Conference report by James Morgan

`The best of Britain's economics profession, gathering in Nottingham this week for the annual conference of the Royal Economic Society, appears to have been smitten with uncertainty compared with years past. The research being presented is heavily weighted towards the empirical and the institutional.' This commentary in The Independent on 31 March was headed `Theorists should admit they make mistakes.'

This verdict was not fully supported by those at the conference, nor was it rejected by all. Some thought the papers had actually become a bit more theoretical this year. The President, in conversation, wondered if they were more theoretical and empirical: `You can't theorise like people used to, there is too much data about,' said Partha Dasgupta.

The Distinguished Addresses

Yet for the newcomer the abiding impression was overwhelmingly of papers arousing responses of a theoretical nature - but that is probably because the data are not available to be checked on the spot. What was also evident was the lack of uncertainty on the part of the profession. The economics empire is expanding - the plenary session devoted to the paper by Anne Case (Princeton) highlighted this point: it was entitled `How Hungry is the Selfish Gene? Evidence from US Stepfamilies'. Richard Dawkins and others found their space invaded by empirical evidence demonstrating something about the generosity of non-biological parents.

Sir Robert May, Chief Scientific Adviser to the Government, invited economists to do more in his field. His paper was called `Ecology and Economics: Bionomics: A Subject whose Time has come'. The content was fascinating and cogent, but Sir Robert had not seen just how far economists had moved in his direction. His observations on the price effects of quotas (as in fisheries policy, for example) were not unfamiliar to many present.

The President had introduced this lecture as an example of the revival of the spirit of moral sciences in economics: the discipline had sprung from moral sciences and could now be helped on its way by returning to this way of seeing the world.

Returning to one's roots provided the theme of the Economic Issues lecture by Luigi Pasinetti (Milan) entitled `Economic Theory and Technical Progress'. Pasinetti rehearsed his views on the failure of the profession to take technical progress seriously - it too often was merely a growth model residual. This had all flowed from Ricardo's entirely innocent assumption for the purpose of his model: `We will, however, suppose that no improvements take place in agriculture.' The law of diminishing returns had thus been given a kind of support that distorted subsequent work for generations. Pasinetti revealed that in fact that law had been undermined by a man Adam Smith must have read. In 1777 James Anderson, a Scottish farmer, developed a theory of differential rent that superficially might sound Ricardian but supplemented it with empirical evidence from his own experience on land improvement through careful cultivation.

One might have thought that the Common Agricultural Policy and its continued ability to resist the forces of economic rationality would have provided an echo of these views but the Conference avoided the topic. Europe, however, did appear constantly, most prominently in two plenary sessions. One was devoted to Olivier Blanchard's (MIT) paper, `European Unemployment: Shocks and Institutions: Some Empirical Evidence'. What has mystified many people was how European unemployment had remained low in the sixties and then soared in later decades even though the basic institutions of the labour market were not very different in the two periods. At the same time the shocks that had struck the European economy were not enough to explain fully the labour market deterioration. These shocks include the oil price rises in the seventies, higher real interest rates, lower growth and so on. So could institutions account for the rest? They comprise everything from employment protection through the minimum wage to the tax wedge. In fact the solution, Blanchard found, is to be seen in the interaction of shocks and the institutions. Such interactions can be seen in many ways: the oil shocks may well have been may well have occasioned a deliberate suppression of interest rate levels in the seventies, which made later adjustments all the more violent. On the Continent a variety of shocks led to a cut in the demand for labour. Hence another shock, the loss of labour share, which became a pronounced characteristic of many continental economies but not of the United Kingdom.

In all, Blanchard's paper served to show how, for one reason or another, Britain had got it more right than its partners had and thus had shown greater stability in some respects because the shift in labour demand had not been as great. But bringing the United States into the equation was necessary to show up the real differences. In terms of coping with shocks it was clear that the US had the best institutions. The worst? Spain of course. But then it always had been - Franco's labour laws did less damage, as there were fewer shocks.

Europe and the Euro

A paper from John P. Hutton (York) and Anna Ruocco (Tübingen) interestingly supplemented these findings on `Tax Reform and Employment in Europe'. It was designed to see if tax changes between 1985 and 1992 had contributed to changes in unemployment. The answer is apparently `yes.' The tax wedge appeared again as a disincentive to job seeking but what also fascinatingly emerged were the precisely opposite paths chosen in that period by Britain and France. EC rules had pushed Britain's VAT rates higher while those in France had been cut. When it came to marginal income tax rates the directions were the opposite. In a simulation where 1985 tax rates were imposed on 1992 the authors found `that one possible contribution to the positive employment trend in the UK may be its different fiscal policy during 1985-92.' This is probably more than a `maybe' because of the conservative assumptions underlying the paper.

All the above considerations made one wonder about the wider aspects of European social and fiscal policy. The recent clear-out in Brussels may well bring greater rationality. Last year the now acting social affairs commissioner, Padraig Flynn, said, `Social protection does not burden our economies. It is one of the secrets of our outstanding economic performance.' This provided the occasion for Iain Begg (South Bank) to wonder if Europe's welfare programmes would be the Achilles' heel of the single currency. (Academic economists could spend more time taking the statements of politicians to bits.) Social protection accounts for 28 per cent of GDP on average and plays a significant role in European stabilisation and redistribution. But there is no provision for the EU institutions to become involved in social protection. `So on the face of it, the EU cannot fulfil a role that tends to gravitate to, and which economic theory suggests is best fulfilled by, the highest tier of government. But EMU will accelerate economic integration and social protection policies will come under growing pressures.'

The public debate on the euro - Olivier Blanchard again, Charles Wyplosz (GIIS), Bernard Connelly (AIG International) and Willem Buiter (Monetary Policy Committee and Cambridge) was chaired by Richard Portes (LBS and CEPR) who remarkably was able to keep this potentially disorderly crew in line without saying a word. The evident failings of current policy in Europe, particularly those of the ECB, did not seem to diminish the natural enthusiasm of most of the panel for the EMU project - Connelly (who wrote a notable book called The Rotten Heart of Europe) was the obvious exception. There was, however, extensive agreement that the ECB has a meaningless monetary target, that its board can not talk constructively to finance ministers because that might seem to compromise its independence, that the Union is running a huge, irresponsible and damaging trade surplus, that Germany is falling into a destructive competitive disinflation and that growth rates in the periphery are increasingly out of line with those of the centre.

Economics and social policy

Now let us look at those papers, which gained the greatest publicity outside the Conference. Not surprisingly these concerned Britain, and had powerful implications for social policy. Renè Boeheim and John Ermisch (Essex) had a good look at why divorce is so frequent, although today that has to be expressed in the form of `dissolution of partnerships.' The risk increases with the failure to get married in the first place. More interesting is the finding that contradicts earlier research - having more children increases the risk of break-up. One result surprised economists but not many others: improvement in a couple's finances cuts the risk of dissolution. Theory indicates that there should be a certain symmetry: an upward financial shock should be as destabilising as a downward one but now it seems theory is wrong in this case at least where it is the man's higher earnings that are at issue. (If a woman, things are different - does she skip the nest if she comes into money? How disillusioning.)

Labour market discrimination provided a fruitful area for the media to engage with the Conference. The paper by David Blackaby, N.C. O'Leary, P.D. Murphy (Swansea) and D.G Leslie (Manchester Metropolitan) showed that ethnic minorities face a dual problem: getting a job and then getting paid the same as whites. Africans and Caribbeans in 1992-92 suffered an unemployment rate of 28 per cent, Pakistanis 22 per cent and Indians 12 per cent. The figure for whites was ten percent. When similar results were obtained in earlier surveys it was thought the problem would diminish over time when the minorities learned to use the institutions better. This is far from the case, according to the paper. It found that half the difference between whites and the rest must be attributable to some form of discrimination. The conclusion was that new initiatives are needed.

Kenneth Clark (Manchester) and Stephen Drinkwater (Portsmouth) found that these problems help ensure that ethnic minorities are over-represented in self-employment. But that is not the whole story for there are `pull' factors at work too: the existence of ethnic enclaves and access to informal sources of labour for example.

A paper on the increase in child poverty in Britain (Steve Machin (UCL), Paul Gregg (LSE), and Susan Harkness (Sussex)) inspired a major story in how children learned to be poor but the main thrust of the paper was on the way demographic and economic shifts had led to greater inequality. Lone parenthood and unemployment are largely to blame. Sonia Bhalotra (Bristol) found some useful material in Pakistan, which could be used against the campaign waged by Christian Aid against stores, which sell the products of child labour. The income from such labour is essential to family survival in some parts of the world and trade boycotts would therefore make things worse. Action on making education more accessible and attractive, as well as improved credit terms for the poor, can help to reduce the need for such labour.

The plenary session on social policy came in the Frank Paish lecture by Rebecca Blank (Northwestern and US Council of Economic Advisers.) This was called `When Can Public Policy-Makers Rely on Private Markets for Social Services?' Ms Blank outlined the complex possibilities, which could govern the public-private mix in social service delivery. There were questions of externalities - a uniform public school system could better ensure the setting of objective standards. The government might also be the better supplier where informational asymmetry exists, particularly when choice by the participants is limited. Private delivery can be successful where meaningful contracts are signed and government regulation replaces ownership.

For journalists present, the most exciting paper was `The Times Price Cut: Predatory Pricing or Canny Competition?' by Claire Morris (Kent at Canterbury.) The implication was that in an earlier enquiry the Office of Fair Trading had got The Times price cut of 1993 (45p to 30p) wrong. The OFT had seemed to assume that all other newspapers were competitors and predation was not possible in a market of eleven suppliers. If one took an alternative account, where differentiation is of the `address' type, Ms Morris showed that The Independent was the big loser. It had suffered a 25 per cent loss in circulation. Surprisingly the Daily Express was a secondary victim, losing three percent of its circulation in the wake of The Times cut.

If there was any paper that could be said to have most excited the majority (and if such a gathering allows itself to be excited) then it was probably a non-economic one. Ken Binmore (ELSE, UCL) gave us `How and Why did Fairness Norms Evolve?' This was an essay in anti-Kantian moral philosophy. Social morality, Binmore reckoned, when concerned with fairness was not based on a categorical imperative but on a series of practices that evolved from early societies to enable people to get along with each other. Binmore's publisher's stand was thronged with potential buyers as soon as he finished speaking.

Economics, Politics and Institutions

So economists are becoming more interested in other people's problems and others are becoming more interested in economists answers. This was highlighted in Her Majesty's Treasury presentation. Half of this was devoted to an exposition of government policy on productivity and competitiveness (pace Paul Krugman.) We all have to collaborate and educate ourselves better to be competitive and close the productivity gap with France, Germany and the United States. It is no good sacking two million of the least inefficient of us to achieve this end so presumably we must grow much faster than the others.

The Treasury appealed to the community of academic economists to join with it in overcoming the gap that had been opened up between the two over the past decades and help the government achieve these worthy ends. The reaction of the community was sceptical - would there ever be as many economists welcomed at Number Ten as Spice Girls and footballers? The message for next year at St Andrew's (for the Brits at least) should be to arrive with a lot of cuddly models and maps of not only the Third Way but of the fourth, fifth and sixth as well.

Now to return to the views with which we opened this essay. The commentary in The Independent stated that insight into institutions and politics matters for our understanding of our own economies: `In a recent speech Lawrence Summers, the US Deputy Treasury secretary, noted that no two countries with a McDonald's had gone to war with each other.' By the time these words appeared, US bombs were raining down on Serbia. There are five McDonald's franchises in Belgrade alone: perhaps the one on Serbian Rulers' Street was an early target. But the statement was bizarre even before the NATO raids and one might well wonder how this staple of school debating societies ever got to be so widely accepted. Maybe there was a sampling error: there were no wars between `McDonald's nations' before 1974 because there were either no McDonaldses or they were confined to North America. Since 1974 there have been very few cross-border wars anyway: 90 per cent of military conflicts that have occurred have been within nations. Of the six international conflicts since then, three have seen McDonald's on both sides - the Falklands (1982), Peru-Ecuador (1997) and NATO-Serbia today. There should be a paper on this matter.