Dangerous guesswork in economic policy
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Welcome to the LSE events podcast by the London School of Economics and Political Science. Get ready to hear from some of the most influential international figures in the social sciences. Pretty good audience. Many familiar and friendly faces here, which is great. Professor Anderson, hello. We have an interesting evening. My job is obviously not to screw up the introduction, but I'll do my best.

I've been asked to do this because I've known Max for a very long time. I've known Max since I was a graduate student here in 1976, and Max returned from Ghana where he'd been the head of the economics faculty for a period on some extended leave. Max joined the faculty of the LSE, would you believe, in 19...

and was a fellow graduate student before that with Robert Mundell, once of this parish. Max was a key member of the Economics Department, obviously, in the 1960s, and played an instrumental role then in setting up the MSc in Economics, and in particular the course Methods of Economic Investigation, which was a key part of the old MSc. And I was fortunate that...

When Max returned to the school, he saw the disastrous state of the PhD program that I was a member of, and he helped sort that out. And the modern PhD program at the LSE today in economics, which is world-renowned, owes a great deal to the efforts that Max put in at that time. Subsequent to his...

in the economics department. Max established, actually did establish, the CITES program here at the school with funding from Arup and various other people. And he also played a fundamental role in setting up the Center for the Philosophy of Natural Science or whatever it's called, something like that.

and performed a large number of roles within the school, some of them of a rescuing nature, which I won't bore you with today, but I could talk about Max's many contributions for a long time. But today, I have to say I was very fortunate that I was allowed to do the presentation in 2023 for Max to be given a rather late award of an Honorary Fellow at the LSE.

Today, Max, though, is going to talk about some thoughts that he's been having about the nature of our discipline, economics, and its impact on economic policy, for good or for bad. And he's going to talk about the need for and the benefits of drawing upon specialist skills in formulating economic policy. And some of the issues, though, addressed...

can be sort of understood really on a common sense basis to the people that read the FT, etc. But some involve obviously quite careful analysis and ultimately involve very big decisions about the use of resources in the economy and understanding the wider economic and social implications of decisions. Hard choices have to be made about the NHS, defence policy, education, housing, climate, lots of other things.

I've got down here in my notes, high-speed rail. There's an example of an interesting set of decisions where some level of expertise could have been applied slightly better than it has been. But today, Max is going to take us through some of his thoughts about the relationship of economic theory analysis.

and empirical research in economics and how it's used in thinking about the formulation of economic policy to make the world a better place. Max is going to talk, at least the UK mainly in this case, a better place, hard task. Max is going to talk for approximately 40 minutes and then we're going to take questions. And the question session obviously is going to be quite tight.

This is a hybrid event so there are people who are watching this event online and when it comes to questions, I will try to take at least one question from the online audience. Finally, I should say that

We all, as you know, have to behave in a civil and open-minded way at the LSE and respect the school's attitude to free speech. Is that the First Amendment in the United States? Whatever. Anyway, so I'll hand it over to Max and I won't guillotine you after 40 minutes, Max, but I will touch you on the knee. Thank you so much, David. Very nice of you to introduce me in that way.

It's great to see, it's a pleasure to see so many familiar faces and it's an even greater pleasure to see so many unfamiliar places. I'm not going to start with the usual introduction. It's great to be giving a talk at the London School of Economics.

It would be weird for me to say that as I've been talking here since 1959. I was wondering about that. I won't say it all over again. Now, I approach this, it would also be misleading to say that it's great to be here because I come with certain anxiety

not to say trepidation. I've been to quite a number of launches of books and some of the books have been pretty good and some have been a little less. But the launch talks have been almost all disappointing. And the reason for that is not hard to find. The authors, and I include myself among them,

have been lucky enough to have their thoughts printed and put in a book. So what are they going to say now? Well, my plan, as David explains, first of all is to keep it short. And my strategy is to tell you some tales, some six little tales that shed light on the book and in modern parlance tell you where I'm coming from

but are not actually in the book on the whole. If you find these little tales entertaining or intriguing, you might turn to the book and, as Nick Abbott would say, you will receive total satisfaction. Now, the first tale that I'd like to tell you is an allegory, if I'm using that term correctly.

It's completely true to life. At the time I was supervising two PhD students, excellent students, young man and young woman, very, very well trained, very skilled and competent in an excellent PhD cohort which included Darren Asimoglu and Thomas Piketty.

and these two were very strong as well. They tended to work together and occasionally I would see them together and they also worked separately and sometimes I would see them separately. On one occasion I was seeing them together and I had a thought that I would suggest to them. At the time there was a large international football event and it was widely agreed

that the system for distributing tickets was unsatisfactory. And I suggested that perhaps they might work on a more satisfactory way of distributing the tickets. They needn't aim for the optimal distribution, the best possible one. But if they could come up with a distribution system that was superior to the existing one, I thought that would make a nice publication.

and it might even have a favorable effect on future events. And they thought it was a good idea. They accepted the idea and went off on it. I didn't check up particularly how it's going for a while, but after some time when I hadn't heard anything, I said, "How's it going with the tickets?" And they said, "Well, what happened was in the course of our investigations,

we came across a difficult unsolved problem in statistical inference. And we've been working on that. A number of other distinguished people have tried to solve it and haven't succeeded. And among them, Henry Wynne, who has recently departed from us. But they thought they had a chance of solving this problem. And the ticket issue

but went very much to the back burner. Had they succeeded with this, their brownie points in economics would have been much higher than if they had published the ticket paper. And in economics, we're far more concerned with the rankings, as I understand it, than in other disciplines. Who are the best hundred economists? Who are the best 50?

who are the best-ten economists. And these rankings don't have much to do with issues like the ticket problem or other public policy problems, but has far more to do with solving Papst-Truth's technical problems, which other people have failed to solve. And this creates a problem for well-minded,

Am I supposed to click something? You've got the clicker. Forgive me. Oh, there we go. So this tendency of the ranking based on these technical facilities make it difficult even for good-hearted politicians

well-minded who do want to draw on economic knowledge and they tend instead to go for the DIY approach to economic issues with very often disastrous results. So I have quite a general point in the book which I discuss which has to do with the responsibilities of people, say for example the board of directors

having to choose a new CEO or a team at the London School of Economics, having to choose a new director or as we now call them the president. The CEO board has a tendency to pay a lot of money, to give top dollar. If things go well,

They say, "Well, it's gone well." And if they go badly, they offer the excuse that we paid the top dollar. But that's not an excuse. That's no reason. The responsibility for people in those positions of choosing an advisor is to know something about the subject

not being a master of the subject, but to know something about the issues and something about the needs of the institution which requires this advice. And I know this is not easy to access economic knowledge, partly because of the allegory that I told you. And in my book, I hope I offer a helping hand. So my next tale

has the title "Nature." In the old days, we were very taken with the Cobb-Douglas production function. That's an equation which relates output to the inputs of labor and capital. It's a log-linear function, easy to estimate, and the data is relatively clear.

you can differentiate the function, you get the marginal product of labor. If you differentiate with respect to labor, and that's in the analytical framework, is the wage rate. You can differentiate it with respect to capital, that's a little more complicated, but nevertheless solvable. So it was a real empirical thing, and we liked it very much, unlike the

the world production function or the national production function frontier or the utility functions which were a bit more mysterious. But a missing thing to me in the Cobb-Douglas production function is that things are made out of labor and capital, yes, but they're made out of nature as well. I mean, people who

do exploration and find oil, for example, and produce it. They deserve to be paid for their efforts, but they're paid for more than their efforts. They're paid for the oil, but they didn't put the oil there. Oil came from nature. So you think of a whaling ship out there,

I must confess I have no particular desire to go whale watching. That's probably a character failing on my part. But I do like watching them on television and I like the fact that they're there. You might ask yourself, well, who owns the whales? Well, in a way, everybody and nobody.

And there is one way you can own a whale, and that's to kill the whale. And ownership of nature was a major concern of Henry George, which is how I came into economics. And I think the neglect of the role of nature, which is almost totally absent from standard economic theory, has unfortunate consequences.

and particularly land ownership, and Henry George was known as the sort of land tax man. Land ownership, there are families and institutions which own a great stretch of London. They own the land and they can keep it for generations. I would like to see it gradually whittled away and nature become more of a public owner.

Recently, at the London School of Economics and elsewhere, there's been discussion of who owns space. And I think this is a very important discussion. When the Americans put the two men on the moon, they also put a flag stand and the American flag on it.

And given that weight was an enormous constraint and consideration, particularly in the lunar module, it was a big decision to put this there. As far as I know, they didn't put it there to say America owns the moon. They put it there to advertise the achievement and also to preempt anybody else from...

owning the moon, and I think that was a good thing to do. But it's a pity that we couldn't have consideration of nature and its role in economic production. The contextual aspect of the application of economics has to take account of nature. But more even important is the social consideration.

Economic theory is not specific, but the market in Japan is a very different thing from the market in the United States or in Holland or in the UK. And the social setting, the context is terribly important.

And economics, when it comes to public policy, is not off-the-shelf knowledge. You can't say, "Well, we have this problem, we'll pull out this text and that will tell us what to do." The text will give you the framework for consideration, but successful consideration involves

the application of that framework of thought to the particular context. And the social context is terribly important. So the next tale that I would like to tell you has to do with wealth inequality. I think that the wealth inequality is a terrific, dangerous threat to democracy

and to the successful functioning of the market. Thomas Piketty has done more than anybody else to bring the issue of wealth inequality to the agenda, but I must confess I think his theory of the causes of wealth inequality are mistaken. He emphasizes two numbers, R and G,

G is the rate of growth, long-term rate of growth, which is about 1%, and R is the rate of return on investment, which is maybe about 3%. And he thinks that that is what accounts for great wealth inequality. I think that's a mistake, but there is a wonderful paper by a former colleague of ours, Patrick Bolton,

lost somebody else's gain, he's no longer with us, but he wrote a truly marvelous paper on wealth inequality. If you ask yourself, why does the wealth inequality vary over time in a particular country, and why does it vary between countries? It has very little to do with the nature of the economy, but it has a great deal to do with the taxation regime.

And in the early stages, it's quite feasible to mitigate the effects, the extreme effects of wealth inequality through an income tax and corporate tax and inheritance tax. But we're not at the early stages. We're at the very late stages. And at this stage, it seems to me,

that a wealth tax is the only possibility that we could employ. As far as I know, the Green Party are the only people who were thinking about a wealth tax.

Now I know if you say to me, I suggest the wealth tax you will say to me, but if we tax them, and when I'm thinking of the wealth tax, I'm not thinking of taxing the middle classes. I'm thinking of people with say 200 million or 500 million and more, and I'm thinking of taxing them at a rate of less than 1%, say half a percent. But people say, nevertheless, these billionaires will go away.

and that will be very bad for the economy. Well, two questions in my mind. I'm not all that sure they will go away, and I'm not all that sure that it will be all that bad if they did. But there are obviously complex issues here. Jurisdictional issues, measurement issues, the correct penalty system and so on. It is a complex matter.

So I would like to see a political organization, maybe in opposition for 14 years, nevertheless take some time to study this matter and try to work out, first of all, whether it's a good idea to do it or not. And then if they're going to do it,

work out how it should be done so that it won't have adverse consequences. That takes effort and consideration. As I understand it, the government today is very concerned with growth. Well, economic growth is a very complex matter. Dick Lipsy has written a monumental book about this.

and there are other people. I wouldn't expect the politicians to devote time and energy to reading that. See, they wouldn't be able to do so to any great extent. But I think that they should be able to draw on the knowledge of people who do understand the issues of economic growth and more importantly even than

the knowledge itself, but be able to draw on that knowledge and make it applicable to the context of the United Kingdom. Without doing that, it's a matter of, as I say in the book, dangerous guesswork. So we say we're very interested in the economic growth

So we're going to build a lot of houses, which may be a good thing in itself. And we're going to get rid of a lot of regulations, which I think some regulations are good, many are. But anyhow, that's how we're going to do economic growth. Well, that sounds very strange to me. And I think it's a shame that they choose to operate in that way.

I'm now going to move on to my fifth or sixth tale, which is about the penultimate chapter in my book, which is controversial. I admit that. Even the PR people working on my book suggested that I drop that chapter.

but I've stuck with it and maybe I'll pay a course for that. But anyhow, the idea there is this: the standard goal in economic policy is choice. The object of successful economic policy is to expand the choices that people have. I quite like this.

The idea that people know best what is good for themselves, I think that's a little doubtful in many cases, whether they know best about eating or housing or anything else. Nevertheless, I like the idea of individual responsibility. But that's a single goal which a lot of people claim is value-free, but it's not.

The idea that the economy should be devoted to choice is a value in and of itself. But I would suggest that maybe we could think of economic policy in addition to choice of promoting virtue. Promoting virtue. So what do I mean by virtue? Well, I'll quickly discuss three. The first is courage.

I think courage is a virtue. To be courageous, to stand up to evil, to depart from the wisdom of the crowd is very important. And another virtue is curiosity. Curiosity is the enemy of ideology. And I think...

one can think of the design of policies in a way that would promote courage and curiosity. And then a third virtue which I suggest is compassion. Now people say, "Well, compassion makes a lot of sense." You see, sleep with Sir Pervin sleeping rough and you should say to yourself,

Maybe I might be in that circumstance one day, so that's where I should be concerned. I don't think that's a very good argument.

I would extend compassion to animals, for example. I think we should be kind to animals, but there's not much chance that I'll turn out to be an animal one day. That's not the reason why we should be compassionate. There are much deeper reasons. So I suggest that

policies might have a wider agenda than choice, and I discussed some ways in which one might promote virtue. Well, another issue, which would be one of the concluding issues of this little talk, has to do with the great divide. There are those people who favor small government, little regulation,

little welfare program, modest welfare program, low taxation. And others who favor a bigger goal for the government and important regulation and important taxation and we have this great divide. And what does economics have to say about that divide? And the answer is nothing. Economics is not capable of

contributing to that debate in any, it is in some ways which I'll come to, but basically economics is about how does the system work, what causes what and so on. What kind of economy you want to have comes from outside. But there is one thing that economics can do

and that is to explore the arguments which are made on both sides of the great divide in advancing their cause. The rough and tumble, wild west view of the economy that people say, well, this is going to be so much more productive that it will give much more to everybody. Is that really true?

Is that going to happen? And on the other side, people may raise issues about the design of the welfare system and so on. Well, as I draw near my closing comments, I'd like to make it clear that in my book, I don't intend to represent the economics profession as a whole or

in a comprehensive way. It's very much the way I see the thing. It's not a general exposition of what economics is about. However, there are economists who have been nice enough to say very nice things about my book.

Professor Nick Stern wrote very nicely about it and so did Professor Charlie Bean and I'm grateful to them for that. But I'm also aware that there are many economists who would say I'm talking nonsense in the book and would disagree with it very firmly. That's okay with me. I think that's fine. There should be a debate and I wish that that debate

would come more to the fore, and I certainly wish it would be going on when I was a student. While I'm thanking the endorsers of the book, I must mention John Blair, Oscar-winning film director who wrote very nicely about the book, and the International

intellectual Steven Pinker who wrote very nicely about the book and I'm very pleased about that but I have no illusion that it will be widely greeted with hoops and cheers from the economics academy generally. So

Sticking to the plan of a short address, I would like to move speedily to the Q&A. And I would like to thank you for listening to me so politely. And perhaps I could even go so far as to say I'd like to thank you for not making a riot while I was talking.

Well, thank you very much, Max. So, pretty stimulating, and that's reflected in two questions that I've gotten from the online audience. But before we take those, I'm going to go to the floor.

I'll take questions. I think I'm just going to take one at a time. I know often we do them in banks. But the reason for taking bunches is usually just to make sure everybody gets a say and no one question gets too much attention. So bear that in mind. So John, can you? Hi, I'm interrupting this event to tell you about another awesome LSE podcast that we think you'd enjoy.

LSE IQ asks social scientists and other experts to answer one intelligent question, like why do people believe in conspiracy theories or can we afford the super rich? Come check us out. Just search for LSE IQ wherever you get your podcasts. Now back to the event.

Well, I've been picked upon to ask the first question. That's why he's sitting there, you see. So here it is. I'm terribly much in step with what Max is saying in this book. And of course, like many people, I do bewail the fact that often policies...

go wrong because they haven't been talked through fully from an economic perspective at the beginning. But in one of the later chapters, I was very much struck by your discussion of issues of public sector spending. And it reminded me of the public finance initiative and all the criticism that we made about that over the years. And it brought back to me that

It wasn't so much that the consequences weren't understood. There was a lack of analysis of the kind of world concerned about it. But there was another dimension to it, which was that at the time, whatever its economic wisdom or unwisdom, it was politically very attractive because it allowed certain public projects to go through with private sector finance companies

And this allowed things to happen without big jumps in public sector borrowing requirements, which was politically very sensitive at that point. And so often we make mistakes not because we don't understand the consequences, but because economic and political considerations are being balanced, sometimes in ways that lead to long-run consequences that are not very balanced.

Well, I'm grateful for the question, which it seems to me answers itself. I would be hard pressed to put it any better than you've done in your statement. Yes, you're right. There's a great deal of opportunism in proposals like public-private participation.

I don't have much to say about that. I'm sorry to say I do think that There's an enormous reluctance on the part of decision-makers to draw on what knowledge is available and I think that that is a terrible failing I do think that

It's to some extent down to the economics profession in its concerns with technology rather than practical application. But that's not the whole story. So I would agree with what you say, that the attempt to get things on the cheap through a public-private initiative

plants the seeds for trouble down the road. Thank you. I'll come to you in a minute. There's quite a few questions. I'm going to go to you, since you were first, and then to you, and then to young lady over here. You'll need to put your hands up again for the microphone in the order that I've given it. Do you want to know who the people are who are speaking, or it's not necessary? No, it's...

I rather base it on what they have to say.

Pretty good, eh? I like that. I'll use that. Too late for me now, but OK. Max, thank you very much for your six pillars of wisdom. When I studied economics here over 40 years ago, we were taught that generally when the price of something goes up, the demand for it goes down. How much guesswork do you think the chancellor has been applying to economic policy by putting the price of employing people up when her objective is to drive economic growth?

I'm not a great expert here, but my impression is that the right-wing press has been unnecessarily harsh on the Labour government and tends to poke holes. However, I am of the view that the years of opposition were in some ways wasted.

And much more thought could have been given to the budget and to the plans for growth and other aspects of current labor policy rather than plunge in without doing the homework, without having the analysis in advance. So that's my general take on your question. Thank you, Corey. Thank you.

Thank you, doctor, for talks. So my question is, you mentioned that one goal of economic policy is the promotion of good virtues, such as like courage and compassion. So can you talk about how practically can it be implemented in economic policy? Like how practically can that be done? Thank you. That's a good question. I'm sorry, could you... He's concerned... Let me try to summarise what you said. It was to do with the role of your virtues, etc.,

and then it's really the mapping of that into something that's measurable and effective in the formation of economic policy. Is that correct? My question is how should we implement that kind of virtue promoting economic policies? Yes, making it effective. How does it translate into economic policy and shaping decisions? Yes, well, an economic system which makes people fearful is dangerous

and taps away on courage. So one of the things that I would consider is people's security and ability to not draw too heavily on their stock of courage in their life generally. I forget. It's funny, almost always when I sit down

from a talk, I remember something that I forgot to say and that's happened to me now and I'm going to interrupt the questions a bit just to tell you this last little bit. When I was talking about the social context of economics, I was reminded of when Keynes

My John Leonard Keynes retired from being the editor of the Economic Journal. He gave a talk which mystifies me to this day. I think he was the greatest economist, but what he said was this. He started out by saying economics is not important.

Well, I think that was a way of provoking his audience. But what he went on to say was that economics is like the plumbing in a house. It should be quiet.

There should be no leaks. It should be efficient and so on. But what matters is the life that's lived in the house. Now, this is terribly mistaken in my view because the relationship between the economy and the society is nothing like the plumbing.

the kind of society that you have very much affects the kind of economy that you have, and the kind of economy you have very much affects the society. So that particular statement of Keynes I find very mysterious. On the other hand, he also made a one-page statement on how economics works and what it is, and he starts out by saying

economics is not a difficult subject. It's not like, as he put it there, like mathematics and philosophy, which I found very intriguing. But he says, though it's not a difficult subject, very few people do it well.

and then he goes on to explain why they do it well. And I commend you to that statement in my, which I quote in full in my book, that alone is worth the price of admission. Well, leave that up to the audience. Young lady in red.

Thank you for the insightful session. So I want to ask that when I read about the book, it was found that the book touches on the moral issues involved. So I would like to ask that is there a moral duty that the policy makers should follow when it comes to a

expert driven policy versus a less popular, I mean popular but less effective policy. Like for example, the progressive taxation reduces inequality, but it is sometimes opposed for growth reasons.

So the policymakers are often in a dilemma when it comes to expert-driven policy versus a popular but less effective one. So how would you address that in the book? Or what is your thought on that? I think it's a trade-off between popularity and effectiveness. Is that right? Yeah. Which is obviously a dilemma which is somewhat affected by the length of time politicians have to

trade that off, as it were, four or five years. Yes. I don't have anything particularly new or interesting to say about that. I mean, it is true that you can't consider a policy in the abstract. You have to consider the political implications and whether it's going to... When I was in Ghana...

there was a massive devaluation. It was a very good thing to do for the economy and it was followed a few weeks later by a massive coup that kicked the government out. In fact, there was a luncheon

a few days before of most of the people involved in economic decision-making. I was the only foreigner there and there were about a dozen of us there. And two days later,

everybody at that lunch but me was in jail. So I'm very much aware of the sensitivity of economic decision-making to the well-being of the politicians. However, it seems to me that the major cause of unsatisfactory performance

is a lack of understanding, is a lack of knowledge rather than adverse political consequences. And my plea is a plea for knowledge. Yeah, it's an interesting question when you can get elected as a government in this country with 34% of the popular vote. I think that's about right. It might be less in the future, by the way.

I'm now going to take a couple of questions which have come in off the internet. I'm not sure how big the internet audience is, but I understand it could be up to 200, so it's similar size to the number in the room. Question number one, Max. I'm going to read it. Yeah. Are you ready? Are you ready? One of your key points...

was that there was the need for expertise when managing economics in institutions. Could that be a double-edged sword as it can sometimes numb our ability to think outside of the box? Such as the relationship that Rachel Reeves has with her former boss, that's at the Bank of England I guess, which is reportedly meant

which has made her weak on challenging the Bank of England on certain issues. This is an interpretation of somebody, so we don't necessarily have to agree with the statement, but even so it poses a question if you agree with it. Well, I'll tell you what my preference would be, and that is that you would go on to the next question.

Sorry, apologies to the person on the line, but Max can't answer your question. I, of course, could do that. We do have Professor Goodhart in the front row, who I refer you to by email. Next question.

This one I think is something that should get, this is very pertinent I think. Considering the wealth tax arguments, is there a possibility of considering them leaving as a salient argument given the precedent of the contemporary situation in Norway

a far better economy than ours, alongside the consideration that the UK's core industry is financial services, i.e. the processing of wealth, of which the top 1% control 25% of the UK.

rather than metaphorically punishing the top barrier, I guess that's group, is there any way you can see of reducing the economic disparity by helping out the other end of British society? So there are really two issues there. Quite a few issues. I mean, Norway is interesting in my discussion of nature in that, as I understand it, to a great extent,

They made energy a public good or the ownership of energy in public hands, which I think is a very, very good arrangement. And I was so wrapped up with the word Norway that I rather missed the important part of the rest of the question.

Well, basically, the Norwegian economy seems to be doing pretty well. Evidently, they've got some of the taxes that you've alluded to. The UK economy has got clear significant wealth disparity with a lot of the money, a lot of the wealth being in the hands of a small percentage of the population.

That said, it's a very different economy. I mean, the Norwegian economy is a resource-led economy. The UK, apart from some other strong sectors like media and communications and these days a bit of high tech, is financial services. So is that an issue? Capital mobility, things like that, I suppose. Well, I mean, the difference between the two economies is multifaceted and is...

That's the first thing that one has to say about it. If you want me to give an impression about the relative importance of the different factors, I can't do that. I haven't studied it enough to be able to do that. So the short answer to that question is, don't know.

I suppose the question might be just then related to the UK. I mean, I personally believe a land tax, which Charles has advocated as a good idea, which is some form of wealth tax, which is a good revenue source, Henry George, who you spoke about. But I mean, there are some people who are very nervous about it. But you mentioned a rate of less than 1%, which is not different from Charles's rate and his FT piece.

And given that the government can't raise any money, having tied its hands on almost all taxes that we currently have, what better than a new one? And a non-distortive tax. Well, a less distortive tax. Yes. The claim is that it's totally undistorted. But that's false. Yes. But it has... Because they say that tax always makes things smaller. You can't make land smaller.

But that misses the point that you can use land in different ways. And so it can be a distortion tax, but on balance, all in favor. So now go back to the audience. Maybe I'll ask a question then. Oh, sorry, you get precedence over me. Yes, good evening. I was an undergraduate in 1981 and had the pleasure of being taught by Mr. Storr, and I wanted to thank him for that very much.

and I seem to recall actually that there was a poster at one point in the LSE advertising the LSE Jazz Band and you were going to be playing the bongos, am I right? Yeah, bass guitar. My question is, can you describe any coherence to the policies we may be seeing in the US of

government intervention, for example, to impose tariffs and government intervention to remove regulation within the domestic economy. Are we moving to a new paradigm of economics where those apparently contradictory policies are actually consistent? Well, this anti-regulation movement generally seems to me to be ill-founded.

Economics makes one very well aware of all sorts of externalities and areas where the market, unfettered market, can bring about adverse consequences. And the answer to those concerns

issues is form of regulation. People seem to talk as if all regulation is somehow a bad thing. That's crazy in my view. I think if you say, well, we got to get rid of all that red tape and so on, that's a very short-sighted view. The people who...

tend to take that view, go for the wild west economy, everything will roar ahead, we'll be so productive and so on. There's no sound economic analysis or experience of various countries to support such a view. So I think that we're in an atmosphere. And it's no chance that we're in this atmosphere.

People say, as I mentioned, billionaires, why do they care about more money? They care about it because they want to influence the political process and have been very successful in spreading a kind of view that there's something called economics which favors

freedom and no regulation. And that isn't true of economics at all. What about the tariff point, Max? He asked about Trump's tariffs, sorting out all the problems. Yes, well, I mean, I think what's happening in America is a really terrible tragedy. And I'm very optimistic about

the world at the moment. I think so many things are going in the right direction, from Syria to problems. All the dictators seem to be in terrible trouble. But this situation in America is absolutely terrifying. And the idea that we're going to solve issues through a tariff program

is, first of all, Trump seems to think that tariffs are a tax on the foreigner. Of course they have an effect on the foreigner, but they're a tax on the citizens. And the idea that he's going to make things cheaper in America through imposing tariffs is just wacky sort of stuff.

But at the moment, the cult doesn't worry about that. They think that he's on the right track. And it will be interesting to see when it becomes clear that he's completely mistaken, how the cult will react. My guess is that they'll find some way of blaming other people rather than the tarot. But that's just my guess.

Max, sorry. No, no, no, you're before me. I'm very interested in how economic policy has changed, particularly compared to say the 1950s, 60s, 70s and today.

And I wondered if you could say anything about that. We live in a much more dangerous world now for lots of reasons. So if we put that aside and just look at what economic policy has been, is it more dangerous now? Are economists more involved now, less involved? Do you have any comments on the change in economic policy? You should answer that question.

Well, Charles could answer it. No, no. I mean, the challenges facing us today distract me huge. I mean, climate change is massive, obviously.

I mean, the imbalances in the world economy are staggering. Where's the next debt crisis going to be? What will the implications be? We look at China. China proudly thinks it's going to get a smooth landing. If it does, great. If it doesn't, it has dramatic impacts.

The issues around the US at the moment where Trump thinks he can sort things out with some kind of tax cuts and some reversion to trickle down economics or whatever the hell that is, that was discredited, I think. It's very challenging. And then...

I mean, I think this inequality issue that Max has been alluding to, the wealth inequalities and the challenges that poses are dramatic. I mean, populism and so on is not independent of that.

I mean, the lack of productivity growth, which we've experienced in the West for donkey's years now, improving in the US, very slowly in Europe, but not much evidence of it, is challenging the political stabilities that we've had for so long. So these are things that I think we're going to be challenged with going forward. So I'd say I'm less optimistic than Max.

for what it's worth. But my opinions don't count. But I will ask a question. It's a very simple one. It's actually just something that occurred to me. But it's something I need to think a little bit about.

So, it was when you were talking about Thomas Piketty and Darren Asimoglu being distracted from the fundamental question which had some policy impact to work on something that could have impressed their colleagues more. And the economics profession, despite my great age and doing my fifth stint on the Schools Promotions Committee this year, I have to say the work that I'm looking at is stellar across the board.

I look at a few economists who are great, etc. So they'll all do very well, I'm sure. But there is this issue of what they work on. For example, the bulk of our finance academics, our economics academics at the LSE do work on U.S. data sets, etc., right?

They don't work on UK problems. Why? Because the big journals are US journals, except for the Review of Economic Studies. But the other day, I read a great paper, 1963, Kenneth Arrow, Uncertainty and the Welfare Economics of Medical Care. One of the great papers of all time. Right?

This was written by Arrow when he was asked by the Ford Foundation to write something about health. He hadn't worked on health before, but he wrote this wonderful paper. The paper's really worth reading. It challenges how we actually... The question he asks is not...

The question he asked is, is the health industry, as he saw it, in the US, catering to the needs of the US population? And obviously he looks at the problem of information in the economy and whether or not the insurance industry is providing for the vast majority of people.

and recognize it doesn't do too well for the rich, for the poor, sorry, and it doesn't do too well for people that have got a lot of things wrong with them. And it certainly doesn't do very well for elderly people. And he looks at the premium patterns, etc.,

And it's interesting that out of this comes thinking, which he didn't actually propose Medicare and Medicaid, but the paper was picked up on by the Johnson administration. It was fundamental to these big changes. And the same economics underlies Obamacare, you know, whatever they call that thing, the Affordable Care Act.

It all comes from a piece of, actually, it's a pure theory, normative analysis with reference to data. This is a beautiful piece of economics by arguably the best post-war economists, in my view, the best post-war economists.

And I think that really it's the engagement of economists with this sort of problem is fantastic. It's interesting that on Passon, Arrow makes a bit of a slight at Milton Friedman. And he says Milton Friedman thinks methodology of positive economics, it's all about prediction.

etc. You know, assumptions are miles away from your predictions, etc. Wonderful stuff, etc. So this is an idea of freedom looking for regularities in the economy, causal patterns, etc. Wonderful stuff. But it doesn't get to the hard meat of how to think about the fundamental nature of how the economy is working. The Arrow paper does that. And I'd say that's a great paper for people to look at and say,

Why is it less of that stuff in economics today from the first-rate people and the first-rate people are doing something else? That misallocation of the resources of the economic profession kind of

worry me. And I think that was a point that you were making with your example. And I think if there's nothing, I would say that's something that we should take away. And this comes to one, since all of your favourite words begin with the letter C, that had the word confidence, unless you already used it. Have we got the confidence to tell our young people to work on the problems that are really important

and to make sure that the work they do over the next 20 years and so on is going to have a really significant effect on people's lives so that politicians have to listen to them. That's my point.

So, with that rambling nonsense, we can bring the proceeding. That's a statement rather than a question. Yes, I couldn't agree more. Beautiful statement. I remember the paper well. You've never read it, by the way. I'm sure John and Charles have read it, and I'm sure some of the other guys in the room have read it. But you read it. It's a wonderful paper by a brilliant man. And by the way, all the maths...

Arrow was arguably one of the best mathematicians ever to do economics. All the maths is in the footnotes and the appendices. Yeah. But the reasoning in the paper is perfect, because he's Kenneth Arrow. Yeah. Anyway, with that, is there anything else you'd like to say as a summing up, Max? No. So I'd like to thank, first of all, I'd like us all to give an appreciation to Max for this very interesting talk, and so thank you very much. APPLAUSE

I'd like to thank you, the audience, who have come in large numbers, and I'd like to thank the online audience

audience as well. I'm afraid to say I didn't take all their questions. Actually, there was a good one came in at the end. A very good one, but I should have taken it. But anyway, we're done with time now. And then, of course, I'd like to thank the LSE staff who've made the event. People like you, young lady, etc., for making sure the event runs smoothly. Without your contribution, nothing much can happen. And I've got to say, I don't know where Sharon's here. Is Sharon here? Sharon, thank you very much for organising the event. Thank you. Thank you.

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