as good.
Jerome (36:04):
Yes, I agree. I think that maybe in that sense when I use the counterweight analogy it was inaccurate because it takes a variety of actors. In many ways we can exist because
these larger things exist. I'd like to say we are relationships more than anything else and that includes institutional relationships. I think quite idiosyncratically our little boats is able to exist because the big boats know that we exist. Because we've worked there, because we've lived there, because we have the relationships with all the people in the big boats. I think there's lots of people in small boats who would love to have the sort of attention that we get and there's a real inclusiveness question about how all these institutions interact. But yes, we're part of an ecosystem for sure.
Ben (37:17):
That's interesting. I reflect that the importance of that essentially human connection, institutions… Yes, we have processes and ideas and mission statements but they're made by people. Therefore institutional to institutional relationships are also made by people. And where people have been or obviously the history of where that comes from, I hadn't thought about it like that. That there is in building institutions, potentially building relationships is one of the very underrated features. It's obvious on the one hand, but actually you have to put a lot of work into it particularly on that. I was also thinking about your earlier comment. There's one idea about actually maybe the world or certain countries need 10% less democracy. This idea that you need it, but actually we are log jammed with consultations which don't go anywhere because they're 51/49% consultations or even they're 60/40.
You actually kind of know. People know without them and therefore you can't make decisions. I was wondering what you think about that. I'm quite keen on having participatory forums. So I like this concept of open space, even climate assemblies, juries, some of the things which has happened in Taiwan. But actually, I also think that then you do leave it to technocrat. So you get a better source of information, proper participation that happens across many domains, but then you let policy makers actually craft given that information with perhaps less democracy. But there is a balance. I'm not sure, but it seems to be that some of our governance processes at least as they are today, don't seem to quite fit what people in general want. But we haven't manage to square that. Obviously this is one of those that has no answer, right? Governance mechanism, we had a better one in that we'd probably put it in. Arrow's theorem suggests there isn't any perfect way of doing it, but it seems even less perfect today than where we were. I wonder whether actually we need some rebalance between on the one hand more participation which is a form of democracy but you don't necessarily have the binding vote, and then allowing essentially expert policy makers which seem to have got downgraded in people's thoughts, but to my mind are actually even more important today-- the genuine ones-- there's a question around that. So 10% less democracy or 10% more democracy?
Jerome (39:48):
First of all, it really depends where. I think the conversation about democracy in the US or France or Germany or the UK or Taiwan or Japan is pretty idiosyncratic. You have different institutions, you have different societal expectations. You may or may not have a monarch. You may or may not have a constitution. I'm also generally drawn to those participatory models. I think the risk that you described of those, I guess technocratization of decision making exists, but at the same time it's kind of already there; the techno structure. We certainly see it in the EU with the commission and otherwise. I also worry-- and this goes back to my earlier points about, "Why we should worry about all this," that the participation can be skewed. What sort of interests are in play? Who is really participating at the table? What sort of underhand influence in lobbying takes place by a range of institutions around it? So I think it's good, but it's insufficient per se. I think each country in this case in their own institutions and with their own people have got to figure out this balance between the balance of powers, between industry and finance and technology and society and other interests. So that's my non-answer answer.
Ben (41:44):
Was a very good one. In the US I think there's a bit of a debate as well on-- I'm going to call it billionaire philanthropy, but this is a sort of NGO blob, I guess. Do you think we should have more, we should have less? Are they doing the right thing? Is this a problem because it got into the gap of where government hasn't been able to go? Actually, from that view then maybe they're imperfect, but they're going into that gap. I guess it does matter geographically as well because there seem to be more US billionaire philanthropists than any other form of billionaire philanthropists although there are some in Asia and Europe and around. But there's been in the same way that so much in the US has contested this kind of pushback. Like you mentioned earlier, Bill Gates you could argue was a visionary in terms of pandemic. If you're paying attention, done a lot in global development. We have a newer wave actually with a movement called effective altruism to some extent. So I'm interested in what you think about the philanthropy space and whether we should have less billionaire philanthropies or more, or is it about right?
Jerome (43:00):
I think it depends what they're doing. On the one hand we shouldn't overstate the power of philanthropy. Bill Gates, I remember reading a piece like an interview of his in the
Wall Street Journal some years ago reflecting on his experience trying to change American education which I think was his kind of first interest. "We're going to do stuff about education and we're going to pour billions into it." After a few years-- and I maybe poorly paraphrasing and maybe mistakenly paraphrasing, so it's my impression of the conversation. Bill if you're listening, I apologize. I'm not getting any money from the Gates Foundation. I don't think I'm on the radar. But he said, "Oh, I realized that we're a drop in the ocean." The amount of money that goes into philanthropy is in the hundreds of billions. It's nothing compared to the scale of financial markets to begin with. I think the political influence of billionaires in the US, of wealthy people or parts of wealth in general, particularly in the context in where essentially the private finance of political campaigns has become the norm-- Just the whole idea that the presidential campaign could cost like a billion dollars to me is so absurd.
I mean, there is something about the scale of the country and everything but it always shocks me. That is more of a question to me. I think we pay way too much attention to billionaires, whether they're Donald Trump or Elon Musk-- and maybe that's a sort of social media effect and the sort of intersection of narcissism and social media and desire for leadership, I don't know. I'd love to read some analysis on this. But Elon Musk is just a dude, right? Some argue he's a very privileged dude and all of this. That's true. He has created some interesting businesses and in others and he's probably lunatic and whatnot. Why are we paying so much attention to everything that Elon Musk tweets? In some ways I shouldn't even be talking about him right now because I'm giving him attention. Some of it's interesting, some of it's not interesting. Why is it constant headlines? Why are we obsessed with this? So one way to decrease the influence of billionaires is to pay less attention to billionaires. Again, that's my non-answer to your question. But I've met billionaires that I liked. I've met two billionaires in my life. One I liked and one I didn't like.
Ben (46:14):
50/50. Well, that leads me to reflect that it's potentially part of the human condition with social animals. There's something about-- and you can say the social media and things. You've got some hundred million followers. There's something like humans like to pay attention to things other humans do because of this social animal background that we have which leads me to think that there's always a part of me which is disappointed that this blob of ESG can say nothing about art, can really doesn't say very much about humanities. And I think maybe this is the problem, is it does barely say something about human rights. I mean, it does in principle. It says everything about it. But as you've alluded to, in practice within financial markets it's very tough. You get at the margin some extreme embargoes or things like that.
But in the messy middle where we know kind of life goes on, essentially the blob of ESG is silent. I extend that to being it's silent over art and humanities in general. And really therefore, financial growth is overly important. GDP seems to correlate with all of the other things that we think are important like happiness and life and health and education. But then when you get down to it, the kind of things that we seem to really say these are what make us human; dance, poetry, drama, narratives, maybe the blob that social media why we pay attention to billionaires. That core of when people ask, that is really important to not everyone in different flavors of it. And maybe that's the case because we're going to be segmented and we've potentially segmented financial markets in that way. Humanities answer for doing that.
But it seems to-- In some ways I was discussing with people they kind of argue, "Well, maybe does that make us less?" I don't see any reconcile so this is my non-question to your non-answers. But I'd be interested in do you think the power of broadly the arts of humanities have anything to say on financial markets, the blob of ESG or vice versa? And could we do with something more on a systematic level which has more reflection? It goes into, "Do we study enough humanities in universities? Is that the right way of studying it? Why can we not all be more artists at the same time?" I don't know. But anyway, ESG seems to have a lacuna over arts. That makes me sad. I'm not sure if it's a mistake. I feel it might be a mistake. What do you think?
Jerome (49:05):
Lots of things. The starting point we're talking about Elon Musk or billionaires and so on. And all of these things, you're right, they speak so much to some mental models or expectations about how society works. The alpha male followers whatever thing. If we want to be thinking about... Sorry, I'm looking for my words because I'm slightly outside of my comfort zone in terms of things that I may or may not have said before. But I think that's something that's shifting. Those models, the traditional male dominated society that's dramatically shifting that's shown by numbers in terms of who finishes superior education and performance in school. It's shown in who gets jobs and everything. The presence of women in the formal workforce in a range of countries and so on and so forth, that's a huge deep shift that the ESG world is not quite paying enough attention to. And I think this links to culture, this links to how society works, how society is evolving. It's a big deal. In many ways companies pay more attention to it because it's the clients but not always that well, and they don't pay particularly well attention to it in terms of the workforce and so on and so forth.
Maybe I should summarize what I've been blabbering about for the last two minutes about saying, yes, there are deep questions. Gender is one of them and we should be spending much more time on it. Humanities-- First of all, I'm finding that a lot of people that work in ESG are interesting. Part of the reason I've stuck in this field for 20 years is that I keep running into interesting people from different backgrounds and other things. ESG is an endless field. You can have expertise in a range of issues. You can have expertise in a range of asset classes. You can have expertise in a range of industries. Nobody's got that and nobody should pretend to have that. No one should pretend to have a system that captures all of that by the way. That's a big part of it. So I do find people who have this varied set of interest and that naturally gravitates to these questions. They're probably more curious about how the world works. "Can you engineer that?" I mean, I'm generally a big fan of people getting broader, generalized education in humanities and in societal issues and just knowing stuff. Certain faith in road to understanding of things. But it's clearly not enough.
Ben (52:45):
Sure. My last three questions then coming up for time. So one was referring back to the comment you made earlier about the levers that we can pull. I'm interested in what do you think are the few, maybe two or three levers that we should be most looking to pull; either maybe those which are underrated or those which are maybe obvious but we think we should be pulling more. And maybe you could think about that in the context of potentially policy levers. Are there one or two policies that you think, "Oh, we do this and this is a potentially important lever, whether that's carbon tax or innovation or regulational standards? Or are there some levers within the civil society company interaction where you think, "This is where we should be focused or this is where we need more attention." If we think about the levers of the world or the levers that you are interested in pulling yourself, what would you highlight?
Jerome (53:49):
So one that comes to mind is lobbying and in part because we've talked about it and we've done some work on this. But the fact that a lot of the outcomes and lack of regulation around some of these issues, sometimes in spite of and quite often in spite of general popular support happens in closed door negotiations is worrying. I'm not an idealistic about, "We're all nice and we are all making decisions.” And, yes, the sausage is dirty and you don't want to look at how the sausage is made except at the moment the sausage is very dirty. We could use a bit of cleaning. That's one answer. Another thing that I've been thinking about-- and this is more a question than a statement. But
I'm looking at how much regulators are struggling to address greenwashing and all these questions about what is sustainable finance and what is responsible investments and so on.
I think there's two reasons for it. One is the general focus on transparency and disclosure. I think as an industry we spend way too much time on transparency and disclosure and in some ways let the regulators do what they're going to do and then continue the discussion. That's a whole other conversation. But the other thing it seems to me is that it's kind of odds that we are putting so much focus on trying to regulate sustainable finance and so little focus on regulating unsustainable finance because it seems to me that we have a much better understanding about what is unsustainable in terms of markets, practice or mechanisms or emergent phenomena. Then we do about what is sustainable.
Ben (55:55):
That's a very good observation. I haven't heard it express that way. My immediate reflection is that you are correct. That actually we could do with better standard financial regulation and let the markets try and figure out what is sustainable or not. Let sophisticated practitioners still work it out, which we're still working it out. We have an idea of what causes bank runs. We have an idea of what isn't very good finance. In some ways, some parts of what I like to call high finance could do with stricter regulation or certainly more oversight. And what I call the frontier parts where we don't have a consensus on it still like, “What is ESG? What is sustainable?” No consensus on some of the-- Some there are, but some are not. So if the experts don't really understand it I'm not sure how the regulators would understand it which actually means that I'm going to ask one extra question. This is maybe a bit more technical then.
But do you have a view on EU taxonomy or SFDR which are these sustainable finance regulations coming through? Because there is a strand of thought which is that they're not really doing that much. This maybe alludes to your fact that transparency gets you so far but extra transparency is not adding anymore. You get the sense that people are flailing around to try and do something. Maybe this is back to the 10% less democracy thing but it's not really doing anything on the practitioner level. There's just a burdensome of regulation which if it was good regulation, say on the ozone layer, you'd want it. But when you look back and go, "Well, what is this really doing? Do we really understand it?" You kind of go, "Well, it's not adding anything." I don't know if you have a particular view on particularly taxonomy or that or any of the other regulations coming in.
Jerome (57:41):
So I haven't talked to a single person whether on the finance side, on the NGO side, civil society or otherwise that is happy with this regulation.
Ben (57:51):
They managed to upset everyone.
Jerome (57:53):
No, it is interesting. It's capturing attention. I've had conversations about some elements that may be interesting in terms of over time getting financial institutions to publish things around their externalities; negative externalities and so on. So yes, maybe that's interesting especially because it's kind of a way to everything else that is focused on materiality. And again, I apologize for using all these annoying words. Other than this my sense is that the taxonomy is a cultural misunderstanding in a number of ways. Part of it is bureaucrats and equity markets. Part of it is European thinking and Anglo-Saxon models. But part of it is also fundamentally, trying to codify things that are changing a lot. So with the taxonomy they said, "Yeah, we'll revise it and so on." But it just seems like an absurd exercise and what that is by definition will be too slow.
Ben (59:15):
In a way that's the issue with all regulation, that even the very best is only up to date in that moment in time and then it ossifies. Some parts of the world ossification doesn't matter so much because it's slow and that part of the world is not changing so much. So maybe regulation if it can do that in a part of the world or the system which is changing very fast and or there isn't actually any consensus to begin with. Then when you ossify or you put in rules which may not reflect what people think and then it's useless a year later, I can see that definitely as criticisms. So last question, two part question. What are current projects that you are working on or things and thoughts for the long term? Second part is do you have any advice for listeners out there, perhaps young people who want to make an impact or people in the field about what they should look at or potentially any life advice you want to share about arts or your career or your journey so far? So current projects and any life advice?
Jerome (01:00:32):
I'm trying not to be trite with the life advice.
Current projects, we're working currently on reproductive health. It's a topic that affects us all. It has been particularly in the political spotlight in the US post the Supreme Court decision to pull back on federal productive rights. People tend to think of this as something that happens in the US, but stuff that happens in the US is a way of crossing the ponds more often than we'd like. Sure there's very different views around this globally so I'm not taking a political stance on it as much as saying, “Here's a fundamental health issue and a health question that is not on the ESG radar because it's awkward. Ooh, its swimming. Ooh, it's like political,” all of that stuff. So that's one.
The other project that we are working on at the moment-- We're doing this with support of a foundation called Direct Action for Women Now. And then we're working with the support of another foundation called the CO2 foundation with a really interesting project about bringing together climate activist and social scientists on the finance side, but to try to figure out why is climate action so slow? Why is climate finance moving so slow? Is there anything about human dynamics, behavior and the soul that we can look into that would make us better at our jobs? So that's a project we also have going on.
So the trite life advice is be yourself. I mean, that's one. I've never been happier than when I didn't give a damn about what other people thought of me. Even though I say this, I worry about what people think about me all the time. But in a way where you sort of overcome that and say, "What is it that I can be in this world?" Focus on relationships. To me that is so important in the world that increasingly now is so fragmented and so focused on individuals. I really value relationships. I think we exist because there's a world around us. It's that simple. Make the mistakes you can afford, but make them all.
Ben (01:03:30):
Great. Well, that's a very good note to end on. So Jerome, thank you very much.
Jerome (01:03:36):
Thanks for having me, Ben. So happy.
Mark Koyama: How the World Became Rich, economic history, intangibles, culture, progress | podcast
Mark Koyama is an Associate Professor of Economics at George Mason. Mark researches comparative national state economic development and the rise of religious tolerance. He is interested in how historical institutions functioned and in the relationship between culture and economic performance. His 2019 co-authored book, with Noel Johnson, is Persecution and Toleration: the long road to religious freedom and his 2022 book, is on How the World Became Rich, co-authored a book with Jared Rubin. Book link here (Amazon).
I ask why it has taken economists and historians so long to form central views on how we have become rich?
Mark discusses what historic progress might tells us about economic development today.
One part on current policy ideas:
”...We didn't talk about this in the book because we deal with things historically. But I think in a country like UK and many parts of US, planning and housing are the biggest constraints. So I've really subscribed to the housing theory [of everything] where the high price of housing which is constraint largely by planning restrictions is a big problem in terms of getting people to productive areas. So you need to get young workers and ambitious workers and innovative workers to cluster in places like San Francisco or indeed London. If they can't do so, if it's very costly to do so, that's a big drag on productivity.
I think allowing people to match, so allowing people to move to locations where their particular skills are in demand that is crucial. So that's critical. Housing wasn't a central issue in the pre-modern period because it was largely unregulated. So London became a monster. It became a ginormous city fairly early on; like in the 17th century already. There was no vocation whatsoever. People lived in horrific conditions and there was a lot of overcrowding, a lot of negative externalities, a lot of slum housing. That was obviously bad, but it was also good because it allowed productive, ambitious people to come together and work together. You see similar clusters in the industrial revolution in the north of England. I think actually in British economic history, the last major episode of housing building was in the 1930s. That was critical in getting Britain out of the Great Depression.
So that’s something often missed because our understanding of the Great Depression is totally biased by what happened in the United States. But in Britain, housing is crucial in getting people out of the Great Depression. So I think that's what I would emphasize in terms of most important thing that I can currently think of in the modern world. I would also say that in general, adapting our institutions for the new productive technologies is important. So it's in ways it would be intangible economy and having the right institutions which are appropriate for that. I kind of sometimes feel very copyright, and intellectual property right laws are not really best suited to fit the current technological environment we live in.”
I ask about the interaction between the main factors behind economic progress such as: institutions, culture, infrastructure, geography, energy.
I question the role of common law and ask about living constitutions and Mark discusses his reading of the literature and how the UK is relatively unique in its living constitutions.
I query the role of intangibles and the patent system and briefly lay out the case (after Brad De Long) for importance of industrial labs and the corporate form. Mark discusses these factors and their importance from the 1870s but also what was important pre-1870.
We chat about culture (using Joe Henrich’s terms) as a set of heuristics. Mark discusses the literature on the importance and role of slavery (probably not the most major factor in the UK’s industrialization, but still heavily argued), and the role and roots of social progress such as women’s rights.
We cover impacts of war and also the black death from an economic history view and we discuss the challenge on climate.
We play over/underrated on : GDP, carbon tax, representative democracy governance mechanisms, universal basic income.
Mark ends with current projects and advice.
….So podcasts; everything is online basically. The young person who's ambitious and interested can actually get to speed quickly. So you can teach yourself econometrics by watching tons of YouTube videos. Most people won't because there's other stuff to watch on YouTube, there's other stuff to do. I could be teaching myself foreign languages on YouTube and I'm not doing it because my opportunity costs I guess is maybe high. But if you're young and wanted to study this stuff, you can get a huge head start just by use of the internet cleverly. Tyler Cowen’s advice is find the right mentors. Find some people and learn from them. But you get a huge amount early on to give yourself a head start before you go to university because to be honest, the university experience isn't necessarily going to be all that…
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Transcript (only lightly edited) Mark Koyama: How the World became Rich
Ben
Hey, everyone. I'm super excited to be speaking to Mark Koyama. Mark researches comparative national state economic development and also the rise of religious tolerance. His 2019 co-authored book with Noel Johnson is "Persecution and Toleration: The Long Road to Religious Freedom," and his 2022 book is on "How the World Became Rich," co-authored with Jared Rubin. Mark, welcome.
Mark (00:30):
Thanks Ben. Great to be here.
Ben (00:33):
So first up, why do you think it has taken economists and historians so long to form central views on how we have become rich? Is it simply that historic data has been hard to reconstruct or is it to do with the complexity of the interactions between these main various factors? We seem to have been slightly slow to really understand the causes of progress. In fact, some of them are still a little bit contested.
Mark (01:01):
So I think there are two elements to this. One element is for one you mentioned briefly, which is the quality of the historical data. So even as recently as late 1980s/1990s, there are great books on the origins of economic growth historically. These are books I've learned a lot from. Eric Jones, "The European Miracle." Birdzell and Rosenberg have a book on origins of economic growth. They were great books but those were not really informed by very anchor estimates of per capital GDP in the past and not informed by real wage data, not informed by kind of the data on heights. So there has been a revolution pioneered by other historians in terms of how much we know; like in terms of quantifying economic history. So to give one concrete example, Angus Maddison was a pioneer of historical GDP data and you'll see a lot of books quote Maddison's numbers. But actually, Maddison's original numbers were quite vague and really guesstimate.
It's really in the last 10 years where people have created I think much more credible estimates. Others call it building on Angus Maddison. So that's part of it. There's another part of it which is... Sometimes the way I think science and even social science progresses is that early on we might have quite a good understanding of the topic, but using methods which are quite ad hoc or subject to criticism. Over time, what scientists and social scientists try to do is refine our methods. But as we refine our methods, we have to throw out a lot of what we previously knew. Paul Goodman has a famous essay on development economics about this where he compares it to a map of Africa.
So before the explorations of the 19th century, people didn't really know what was going on in the interior of Africa. But we had a vague idea where rivers were and where Vietnam's mountain ranges were. The VSA thought there were monsters in places and unknown regions. But as we refined our knowledge of maps, we got rid of the stuff we didn't know for certain and actually we lost knowledge. We forgot about certain rivers and where certain places were because we only wanted to rely on scientific evidence. So I think in economics and economic history of just something of the same development. So Adam Smith and John Stuart Mill actually understood quite a lot about economic progress and economic development relatively, and actually with the formalization of economics in the post-World War II period, we actually got rid of a lot of insight to that institutions about culture and so on because we wanted a more rigorous framework. We wanted a solo model. Now, what the research in the past 20 years has done is relearn some of those lessons.
Ben (03:52):
So it really does seem that we've had a little bit of step change in the kind of history and the science here. I was wondering maybe stepping forward before moving back, if we think of becoming wealthy as a form of progress, what do you think this history teaches us on where we might go next? You lay out in the book strong arguments for the intersection of several prerequisites such as infrastructure, institutions, culture, geography, represented democracy of sorts, energy. Do you think these same factors will broadly apply to, for example, poor parts of Africa or developing nations, even a country specifics will vary, or do you think it's so complex and nuanced that those individual factors will always vary depending on the locale and where we're thinking about?
Mark (04:39):
The lesson of Alexander Gerschenkron was the path followed by later industrialized is different from the path followed by the early industrialize so we can definitely see that. Even in the poorest parts of the world people today have access to cell phones and the internet, which obviously, equivalently, poor countries didn't have in the past. So you can think about jumping over what were previously important steps along the road to getting rich. I'm not a prognosticator. I don't think like a super forecaster. But what I would say is one of the main routes to getting rich in the last 150 years roughly has been manufacturing. So that's a route pioneered by Britain, by the United States, by countries like Japan, by China.
Often you move through the value chain from lower value to a value added manufacturing goods like textiles, and up the value chain more sophisticated products. One of the issues in the past 13 years has been that China had such a cost advantage, but other countries saying Sub-Saharan Africa, whatever parts of world struggle to get onto the ladder even. So that factoring route is difficult. Now, China have started to increase so it's a possibility for other hubs to emerge below cost manufacturing. Perhaps you could say Bangladesh is already doing that. But the broad principles still seem to apply. We're trying to articulate some principles about institutions and culture. So when we talk about infrastructure we're talking about infrastructure which supports markets and trades. I think broad lessons still apply, but as you suggest, it's nuanced in a sense that how it applies is different in each case. That's why development economics is rich. That's why development economics is complicated. It's why people can make flaws of themselves with two strong predictions.
Ben (06:57):
Great. Maybe again just before skipping backwards, I'd be interested if you had a view on the richer nations themselves. So there's a lot of talk in the UK or the US or many other richer nations about how productivity may be more diminished recently and how we should be aiming for more growth or more productivity. I'd be interested if you had a view whether some of those same factors; so new institutions, a building culture or innovation culture, anything to do with infrastructure, do those lessons of history still apply to potentially getting some of this better-- because there's debates on supply side progressiveness or whether we've got too managed regulations or whether like you say, once you've industrialized, you're kind of into uncharted territory and the lessons of history may not hold.
Mark (07:50):
So when it comes to calling of current policy advice-- We didn't talk about this in the book because we deal with things historically. But I think in a country like UK and many parts of US, planning and housing are the biggest constraints. So I've really subscribed to the housing theory [of everything] where the high price of housing which is constraint largely by planning restrictions is a big problem in terms of getting people to productive areas. So you need to get young workers and ambitious workers and innovative workers to cluster in places like San Francisco or indeed London. If they can't do so, if it's very costly to do so, that's a big drag on productivity.
I think allowing people to match, so allowing people to move to locations where their particular skills are in demand that is crucial. So that's critical. Housing wasn't a central issue in the pre-modern period because it was largely unregulated. So London became a monster. It became a ginormous city fairly early on; like in the 17th century already. There was no vocation whatsoever. People lived in horrific conditions and there was a lot of overcrowding, a lot of negative externalities, a lot of slum housing. That was obviously bad, but it was also good because it allowed productive, ambitious people to come together and work together. You see similar clusters in the industrial revolution in the north of England. I think actually in British economic history, the last major episode of housing building was in the 1930s. That was critical in getting Britain out of the Great Depression.
So that’s something often missed because our understanding of the Great Depression is totally biased by what happened in the United States. But in Britain, housing is crucial in getting people out of the Great Depression. So I think that's what I would emphasize in terms of most important thing that I can currently think of in the modern world. I would also say that in general, adapting our institutions for the new productive technologies is important. So it's in ways it would be intangible economy and having the right institutions which are appropriate for that. I kind of sometimes feel very copyright, and intellectual property right laws are not really best suited to fit the current technological environment we live in.
Ben (10:18):
Very good. That's exactly what Anton Howes said. He was on the podcast a few months ago, on the institution side on copyright on patents. And actually Stian Westlake who was also on the podcast recently has said a lot about new institutions, particularly for the intangible economy but for other things or new bits of old institutions. But I think the housing point is really interesting.
Mark (10:43):
I didn't know either of them had been on the podcast. I know both of them. We share similar ideas I think.
Ben (10:50):
So it's good. You have not as yet contradicted either of them, at least on the forward looking part. That housing point is really interesting because it's so contested. I would say there's probably a broad consensus in the UK amongst economic or even economic planning people that if you could build a lot on the green belt, which they don't think is very valuable land, it would be enormously beneficial in economic terms. But the political economy, at least people reading of the political economy hasn't seemed to have made it happen, which seems to be a little microcosm for a lot of these things. So we'll see where that goes. Although there's some signs actually just today in September, the UK is going to try and do something about that with the new government.
So maybe then skipping back to your book, why I really liked it or if I got the reading of it right, is you seem to be arguing with your co-author that it was the intersection of so many of these prerequisites which was really important. So it's not just institutions and infrastructure. It's not just coal in Newcastle. It was not just a parliamentary representative democracy or your geography. It's the fact that you had brought all of those components together. Am I right in reading that as a central argument of your book? Then I would add on top of that, you are quite careful to lay out the median theories about where all of this literature is and make the intersectionality of it all. Would you yourself wait any one or two of those factors or maybe some of that intersectionality perhaps different from where the median literature is?
Mark (12:33):
Complicated question. So from a scientific perspective like an actual science perspective, in some sense what we do you could say is not fully satisfying because if you want to propose a theory of economic growth, you want it to be parsimonious and you want it to focus on a few factors. So that's what some people tend to do, because I think it's a habit we have from if we've studied the harder sciences. But what we feel is important here is that we're not articulating theory of growth. We're documenting how the industrial revolution, how modern economic growth began. So then it's important to be broad minded about the causes and it's important to give a full coverage and give equal weight to certain views.
My positions on this are open to debate and change. I think there's a lot of room allowing for multiple channels of causations. To be clear, for example there's some scholars who really emphasize the role of the energy transition. So they move from an organic economy to a mineral based economy, particularly the coal. So they'll say coal is central to the British industrial revolution. Those who push back will say, "Look, Britain didn't have to have a coal. It could have important energy. And even if there hadn't been coal, there were enough incentives to utilize other energy sources and maybe growth would've been different or slower, but they still would've been something that we would recognize as industrial revolution without coal.” My own reading of it is not to overestimate the role of coal or other product technologies, but I'm aware of ongoing research.
There's a paper by Kevin Oakes on culture I think, which is showing a correlation between coal and city growth. So coal might play 5%, 6, 7% contribution. That's not trivial but it's not all of the story. Another example is the role of slavery in the Caribbean in the British economy in the 18th century. In our book we review this hypothesis which is associated with Eric Williams, but we kind of come down on the side of the skeptics because we didn't see evidence at the time we were writing of strong linkages between the sugar nexus. So the British economies in the Caribbean based on slavery basically enriching a lot of plantation holders and they're making some people rich, but we didn't think there was a lot of evidence for links between what they were doing and then industrialization later. So we downplayed it.
Now there's a new NBER working paper by Hans-Joachim Voth and Stephen Redding arguing that there is evidence for this link. But it turns out if you read that paper-- and they say this is support for the Williams hypothesis, but you find even in this paper they find this statistical link between slave wealth basically and local levels of manufacturing. But even on this paper, the effects are actually small. So I think that we wanted to present an account which we thought was fair to other literature, is up to date as we could possibly make it given when we were writing, and that which we'd be happy with in 10 or 15 years as people do more papers and more studies. So we're waiting to adjust things on the margin and we do think it's a multi causal process.
There's no single factor that was critical. You could imagine industrial revolution happening a little bit later or a little bit slower or a little bit faster minus or added some of these factors. So none of these factors to me is super decisive. If England had missed several of the factors that we identify as important, you could imagine industrialization not happening. You could imagine 1700s, 1800s Britain as a comparatively rich commercial trading society, but one which doesn't produce an industrial revolution.
Ben (16:56):
Great. That brings up so many thoughts. I would reiterate that means you think there's no one factor for instance, which would make even 20 or 30% the routes of getting rich because it's unlikely to be one of the slightest factor that's still a multifactorial thing. Maybe we'll go through some of them about how you potentially waited.
Mark (17:20):
Yeah. If anything's critical it's the science, in terms of preventing the industrial revolution from petering out. So if any one thing is critical, you take away the scientific revolution and the connection between scientists and engineers, then you start to think that maybe even the first industrial revolution still could have happened because many of the inventions type of things didn't depend on science, but then you get stuck there basically.
Ben (17:47):
Okay. That makes a lot of sense. Maybe skipping back-- Actually, this is kind of a question from Anton Howes which is, so why do you think then some older civilizations like the Romans or the Greeks or the Chinese-- Was it that science part or was there something else which meant that they couldn't sustain their industrial revolution? Maybe you can go one step further if you think about between Britain and Holland which you cover in the book, that you kind of think that Britain really did sustain it and the Dutch didn't quite make it in the half mini age before that. At least that's what I get of your reading of the literature.
Mark (18:30):
Yeah. Certainly. This is a longstanding puzzle which I don't think we have a great answer to. The Romans and the Greeks had amazing [technology] in many respects. But many of the things they used it for seemed to just be for toys. So early steam engines in the era of Alexandria they use basically to move things in temples. They're gimmicks. Why are they not using it for industrial purposes or profit making purposes? You can tell a cultural story for why that is. You can tell a story where slave labor is sufficiently cheap, the mechanization is not appealing. You could tell a story where the engineer-- I think that the tool making was there. So if you look at the Antikythera Mechanism, this proto computer calculating device which was discovered in a shipwreck off a Greek island; Antikythera Mechanism. They had the engineering tools to do it.
I used to think they didn't have the engineering capabilities; like the ability to make reliable clocks and so on. They had it undoubtedly now. So that makes the puzzle starker and I don't have a great answer to it. But I think culture is plausible and I think the slavery factor is also plausible. Then when it comes to the Dutch, they are participants in the scientific revolution. I would mostly say it's a scale thing. I think part of it is a political economy story in where the Dutch is just too affected by their war with France; too devastated by their war with France, but it was huge tax burden, huge debt burden. They have to pay off revenue 18th century and it leads to bit of... They have relatively stagnant high levels of income 18th century. But you could also say that Amsterdam's a trade and finance capital. It doesn't seem to have quite the population of skilled mechanics and manufacturers that you see in British cities, particularly obviously Birmingham and then later Manchester and Liverpool. So that could be another factor, but there's not this tight a link as we've see in England between the scientists and the people actually improving things on the ground and making machines.
Ben (21:00):
That makes a lot of sense. I wanted to touch on two things which don't appear so much in the book, maybe because it's slightly later. But I was reading what Brad DeLong has written. Two things that he mentions quite strongly in his more grand narrative-- So you've kind of put a lot of things together, is the rise of the corporate form and also the rise of the industrial lab. Although I guess the industrial lab is putting science into action. So in that way it's just perhaps slightly later on view. Do you think that perhaps from-- Well, he dates it from 1870. So maybe from 1870 onwards, did play this kind of role in the sustaining part of the industrial revolution and do you think maybe there's a little bit more weight on those?
Mark (21:48):
It's part of what people call a second industrial revolution. So it is a core part of that. In the second industrial revolution we're seeing some of the most decisive technological innovations. So in some sense, the industrial revolution traditionally gets weighted very heavily because it's the first and it is a breakthrough. But it's true that the decisive improvement in living standards and additionally the period where something in the modern world is created is the second industrial revolution. As DeLong and others have mentioned, that's when you get electricity, that's when you get your automobile. So the really core technologies for the modern world come about in the second industrial revolution.
I'm reading Brad DeLong's latest book right now. He emphasizes the corporate form more than we do. We do mention it at some point [we] think it’s very important. I think it is important. He emphasizes it because it allows a division of labor. So now you could be a Tesla in a corporation and you don't have to worry about the management side effects. So I can buy into that as important. It doesn't strike me as being as critical as DeLong maybe suggests. The research lab is definitely important. Technology was already being brought for market before the research lab. So whether or not that's decisive or just a part of this overall process of making innovation profitable is debatable. I don't have a problem with emphasizing. It's just a manner of emphasis.
Ben (23:41):
Sure. That makes a lot of sense. Maybe we can argue a tiny bit or delve into this corporate form thing because I guess some people put a lot of weight on that. The British East India or maybe the Dutch East India and this corporate form. I think it is interesting that the world now is very much this kind of corporate form that you have. The other observation I have is really on what some cultures or country-- and we can be slightly careful about how we talk about culture because we don't mean it in any sort of dismissive way. But I think of this as the kind of view of credit or the corporate form within some Islamic way of thinking because actually even today, the securitization of assets and how they deal with credit is a little bit difficult in terms of that kind of securitization. So I do wonder whether maybe there is something more to that corporate form or whether that may be just kind of as an emergence from this idea that you had saying in the first one about institutions. So you simply needed some sets of institutions to carry forward these ideas and actually the corporate form was that. But really it's just a kind of extension of institutional thinking.
Mark (24:53):
Yeah. Certainly, some scholars have emphasized it more than we have it. [ ] this development of the corporate form. It is a decisive thing in the 19th century. It's important for risk sharing and it's important for innovation and [ ] emphasize the idea that you have long lived organizations which is separate from the states. I think that is important. I think because we focus a bit more on the industrial revolution than on the second industrial revolution and we focus a little bit more on developments in Britain and Europe and on America, that we're a little bit less kind of, “This is the key innovation.” But yeah, I definitely think it's important. Credit is important. Banks are important. I just don't think they're the decisive thing. I think by the time you get the modern corporate form, the genie of economic growth is in my view already out of the bottle. So that's why I'm not emphasizing it as much as perhaps obviously.
Ben (26:05):
Yeah, well that's good to know. Well, I think you might be right and DeLong might be wrong. But obviously, there's still not necessary a settled debate. I guess this is one of the other things you mentioned in passing, but don't put as much weight on. Actually, I haven't seen too many, but I do wonder about the role of the creation of markets for intangibles at the time. You particularly see this in patents and you see this strangely because actually where you have certain companies formed today seem to depend on patents and patent laws. In some ways I do view this as an extension of institutions and you always had trade secrets and those sort of things. You mentioned it as a factor, but again, not a decisive factor. But I wonder because there's so much inferences on intangibles today, whether it adds actually one of those foundational aspects which actually if we didn't have, we might have been very hard for us to sustain. Very hard to know about the counterfactual. But I was interested in whether you thought more about the role of the patents or the institutions around intangible ideas and copyright and the like.
Mark (27:12):
The literature in economic history has tended to be a bit down on the role of patents in industrial revolution per se. That's what we follow. A lot of important innovations and industrial revolution were not patented. There's debate-- I don't take a strong view on this. But there's a debate about James Watts patent on the steam engine. Did it block subsequent intervention or did it not block it? People have made strong claims they blocked it. Others like [inaudible 27:44] it didn't necessarily block it. So there's a debate on patents in the industrial revolution itself, which I think even if it's not fully settle doesn't point towards patents playing a particularly decisive role. Nonetheless, patents could still have mattered later as we go into the 19th century.
So people are innovating for a bunch of reasons in the 18th century and 19th century and obtaining a patent of innovation is only one and potentially a minor reason for it. Now going to the 19th century and adding 20th century, you need some monopoly rent to reward innovation. Can trade secrets do as well as patents? For some things. Coca Cola still have kept their recipe a secret. So I think patents are not decisive or that important in the industrial revolution. Did they make a positive contribution towards innovation in the late 19th century, early 20th century? I believe the case could be made for it, but I'm not more expert than that.
Ben (28:55):
Yeah. Okay. That makes sense. So the median literature downplays it certainly in the first industrial revolution, but 1870 onwards and sustaining might have had a bigger role. Another thing I picked up in your book and I hadn't really seen the literature on it so I was really interested, which was this idea-- I'm going to put it in my language. This kind of idea of nation states which had come through perhaps a common law route or a sort of living constitution route which you see in the UK, versus those nations which had more of a fixed constitution and fixed laws and how they might relate to progress. In fact, I see this debate a little bit in the US today-- actually everywhere, but in the US today between a kind of more literal reading of old constitution law and more of a kind of progressive reading and more of a living constitution. But it seems to me that some literature which is maybe suggestive that if you represented a democracy, had a little bit more of this flex, it made it a little bit easier to sustain their initial catalyst. Have I read that right? Is it maybe just a little factor or is it potentially more important and how does this extend to other nation states?
Mark (30:03):
I think it's a little bit of tension here between... So there's a literature about common law versus Roman civil law which we review. That's not so much about fixed constitutions versus variable constitutions because on that divide, US and UK both come down as being common law. So there's this literature arguing for benefits of common law over particularly French legal traditions. [ ] There’s this more recent 20, 30 year old econometric empirical literature arguing for some benefits. That literature is quite heavily criticized particularly by economic historians. So I don't want to put too much weight on it in a sense that there do seem to be some particular benefits to how financial markets might have developed better when you have common, or common just seems to protect shareholders better and things like that.
One weakness of that literature, I think, is they really emphasize legal origins. What's happened in the last 30 years is that there's actually been a lot of amalgamation of law. So Britain's a common law country but when it was part of the European Union, they actually imported in a lot of continental civil law. Similarly other countries-- So in Sub-Saharan Africa, you have countries with French civil law due to their county origins and countries with English common law due to their county origins. But over time they're just taking law from each other. So the difference is its shrinking. So there is literature on that. Now, how that relates to fixed constitutions versus living constitutions I actually haven't seen explored in the economic research. In general, my view is most countries follow the US. A lot of new countries or fresh democracies want to have a formal constitution. So I think Britain is almost on its own. It's quite rare in its living constitution. The power of the monarchy is far greater than anyone realizes. They didn't exercise any of those powers.
Ben (32:27):
Yeah. Okay. That's clear. So the common law arguments seem relatively weak although there is a literature on it. Property rights obviously important but not necessarily common law. The UK's a little bit odd in terms of its living constitution and actually still has ramifications now. So I know First Nations tribes and Aboriginal tribes in Australia and Canada are pulling out contracts that they made with the monarchy going back. There's some arguments around that which actually potentially have legal force so that is quite interesting. I guess that pivots me to another element you talk about and put some weight on, although it's a bit complicated around this kind of elements of culture and particularly interested in what you make of trust, because that comes up a lot; this ability to trust. I guess there's two or three things here.
One is, did you only have view on the kind of Quaker movement and this kind of handshake trust element and was that important or not? And then-- you touch on it briefly, the kind of so-called frontier culture in the US or perhaps that's like the building movement today. But I'm not sure whether that's just a nice story or if there is something more to it. But it does have something which actually Anton Howes has called about. This kind of innovation mindset or people who kind of tinkered or entrepreneurs around about particularly this first industrial revolution, but maybe the second as well. All of those kind of things together going making elements of cultural mindset. I was interested to know how much weight you put on that and what your view is. Some of the literature is obviously a bit mixed.
Mark (34:11):
So the way we view culture is through this language that Joseph Henrich has pioneered, goes back to Hayek which is to see culture as a set of heuristics. So in a complex world we rely on heuristics, and these heuristics we've learned from others; even from our parents or from our peers. They're not fully rationalized, we can't fully rationalize. So who we trust is one of those things. Some people be more trusting than others. If you grew up in a more trusting society, you're probably going to trust more. So all else equal high levels of trust are going to be good for an economy because they just allow you to do things quicker. I'm going to assume you are going to go pay me for some service.
We're not going to do everything as a spot exchange. We're not going to just assume that other people are going to play by rules. That actually lowers a lot of transaction costs. But of course, trust is endogenous. In an economy which is doing well, people are more likely to behave in a trustworthy manner. So there's a big econometric problem in disentangling causality. So trust is one example of a cultural trait and cultural traits we think of these have learned heuristics. So in a low trust environment, it could be in equilibrium. So if you're in a society where crime is rife, people are dishonest, you're going to be suspicious to people and your suspicion to people is going to make other people suspicious for you and it's going to be self-reinforcing.
That's a barrier to economic development and economic growth. In a British story, there does seem to be a role for religious minorities. So particularly Quakers in the industrial revolution. So people said, “Why was that? What gave them that advantage?” There's a story where trust gives them an edge in terms of expanding their businesses. So there are a lot of Quaker businesses in industrial revolution Britain. But I think it's plausible. It's hard to find... There's no econometric paper which nails this, but John McNair has written about it so I think it's plausible. Whether it's decisive is another matter as we've already mentioned. That's quite different to frontier culture that Americans are said to have, which is all about individualism, about going it alone and actually might have some plenty negative correlate.
So I think for scholars who did the frontier paper in these counties with more frontier people, there's lower take up of vaccines, for example. Cultural traits persist for long periods of time and they shape economic outcomes. So mindsets matter. Anton's stuff on innovation-- There does seem to be a cultural element to innovation for sure. If a lot of your peers are innovating, you're more likely to innovate. If everyone you know thinks very low risk jobs and doesn't push the boundary out then that's your incentive as well. So I do think a culture matters for innovation, for sure. It's not something you can pull a policy lever and just fix by lowering interest rate. It's something which is hard to see on the ground, but it matters.
Ben (37:51):
Yeah. That makes a lot of sense. So like you say, if trust is that foundational element, maybe you could argue in the frontier culture. If you're going under alone, you maybe have less trust as less of a community. Arguably, we could see what you say about Quakers. Then the heuristics, you kind of do what everyone else is doing. So people are innovating in that mindset. I think the Quaker piece is interesting because some of the stuff I've read suggest that they were kind of foundational an element such as the end of slavery within that. I was interested in some of your views about where social and moral progress may or may not fit in here. Maybe we can reiterate it again. Your reading of the literature is that slavery was actually quite small and probably didn't have such a huge role in terms of industrial revolution.
But I'm thinking if you've got slavery, if you think about maybe women's votes or women entering the work world more, maybe more modern day times you've got minority rights and things. So if we think about where we have a moral and social progress, does it run separately or does it interact? It obviously kind of helps some way and it probably has this complicated interaction. I'm not sure you can necessarily say which one comes first or they influence one another, but has anyone tried to look at this and has come up with anything which can actually be reasonably substantiated? Or I find it's probably quite a hard thing to know either counter contractual or have the data.
Mark (39:19):
It's very hard. No one's been able to do it yet. It's an interesting question. So I think in my book on religious toleration, most economists will tend to push more materialistic views of these things than non-economists. The very materialistic view about this is that when you're starving you're poor. The circle of people you can really care about is also pretty small. So if you're poor in medieval Europe, you're going to care about your immediate family and your neighbors and people in your village. You're not going to really care about people being enslaved in other parts of the world or other areas.
In England in the early modern period, people's moral circle was smaller. So the fact that slavery was atrocious and abominable, but it was happening in the Americas, it was happening in the Caribbean Islands and we're not seeing it, made it seem less bad to the British at least. The materialist view would be to say like, “It's only when you get rich enough, you get some surplus income and you're no longer thinking about where your next meal is coming from, then you have the resources to think about wider moral issues.” So that's a very materialistic view. It's to say, first you need to some economic growth to get going. Then as you get richer, you're going to care more about people who are not in your immediate circle.
That materialistic view I think to a large degree is quite true, but it's also missing a lot of things as well. It is missing a cultural story. The cultural story would say that probably something like Christianity is at the root of this because Christianity does teach a particular moral code, but then it had to be implemented by groups who were fairly radical and willing to go against a conventional wisdom. So because Christianity emerged in a world where slavery was just ubiquitous and inevitable, early church fathers reconciled themselves to the existence of slavery even though it goes against the idea that people are equal and they all have a soul. So it took a group like the Quakers to really think that this was abominable. They were far out from mainstream Protestants and Catholics in all their views.
They're pacifists, they believe in religious freedom, they're willing to be ostracized and punished for this. So the Quakers are important in this moral revolution that happens in the 18th and 19th centuries, and then they may manage to convey their revolutionary further to other people; both religious and secular in a way that generates the abolition movement. It's fascinating. So clearly the materialistic story I gave you isn't sufficient. It’s part of the story, but it doesn't quite capture what's going on with abolitionism.
Ben (42:25):
That makes a lot of sense.
Mark (42:30):
I think it helps that the people in the south can't become abolitionist in some... It's harder for them to be abolitionist in the following sense. They grow up with slavery. Say the south of the US; the Confederate states, they grow up with slavery. They even know about all the crimes of it and all the horrific things. They can't judge their friends and family who are slave owners too harshly. It's hard for them to do so. Morally, if your dad and mom own slaves and so does your cousin, even if you don't think slavery is a good idea, it's a bad institution, it's hard for you to accept the world view which says that your parents are criminals. So it's easier for the northerners and for the British who live in Britain to think of slave owners in the Caribbean, of slave owners in Virginia and to develop that set of views against slavery. And then they can convince other people. So I think it's a fascinating topic, but it's not one that economists are best place to solve. It's going to be difficult to track the change in cultural values. Maybe there's a way to do it looking at abolitionist newspapers or looking at using text search. Maybe someone could scan thousands of documents and see how abolitionist sentiment arises over time and where it arises.
Ben (43:55):
That's one for the puzzle PhD or postdoc students out there. Yeah, I can see that. So these cultural qualities are hard to measure, hard to get a sense of and therefore falls out of a lot of economics today. But I do hear you on your narrative of saying, "Well, you need to have a certain level of richness maybe as a prerequisite, but then you also need some cultural change story maybe by a minority or wherever it comes from." So like you had richer nations before that haven't maybe had a prerequisite, but you need that narrative as well.
That has made me to reflect if you fast forward to today and I think particularly around climate and those externalities and maybe around about inequality as well. If those lessons still hold, it seems to me that you would then need nations to become extremely rich, everyone to be as rich as possible, and then also need a narrative about how important that might be. Actually, that maybe sort of fits today. You got some people with that narrative, but you also have innovation and the techno optimist or realist saying like, "No, we need to be wealthier or we will be wealthier to handle this." So it kind of even fits today. I don't know what you had any thoughts about the climate piece or maybe the inequality piece about fast forwarding that, because obviously it wasn't such an issue a few hundred years ago.
Mark (45:23):
Yeah. I think it works with climate change. You need some level of moral universalism. People in rich countries care about climate change and they are willing to pay a price. People don't want to pay a price if they think they're the only ones paying it. So that's why it's hard to cut down your own emissions without too much if you think everyone is also sacrificing. But people in rich countries are willing to pay through taxes, they're willing to accept that. That reflects moral universalism. In fact, they're rich, but it's much harder to sway people in poor countries to sacrifice economic growth to reduce their emissions. So that's certainly the case. I think inequality is a little bit of a different story so I'll leave it there. It's got different motivations I think in a quite bit moral universalism which motivates concern about the slave trade, concern about genocide in other countries, or concern about climatic catastrophes.
Ben (46:29):
Sure. Okay. That makes sense. Maybe skipping back or one thing on going back to the history part, I read your book is kind of suggesting that the role of war was maybe via second order impacts on technology and the like, rather than war in and itself in terms of its contribution to economic growth and technology and things. Do I read that right and what is your thoughts about all of the wars that we used to have?
Mark (47:03):
Well, there's a view where war is good for economic growth and I think that's wrong mostly because war is probably destructive. We're seeing that in the Ukraine right now. Some of that comes to this misplaced Keynesian notion that war gets the economy product revved up which is just bad Keynesianism. Then it also comes from the fact during the 20th century, there have been important spillovers from particularly American military innovation is spilled over to the domestic sector. So that's true, there have been spillovers. But I'm not aware of such spillovers for the pre-industrial period. So net war is probably bad, but then there's this argument the war is weeding out weaker states or war is encouraging urbanization or war is prompting in some sense, certain change which is good for growth. The destructive effects of war are probably the more important ones, but of course without the pressure of war, you wouldn't get a lot of institutional changes that we talk about.
So that's where war comes in. You're weeding out weaker policies and that is a proving ground for certain institutions. That's what happens in Britain like the Glorious Revolution. All these institutions are really driven by competition with other powers particularly France.
Ben (48:36):
Yeah. And maybe helps drive representative democracy and all of these other impacts. I could see that. So if you had another mechanism which could achieve the same ends, you'd definitely want to choose that over war. And maybe is that also going back to some of your earlier work on the Black Death, because obviously that's simply like a bad thing happens and maybe you get these short run impacts, but maybe the second order on institutions. What do you find was most misunderstood or you find most surprising on your work on the Black Death? I guess you made the Black Death able to be one of these kind of discontinuity type of semi causal type of experiments. What did you find there?
Mark (49:21):
Well, the main story of the Black Death is obviously 40% of the population die so you massively change the labor capital land ratios. I don't know if we're revolutionizing our understanding of Black Death. More is clarifying. You could take what I would call crude Malthusian view where the Black Death is just great. This is kind of the view Gregory Clark promotes in his book, “A Farewell to Alms.” It’s great, real wages soar, peasants get tweet and it’s all great which is kind of strange given that. If you care about living standards in general, you care about your life expectancy, you care about life expectancy of your friends and families. So this elevation of a death rate was probably pretty horrible for overall living quality even if your income and wages go up. The increase in wages actually took some time to take place.
It was to some partially offset by disintermediation over all economies; a decline in trade and so on. But it's still true. It's still true that wages did go up. It just took several decades to do so. So it wasn't like an instant adjustment. Wages did go up and it did eventually produce something of a golden age for those workers who survived. So I don't think there we're overturning the caricature of the Black Death. It's not just clarifying it. For example, it took until the 1370s for real wages to really start rising in England. So Black Death a watershed moment? I have to admit I'm still unsure about this after all this research on it. There are scholars who argue that the origins of both the great divergence between Europe and Asia and the little divergence within Europe can be trained through a Black Death. We discuss those arguments but I'm not sure if I really fully endorse them. We have a paper under review right now looking at the impact of city growth on the Black Death and we don't find evidence for a total reset of European economy. So that's a bit of a partial answer, but that's what I feel about it currently.
Ben (51:40):
Yeah. Okay. So not the feel and end all. I guess this refers to also some your stuff on geographies. It's definitely a factor, but it's certainly not the be all and end all and you can see this with various geographic things. Well, I thought we'd maybe do a short section on overrated and underrated if you’re game, and then end with a couple of questions. So you can do a quick answer or you can pass or make some comments. We just got three or four. So overrated or underrated, GDP as a measure?
Mark (52:13):
I think underrated now. The HDI (Human Development Index) of the other measures just correlate with GDP very well. We have a few exceptions like you have golf states which are very unequal and do badly on some of the other aspects. Basically GDP is good. Growth is good. All the criticisms and caveats that people have, they're not that important relative. The overall message with GDP is good, growth is good, and ordinarily people underrate how good it is.
Ben (52:46):
That seems fair. I guess that probably means you underweight maybe natural capital and happiness researchers then actually just correlates with GDP.
Mark (52:55):
Yeah, basically.
Ben (52:58):
Great. Carbon tax or carbon pricing?
Mark (53:00):
I think it's underrated because it's seen as like a political economy, like no go error, especially in the US. It tends to say carbon tax failed. I tend to think that a lot of the policy mistakes over the last 20 years which goes to housing as well, have been maybe due to politicians failing to lead in a way that maybe they could have done. I'm not an expert on politics. I'm intentionally naive on this. But I kind of think that sometimes politicians are too differential to be electorate and they're too differential to the media. So they're too differential in the UK to the BBC and to the way BBC phrase things. So getting onto current politics I guess now, I think it's refreshing to have government policy where they're just like, "No, this is what we think. We could be wrong and it could be disastrous. This is what we think. You've elected us. This is what we're going to do in some sense."
So I think carbon taxes should just have been-- I think that you should have had politicians brave enough to campaign on them, run on them in their elections and say, "We're going to implement a carbon tax and we're going to make it revenue neutral. So we're going to cut income tax and charge carbon taxes." It just didn't pull well. People don't like the idea of paying more for energy or more for petrol gasoline so they don't get implemented. In the US they're seen as this neoliberal elitist policy. So both Republicans hate them and Bernie Sanders democrats hate them. So that's why there's a coalition against them. But I feel that politicians need to listen to experts more and they need to trust experts and risk political careers. This is a bit of a tangent away from the context specifically and away from history.
American politics is a little bit different so I won't comment on that. But if you look at British politicians, they have very short shelf lives. David Cameron and George Osborne are not old; they're young, relatively. They've been out of office now for like six, seven years and it doesn't look like either of them will ever get a political comeback. So we're not in the age of political comebacks. Tony Blair had an amazing opportunity and did a lot and reformed many things, but didn't reform maybe as much as he wanted to.
He was out of office when he was in his early fifties, I believe. No political comeback for him. Rishi Sunak, again, super young may not ever come back into headline politics. So if you have a current chancellor or Prime Minister, in some sense, if you really genuinely believe your policies are best for the country, you might as well implement them. If they don't work or if you get punished at the polls and you lose the election, in some sense so what? Your shelf life is short anyway if you look at all our recent political leaders. None of them have come back in frontline politics unlike in the age of Gladstone or Disraeli or Churchill.
Ben (56:23):
Yeah. There's a part of me which agrees because particularly in the UK, we don't have midterms. So you have your four or five years, probably that's it. You might as well do it. My two big things would be carbon tax and actually building on the green belt. It shouldn't even be called the green belt. It's mostly brown belt. That's because there's relatively few things that actually you can get 80 to 90% of economists to agree upon. We talked a little bit about this in history. There's always balance and nuance. But in the UK, 80 to 90% of economists agree on a carbon tax and actually give the revenue back some way while they're dividend or tax cut so you can make it revenue neutral. And actually, most people agree on a lot of the green belt is really useless and you should build houses on it. So when your technocrats have that degree of consensus, you should probably listen to them. Other things obviously is a bit more 50/50, but that's kind of fine. Okay, a last couple on here then. Thinking about innovation then, do you like these innovation institutions like DARPA? Here in the UK we have ARIA. You got H-ARPA and things like that; overrated or underrated?
Mark (57:33):
I think I have to pass on that one because I don't know enough about them.
Ben (57:37):
Sure. That's fine. We'll pass. And then current governance mechanisms. So current mechanisms of representative democracy. Let's maybe just say UK or US. Do you think they're about right or overrated or underrated?
Mark (57:49):
Overrated. Something obviously is a bit broken in the system right now in both US and UK in different ways. I touched on it earlier. In both countries on different margins there have been major policy failures in the last two decades. I'm not saying I was smarter than anyone else. I'm not saying I would've made better decisions than anyone in office, but I suppose we can say there've been major governance failures. So I think we have to think about how these work. One example which is just obvious and I think everyone agrees with though we don't know what the solution is, is that it's really hard to be a politician, particularly it seems as a British MP in the age of social media.
You get a lot of hate mail. You get really hassled by crazy people. So if you're a British MP, you don't want to build on the green belt if your constituent is in the green belt. They can make your life hell if you do something they don't want you to do. So there does seem to be an issue with how our democracies are functioning in terms of delivering good policies. I don't have a solution for how to improve it, but I think people should be willing to think about it. People will differ a lot on what the proposals are. I know in the UK, for example, more than 10 years ago, there were discussions about proportional representation of the alternative vote which may or may not have been good. My views on that change. But I think we should be open to the idea that we don't have the best system. We could improve.
Ben (59:46):
That seems fair. But you don't have any intuition about what you might experiment with.
Mark (59:50):
Well, in the British case, the House of Lords is pointless right now because it's purely advisory and it's purely filled with ex politicians. On the face of it you have basically a parliamentary dictatorship because parliament gets whatever it wants. But on the other hand, there seems to be a struggle that you get policies through. I don't know exactly what to do there, but it seems not quite right. The thing I mentioned on social media, politicians are not experienced enough. They seem to leave office too quickly. There are plenty of effective cabinet ministers from the Cameron and Osborne era who basically left politics in 20 after Brexit. Then you replaced some with a bunch of people who were [Johnson , May]… very few survivors. So I felt in the British case compared to even 1990s, you don't get longevity of cabinet ministers. People move around so much so they don't get expertise in their role. So there are a lot of small things I would consider.
Ben (01:01:04):
Yeah. My radical solutions would be something to do with the Upper House here in the UK. Something like give them a single 10 year term or a single 10 year term with a five year extension. So it's longer, but kind of limited. So they feel like, "Okay, 10 years we can get something done, but we're only going to get those things done." You have to be elected or some sort of thing. The second really controversial one is I would slim down the number of MPs but I would pay them a lot more. No one likes this. I would even pay them whatever it is. Whatever you think it is to be the equivalent CEO of your mini state. Maybe that's even a million pounds. People would probably really want to do it for a million pounds. But maybe like they do in Singapore, if there's any graph or any bribery, maybe you have to evoke the monarchy. That would be treason and you go to jail for a really long time. It's unacceptable to have this second job graph thing, but will pay you a lot of money. Therefore, if you are a poor person or have some other radical ideas, you could be, "Well, a million pounds would be life changing and means that more people could go for that." Hopefully you would get better talent. Maybe it's too materialistic, but I do think incentives matter and we don't pay them very well.
Mark (01:02:13):
I do think there's a huge, weird difference in the British system between your average local MP who stands up in PM queues and just says something stupid about their local constituents. They're like, "My local constituents really want to park basically." Sorry, we're going totally off topic. I'm in danger of ranting. So the locale MPs are really fixated on local issues and have no training or expertise in what's going on at a larger scale. They don't have access to high quality advisors or so on. So they really are quite trivial in terms of what their concerns are. Then being a cabinet minister-- Suddenly you get to be the cabinet minister and you're in charge of a national health service. How can one person be in charge of a national health service? It's like the science of a small country basically. It's got so many issues, so many complexities. So the idea that you can go just from being an MP to that position, it seems wrong. I think bigger constituencies, less localism might be a way forward. I'm just totally speculating.
Ben (01:03:18):
On the NHS as well, they generally have neither healthcare training nor economic training nor healthcare economics trainings which is a huge profession in itself. So last one on the overrated, underrated; universal basic income, UBI?
Mark (01:03:35):
So I think that's overrated right now at least by its proponents because de facto... Well, two things. Firstly, I think work is an important component of human existence. On the one hand I appreciate the idea of it. It could allow people to pursue work they're passionate about whether it's like podcasting or YouTubing or something like that. But I do worry it could just support indolence. I also think that its de facto will not replace... Milton Friedman’s idea of a negative income tax was to replace all over welfare and really to slim down all other programs and replace it with something like UBI. I think in principle that would be potentially an improvement. But in practice, it's not going to be like that. It's going to be another form of welfare and I just wouldn't focus on it basically.
Ben (01:04:28):
That makes sense. Would you prefer a universal basic infrastructure? That's something that Diane Coyle who's also been on the podcast has mentioned. Or maybe more controversially, I hear sometimes a kind of job guarantee system have no idea how that would work but to get around this problem about actually jobs do mean something to people.
Mark (01:04:48):
Yeah. I'm not too in favor of a job guarantee because I think it's too much messing with market incentives. I don't know what Diane Coyle means by the universal right to infrastructure, but I think that you want people to not fall below basic minimum which is set by your society. So it's going to be higher in a richer country than in a poorer country. You don't want that to have too many disincentives to work. So in that sense, maybe some basic payment could be justified but it would have to be small. The problem is there's always a tradeoff between setting the incentives not to penalize people who want to work, and also not penalizing people who cannot work. But in some sense you can't square the circle.
Ben (01:05:42):
Yeah, that makes sense.
Mark (01:05:45):
The current UK welfare reform seems to be in the right direction. I know they're unpopular but I can't remember what they're called, which are trying to minimize the tax incentive you face from going from welfare to work. I think that's important to any scheme.
Ben (01:06:01):
Yeah. It is a universal benefit. I think Diane Coyle meant by infrastructure essentially very good public services. So rather than give people income, you're giving people a more equal opportunity. It's that sort of concept. So final two questions. One is, are there any current projects you're working on you'd like to share or anything we haven't mentioned that you want to highlight?
Mark (01:06:27):
Well, I've got a Templeton Grant with Desiree (Desierto) this year-- that’s my wife. We’re working on the origins of liberal institutions in England; which was not just us. We have several graduate students at GMU as well. So that's a big project, but it won't come to fruition for several years because it's really in the data collection stage. So that's the first thing that comes to mind. I've got some other projects on things we've touched on like the Black Death. This one on liberal institutions. Basically from Norman Conquest, Magna Carta all the way up to Glorious revolution. So it's very historical, but it's going to be more data intensive than anyone's done on all those topics, I think. So it's quite ambitious. That's the big project.
Ben (01:07:14):
That sounds really exciting. I was recently speaking to Jacob Soll (Jake Soll), and he put a lot of weight on thinkers thinking about Cicero influencing these institutions. But anyway, there seems to be a lot there.
Mark (01:07:27):
Yeah. It's a more history of ideas way of thinking about it. People have asked us if we are going to integrate it with a history of ideas. In principle I'm open to that. I like reading about Cicero and so on, but it's not something… Even though I like that stuff, my research tends to be more on the material side of things.
Ben (01:07:47):
You like the data?
Mark (01:07:48):
Yeah.
Ben (01:07:51):
Great. And then last question. Do you have any life advice you'd like to share or maybe you could have an advice for a policymaker for one policy-- although it sounds like your policy is carbon tax and maybe we discuss that. Or maybe advice for other people who are interested in becoming an economic scholar and the route you've taken. So any career or life advice you want to share?
Mark (01:08:15):
I'm not sure I'm the best person to ask. It's easy that we put amazing resources online. So podcasts; everything is online basically. The young person who's ambitious and interested can actually get to speed quickly. So you can teach yourself econometrics by watching tons of YouTube videos. Most people won't because there's other stuff to watch on YouTube, there's other stuff to do. I could be teaching myself foreign languages on YouTube and I'm not doing it because my opportunity costs I guess is maybe high. But if you're young and wanted to study this stuff, you can get a huge head start just by use of the internet cleverly. Tyler Cowen’s advice is find the right mentors. Find some people and learn from them. But you get a huge amount early on to give yourself a head start before you go to university because to be honest, the university experience isn't necessarily going to be all that growth. It depends on where you go. You don't know what you'll get into and you'll be distracted by other things. So I would start early and try and learn as much as possible on your own and then you can be ready for your PhD program by the time you're an undergrad.
Ben (01:09:43):
Okay. That makes a lot of sense. So basically, use YouTube and the internet very well. Did Tyler interview you coming through? Did you have a classic difficult Tyler question?
Mark (01:09:55):
Yeah. He interviewed me for my job; this job, but a long time ago now. To be honest, his questions-- I can't remember exactly how I did. He asked some good questions. Yeah, of course.
Ben (01:10:07):
Nothing really tricky that you remember to this day.
Mark (01:10:11):
One of his questions was, “What's the most important thing in economic history?” Then when I said what it was and it wasn't exactly what I was working on, "Why aren't you working on it?"
Ben (01:10:23):
That's tough. At least said, “Well, now I've written a book,” so…
Mark (01:10:28):
I just said I was. Basically, my answer was just what I was working on indirectly shed light—although it’s really important thing, even if it wasn't it. I can't remember all the others, but he obviously asks sharp questions although they're slightly different I think the ones you ask in those days, the ones you asks now.
Ben (01:10:47):
Do you still think it's the same, the most important thing in economic history today?
Mark (01:10:51):
Yeah. I basically said the question of his book, “The origins of economic growth.”
Ben (01:11:02):
Yeah and you've written on a book on it. I do think maybe you should extend it slightly into thinking about what the lessons might be for today, but I guess that's for the forecasters to think. But I think it's really intriguing because the way you put it all together and it has made me think about some of these things that if you go back to some of the historical roots, that maybe some of them you could just do more of or maybe radically more of and we should try that. So I highly recommend everyone listening to get a hold of the copy of the book available from the internet and all good bookstores and the like. Mark, thank you very much for joining me.
Mark (01:11:41):
Thanks Ben. Yeah, it's been a pleasure.