By Diane Coyle, Enlightenment Economics

"It's different in infinite dimensional spaces," or so Peter Phillips said, part way through his Denis Sargan lecture at the 2002 Royal Economic Society conference at Warwick University. An arresting line, but the next few minutes could have been, for all I knew, taken from A Hitch-hikers Guide to the Galaxy. I could tell it was a brilliant lecture, and so the other eminent econometricians present confirmed, but it was too much for a humble mortal to grasp. As it was the first session of this year's RES conference, which was the first I'd ever attended, this was ominous. Was the frontier of research just too far beyond the limits of understanding for somebody who is not an academic?

Luckily for me, the frontier of econometric theory is also pretty distant from actually-existing econometrics, as presented in many of the other papers. These ranged incredibly widely and at any time there were at least two and sometimes more appealing sessions taking place. Maybe this is why each audience was so small (only eight in one case, and that included the chair and three presenters). Clearly, the number of sessions is supply- rather than demand-driven. But can there really be any satisfaction to be gained from delivering a paper to an almost empty room?

After some flitting around on the first afternoon, I settled in the main for the invited lectures and special sessions, all offering papers covering highly relevant policy areas. They were a safe bet - sure to be interesting and less likely to involve the social embarrassment of being a prominent member of a minuscule audience. Congratulations to this year's organisers for putting together such an excellent core programme. There were sessions on subjects ranging from globalisation to the Research Assessment Exercise, the latter apparently of vastly greater interest to academic economists than the former.

Before turning to the actual content, though, I'd like to put in a plea to next year's organisers to include more social events in the schedule. The biggest single benefit of going to a conference, especially now most researchers make their work available on their websites, is the scope for face-to-face meetings with old friends, colleagues and new contacts. Economists are obviously unusually puritanical about making full use of their time. The timetable didn't even allow for a five minute break between sessions, and the sessions tended to run into the coffee breaks. So the Women's Committee Reception stood out as the only opportunity for decent networking. (I did meet some extremely cheerful people wearing cowboy hats in the bar on the second evening, but they turned out to be from a different conference altogether and couldn't discuss unit roots or growth accounting, even after a few pints.)

To return to the serious business, it is obviously both unfair and unavoidable to single out just a few of the many papers for discussion in this conference report. As the unprecedented attention of the media confirmed at the time, there was a wealth of interesting research on offer covering a huge range of areas. The choice here simply reflects my personal interests, and the order reflects the conference timings - as good a way as any of reflecting the scope of the material.

In a session on foreign direct investment and its importance for productivity spillovers in the UK economy, the first paper, by Rachel Griffith, Stephen Redding and Helen Simpson from the Institute for Fiscal Studies, looked at whether there is evidence of manufacturing establishments catching up in terms of total factor productivity to the companies on the technology frontier, for if so it would indicate the importance of technology spillovers. Their preliminary results confirmed this was a significant phenomenon, whether the technological leader was domestic or foreign-owned. However, a substantial proportion of the companies at the frontier - about a quarter on average, much more in some sectors - were foreign-owned multinationals.

Richard Harris (U of Durham) and Catherine Robinson (U of Portsmouth) in their work considered three potential channels for productivity spillovers to domestic plants from foreign direct investment: within industries, between industries , and those resulting from agglomeration effects. Estimates of the indirect impact of FDI for a number of manufacturing industries in the UK suggested the spillover could in fact be negative, the main explanation being the limited capacity of domestic plants to improve productivity. In that case, the presence of higher-productivity competitors is damaging. However, they authors clearly doubted their own finding that there seems to be little sign of positive spillovers, noting that the measurement of the effects does not take account of the complicated forward and backward linkages involved.
The third paper in the session, by Sourafel Girma and Holger Go(umlaut)rg (both U of Nottingham), focussed specifically on the capacity of domestic firms to benefit from productivity spillovers. Domestic producers might not be able to benefit from technology transfer if the gap between them and the foreign producers is too wide. Variations in absorptive capacity might explain why industries differ so much in the extent to which they seem to benefit from spillovers. The explanation is obvious if the local capacity is too low, but it could be too high as well, for then FDI in other regions could create negative productivity spillovers.

The session addressed an important policy question. For many years now successive governments have placed high hopes on attracting foreign investment in part for its potential to improve Britain's productivity performance. After hearing about the research, it was hard to escape the conclusion that we have not yet got far beyond the instinct that FDI by world-class companies is bound to be helpful. Discussant Christopher Moir from the DTI noted that he was left with two unanswered questions, one about the models, another about their empirical application: what is the transmission mechanism for productivity spillovers? And does FDI improve domestic productive capacity beyond what it would otherwise have been? As there are such differences in results between industries, it seems clear that the IFS's use of establishment data may shed more light on the answers.

From there I went on to hear David Hendry (Nuffield) who noted, in presenting a paper written with Michael Clements (Warwick), that the models needed for economic analysis and those needed to make good forecasts of the economy are different. He cited a recent Washington Post headline - 'Never a Crystal Ball When You Need One' - to make the point that it's the things we don't know we don't know that are the problem. Structural change is pervasive in economic time series. Changes in technology, legislation, culture, politics or weather mean it is essential to allow for structural breaks and mis-specification in forecasting - not to mention leaving a role for judgement. He described ten areas in which it is already possible to move away from the conventional approach which assumes stationarity and well-specified models, and another eight areas in which further research is needed. As terrible macroeconomic forecasts are one of the main reasons economists are held in such low esteem by the public, this progress is hugely encouraging. Let's hope that this is one area in which non-academics can catch up swiftly to the technology frontier.

Rounding off Monday, in his Review of Economic Studies lecture Matthias Dewatripont (ECARES) gave a superb panoramic survey of the state of knowledge on information processing and delegation. It was a masterly demonstration of economics as one way of thinking, and a uniquely muscular way at that, about aspects of human society. He started with models in which information processing and communications costs drive the structure of organisations, and moved on through incentives to be informed or not, reputation-building and the exercise of power.
The next morning, Marcus Miller (Warwick) kicked off a session on monetary policy and asset prices with an anlysis of Argentina's economic crisis, with the gloomy bottom line that events have turned out as badly as possible. The final costs of the crisis will depend on the success or otherwise of the post-devaluation and default policies. Financial restructuring and indexation would allow the devaluation to work. On the other hand, policy failure will result in a self-fulfilling confirmation of the view - held by former finance minister Domingo Cavallo - that the devaluation and default option should be avoided at all costs. The 'correct' policy prescription in the first place depended on beliefs about the likely ex post policy reaction to the various possible outcomes, and therefore the smoothness of the transition from the old policy regime to a new one. In practice, the chaos of the transition is weighing in favour of those who opposed devaluation at all.

The other two papers on asset prices brought us back to home territory, and the debate about whether the central bank should target asset prices or instead use them as part of the information set available for inflation targetting. As Simon Wells (Bank of England) pointed out, presenteing a paper co-authored with his colleague Stephen Millard, asset prices do have some predictive power for output and inflation - especially house prices. It is, of course, hard to identify specific bubbles in asset prices. The authors therefore looked at financial conditions indicators that combine a number of different asset prices, and concluded that use of such an index as a monetary policy target would not have delivered better outcomes than a simple Taylor rule. In another paper Jagjit Chadha (Cambridge) and Charles Nolan (Durham) considered the role for asset prices in the presence of financial frictions such as liquidity constraints, and concluded there could be case for targetting asset prices. However, their volatility would mean much greater volatility in the monetary policy instrument. Policy would have to be quite aggressive. The opposite conclusion was drawn by Boris Hoffman (Bonn) presenting a paper co-authored with Charles Goodhart (LSE). Central banks should respond directly to asset prices as evidence of future excess demand, he argued.

This is another area of academic debate that has spilled over into the public domain, for the obvious reason that it could hit us all in the bank account. It is no surprise that, broadly speaking, commentators in the City and media favour using a monetary conditions indicator that would incorporate the exchange rate, but are more sceptical about the use of house prices as a target for policy. In other words, arguments weighing on the side of lower interest rates are popular, while those favouring higher interest rates are not.

Tuesday morning also brought a special session on new technologies and productivity growth, one that promised to be extremely interesting in its extension to UK data of the kind of research that has now been so plentiful for the US.

One of the papers, presented by John Fernald from the Federal Reserve Bank of Chicago, was about the US. He reported finding that cyclical variations in capacity utilisation made little difference to estimates of the acceleration in trend productivity growth (in contrast to the well-known result from Robert Gordon). However, incorporating adjustment costs to new technologies produced an estimate that the consequent drag on output had sliced 0.6% a year off US growth from 1995-99. Correcting for the adjustment costs therefore led to an even bigger estimate of the contribution of the technologies to trend productivity growth. As Garry Young (Bank of England) observed, the findings raised other questions apart from the contrast with other results on cyclical effects, particularly in terms of the differences at industry level. Some industries appeared to be displaying technological regress, especially in services, suggesting there might be serious measurement issues.
Turning to the UK, Hasan Bakhshi from the Bank of England presented a paper, co-authored with colleague Jens Larsen, on investment-specific technological progress in the UK, building on the Bank's programme of research in this area. Discussant Bill Martin (UBS Asset Management) noted that this approach, looking at technical progress embodied in investment, fits in with the longstanding investment-obsession of policy-makers but overlooks the fact that it is a steady-state approach; whereas in growth accounting exercises the contribution of information technologies to total factor productivity stems from increases in their weight. The income and price elasticities of the new technologies are almost certainly more than unity.

Gianluca Violante (UCL) started out with the observation that measurement is all-important in this area of research. He and co-author Jason Cummins (Board of Governors) estimate that the percentage of output growth due to quality-improvements in capital climbed from 21% for the whole of the 1948-99 period to 31% in the 1990s. The technology gap between industries had not changed but that between the best and the average companies within industries had risen over time. In other words, the evidence for the UK points to an acceleration in the rate of embodied technical progress across industries but greater adoption by some firms than others.

In fact, every speaker in this session spent some time talking about data and measurement issues. So it was a shame that most of them did not manage to attend the subsequent special session, New Measures for a Changing Economy, in which three speakers from the Office for National Statistics described work in progress on improving statistics needed for exactly this kind of research. I have now spent some years popularising research on technology and productivity, and have therefore kept a close watch on the work being undertaken on both sides of the Atlantic. To my mind, the developments in statistics are just about the most challenging area of all the new economy research. For the precision needed to collect statistics demands the utmost clarity of thought about the underlying economic concepts. So far, I think economists are failing statisticians, demanding 'better' measurement without offering the conceptual advances that would make it possible to meet that demand - or, indeed, bothering to pay attention to what the statisticians are actually doing.

The papers covered a wide range of innovations the ONS has in hand. Sue Holloway described the methodology for the household accounts, being developed as a satellite to the national accounts. At a time of structural change in the economy, when the production boundary is shifting these are likely to emerge as one of the most illuminating sources of evidence we have available. Eunice Lau described the programme of work to develop quality-adjusted labour supply measures and link up this evidence from the Labour Force Survey with the productivity data based on the national accounts. Tony Clayton presented the ONS's work on measuring e-commerce and other indicators of changes in behaviour by businesses and households. As the scope of these subjects indicates, the statistical programme is ambitious and exciting.

The final morning of the conference brought a special session on globalisation, with Richard Portes (LBS) and Thierry Verdier (LSE) presenting an overview of a report 'Globalisation and its Discontents' published by the Centre for Economic Policy Research. The report, prepared for the European Commission, presents an overview of the economic evidence on the most salient aspects of globalisation. The body of research available is now huge, of course, but so far economists have had little impact on the policy debate. This is more than a shame, because a number of the 'facts' about globalisation current in the debate are at best over-simplifications and at worst pure myth. So, for example, the evidence certainly does not point overwhelmingly to the conclusion that globalisation has increased inequality. This is a claim that depends on looking at the data in one specific way, namely the gap between Sub-Saharan Africa and most of the rest of the world. Similarly, there is no evidence of a race to the bottom in corporate taxation or environmental standards. What's more, such myths divert attention from the problems that do emerge as developing countries globalise, the institutional weaknesses and market failures that become more pressing as they engage in the world economy.

It is surely time for economists to take a higher profile in the public debate, but the evidence from the conference session at any rate is that it is not such a hot button issue for the profession. It was one of the least argumentative discussions of globalisation I have ever witnessed. Perhaps that was the result of the presenters' skill in generating more light than heat.
Or perhaps it does reflect a division between the preoccupations of academics and the rest of us, a division that is natural in any subject but particularly striking in economics because of its importance in public policy. The conference turned out to be a good opportunity to catch up on some research in areas that interest me, although not really geared towards the needs of economists who are not academics.
It did also leave me wishing that there had been a bit more evidence of academic interest in what is preoccupying both other professional economists and wider audiences, and not so much obsession with the RAE. The Royal Economic Society's media initiative has done wonders during the past few years for the public profile of economics, finding the juiciest research plums and translating them in ways that respond to the public and media agenda. It has demonstrated that there is an appetite for economic research. Academics could do a lot more to help in future by being more willing to engage in communication, and taking communications skills more seriously. (I hope all those who presented their papers at the conference with their arms folded and their gaze fixed on their feet know who they are.) It is especially in a subject like globalisation, overly-fashionable and crowded with pundits, that economists need to make themselves heard. For the abdication of serious researchers leaves the way open for all kinds of nonsense to become conventional wisdom, and contributes to the ebbing of public confidence in economics.